Oil and governments

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Although it is an exaggeration to say that an Arctic 'resource war' over oil is probable, the interest of foreign governments in the region is perfectly understandable. There are two quite different benefits that oil gives any government that can claim title over it: security of supply and export revenues.

Security of supply

Some countries are still haunted by memories of the desperate situation in which the United States and its strategic allies in the Western world found themselves in the wake of the Arab oil embargo that followed the Yom Kippur War in October 1973. Having lost the war, the Arabs sought to compel the United States government to change its position on the Arab-Israeli dispute by starving it of oil exports. This effort at 'political blackmail' (to use Henry Kissinger's term) not only exacted a heavy economic price but also succeeded in engineering what a historian of the crisis has called 'one of the gravest splits in the Western alliance since its foundation in the days after World War II, and certainly the worst since Suez in 1956'.5

Today, however, it would be quite impossible for any oil producer to starve a consumer in the same way. In the intervening years, energy markets have been transformed and oil is now bought and sold in a truly open, global market that prohibits producers from dictating where their oil goes. After the crude oil is loaded onto tankers, international traders make electronic bids for the cargo as it makes its way to prospective markets. To starve a particular consumer of supplies, a producer, or any other country, would have to impose a military blockade stopping all oil cargoes from pulling into harbour.

Of course, any oil exporter can still deliberately disrupt its exports, cutting back on its production levels or refusing international shipping permission to use its ports. This is what Iraq did briefly in April 2002, when it protested at an Israeli incursion in the West Bank by imposing a month-long embargo. It is also what others have threatened to do, even though such a move would, in all likelihood, be economically suicidal. Ayatollah Ali Khamenei, Iran's Supreme Leader, has been known to issue vague threats that 'if [the Western countries] do not receive oil, their factories will come to a halt. This will shake the world'.6 In this situation, consumers would still be able to buy crude oil from other suppliers, but probably at a higher price for the simple reason that any disruption, in any part of the world, is apt to cause an imbalance between supply and demand.

Instead of a producer deliberately cutting back on its output, it is today much more likely that war, terrorist actions, accidents and severe weather conditions will block supplies and send the barrel price soaring. The most vulnerable single area is the Strait of Hormuz in the Persian Gulf, through which tankers move around one-fifth of the world's oil, although the Niger Delta, Iraq and Venezuela are also susceptible. Following Hurricanes Katrina and Rita in 2005, the United States experienced a supply disruption of around 8 per cent, causing a price spike that was mitigated only because President Bush released a certain number of barrels from emergency reserves.7

It is in the event of such disruption that a consumer might arguably be able to benefit from 'security of supply'. If there is a tight oil market, it can increase production from its own oilfields, helping to redress an imbalance between supply and demand, instead of vainly imploring foreign producers to do so on its behalf. It was in this spirit of impotence that, in the summer of 2008, when the global price of crude oil began to climb to record highs and eventually reached a barrel price of $147, the British Prime Minister, Gordon Brown, met with Middle Eastern leaders and other representatives of the Organization of the Petroleum Exporting Countries (OPEC) and urged them in person to step up production while pointing to the 'scandal that forty per cent of the oil is controlled by OPEC'.8

Rightly or wrongly, many people felt that the sharp price increases in the summer of 2008 were an alarming premonition of the future. However complicated the causes of the oil price bubble may have been it is easy to understand why anyone should take such a view. Almost every day there are reports in the media that the age of 'easy oil' is over and that new reserves will become increasingly hard to find, despite growing demand, in the years ahead. The arguments of the advocates of 'peak oil', who claim that global output has reached its peak, seem compelling to many people.9

'Peak oil' is a hugely contentious issue, but what is not in doubt is that almost everyone is more uncertain than ever before about where future sources of supply are going to come from. The International Energy Agency (IEA), which acts as a watchdog for the governments of the developed world, predicts that the world will need as much as 100 million barrels of oil every day by the year 2015 (daily consumption in 2007 stood at around the 86 million mark). At the same time, supply is widely anticipated to peak and then gradually decline, although of course no one is quite sure when. In December 2008 Fatih Birol, the IEA's chief economist, told a newspaper that conventional crude output could reach a plateau by 2020, a far more pessimistic prediction than the IEA had ever previously made.10 But what really matters is the underlying sense of gloom, in both the industry and in government circles, about the future. Even leading figures in the world of oil who are very far from being 'peak oilers' feel far from sure about what the future holds. James Mulva, chief executive of ConocoPhillips, and Christophe de Margerie, his counterpart at the French energy giant, Total, have said that in their view, daily world production is most unlikely to ever surpass the 89 million-barrel figure.

Unless new replacement fuels are discovered to redress this increasingly uneasy relationship between supply and demand, the result will be dramatically higher fuel bills. This would exact not only a painful economic price, but would also carry big political risks: in the summer of 2008, for example, higher fuel bills triggered large-scale rioting in many parts of the world, including France, Nepal and Indonesia.

Some experts argue that one way of meeting the threat of such price spikes is to acquire ownership of the world's remaining oil reserves: if the global price of oil shoots up, then a government can arrange for a nationalized upstream company to pump oil at a faster rate, or for a distribution and marketing company to divert crude from refineries abroad to those at home. In practice this presents all sorts of problems: in the Western world, governments have no direct means of making private oil companies toe the line unless they nationalize them. But this may seem a minor objection to a government that is deeply concerned about achieving 'security of supply'.

Export revenues

Anyone who has spent much time in oil-producing countries usually has a similar story to tell. In each of these states, usually not far from where the impoverished masses live and work, is a privileged elite whose lifestyle seems luxurious even by the standards of the Western world's most affluent. In the streets of north Tehran or Khartoum, land cruisers are driven by the fortunate few who wear expensive suits and dark glasses while in the Nigerian capital, Lagos, some people had 'champagne, watches, cars or - if they were too poor - just motorcycles' at the height of the oil boom of the mid-1970s.11

Such scenes are a reminder that besides 'security of supply', oil offers something else to a government that can lay claim to the underground reserves - export revenues. In the case of both private and nationalized companies, these revenues are drawn from taxes that are either imposed on company profits or on the actual movement of goods as they leave the country of origin and head for their destination markets. How much a government takes can vary enormously: in recent years, Saudi Aramco has paid around 93 per cent of its profits in royalties and dividends to the state, keeping the rest for itself so that, in the words of one Aramco official, 'it does not have to ask permission from the government to get the money back'.12 The Russian government also takes a very high percentage, and in 2004 introduced a punitive tax that allowed it to appropriate around 80 per cent of oil revenues. Western governments, by contrast, are unlikely to take as much from the privatized energy companies, such as BP, Royal Dutch Shell and Total. It was precisely for this reason that in the summer of 2008 the British government argued in favour of a windfall tax that would take much more money from UK-registered oil majors at a time when their profits were being hugely inflated by the soaring price of crude.

This is why oil-producing states across the world reaped such large profits from the dramatic rise in the price of crude that lasted from the end of 2003, when a barrel fetched around $25, until the late summer of 2008, when the price peaked at $147. Russia, for example, had faced a serious economic crisis in the late 1990s when its $200 billion economy nearly defaulted, but by the spring of 2008 its gross domestic product reached $1.4 trillion (35 trillion roubles), driven almost entirely by the sale of oil and natural gas. In the Middle East, many governments were also similarly awash with petrodollars. These sums of money remain vital to every aspect of the economies of almost every chief oil exporter, whether it is to pay their civil servants, to finance a state-induced spending boom or to subsidize the price of gasoline at home, thereby offsetting any price increases in the wider global market.

How much oil, then, does the Arctic have to offer, and could it be the setting for a future 'resource war' waged by oil-thirsty countries desperate to acquire its assets for these two reasons?

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