Political Economy of Oil Research Paper

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In contrast to more narrow economic analyses of oil, where the focus lies on the price formation and the conditions under which the “right” price for this nonrenewable resource can be obtained, political economy of oil studies the conditions and consequences of the production, appropriation, distribution, and consumption of oil (and oil-related products) by taking into account social relations of power (at local, regional, and global scales), cultural codes of consumption, institutional structures of surplus extraction, and ecological impacts of human activity. In this sense, again in contrast to economics of oil, political economy of oil is decidedly interdisciplinary—moving beyond economics, it draws upon political science and international politics, sociology and cultural studies, geology and geography, and ecology. In what follows, the contours of a political economy approach (as distinct from the standard neoclassical approach) to oil will be outlined. Beginning with the status of oil as a nonrenewable resource, the research paper will discuss the nature of the global demand for oil and will offer a historical account of the concrete socioeconomic processes (including the processes of price making, market maintenance, and state formation) within which the price of oil is determined. In the process, a general political economy framework will be developed to explain why the increases in the price of oil may not result in the changes in production technologies and consumption patterns that are necessary to move beyond petroleum. In short, the research paper will argue that not only producer but also consumer petro-states suffer from the so-called oil curse.

Oil as a Nonrenewable Resource: Malthusianism and Its Limits

Oil is a fossil fuel, 150- to 300-million-year-old “solar energy” buried underground. Up until the Industrial Revolution, most of the world’s energy was supplied from renewable sources. But with the Industrial Revolution and the depletion of wood in England in the early eighteenth century, the transition to technologies that run on nonrenewable sources of energy occurred as production and transportation began to rely increasingly on coal (Mitchell, 2009). Earlier in the twentieth century, we observe another shift to a new nonrenewable resource pioneered first by the introduction of battleships that run on oil to the Royal Navy and then by the mass production of cars in the 1920s (Yeomans, 2004; Yergin, 1991). Today, our highly industrialized, and predominantly capitalist, world economy continues to be heavily dependent on this nonrenewable energy source.

This state of dependence inevitably begs the question of the exhaustion of this nonrenewable resource. How far is it? How much oil is in the ground? What is the rate at which new oil reserves are found? How difficult is to extract them? How reliable is the reserve-to-production ratio that indicates the length of time the remaining oil reserves will last if the production will continue at the current levels? What is the rate at which the consumption of oil is growing? Even though the answers to these questions are heavily contingent upon the assumptions one is willing to make in calculations, if one were to accept the “optimistic” predictions of the International Energy Agency (from the 2004 edition of their World Energy Outlook) regarding the possibility of reaching peak production sometime between 2013 to 2037, it will be probably safe to assume that the current reserve-to-production ratio of 42 years (reported in the 2009 edition of British Petroleum’s Statistical Review of World Energy) will not improve drastically in the coming decades.

Nevertheless, the picture is not that simple. For instance, it is important to recognize that what makes the geological approach to peak oil so powerful in the minds of the general public and research community is Hubbert’s (1956) success in predicting the U.S. (a limited territory) peak in 1970. Yet, in order to extend the argument to the world scale and to claim that the future production rate depends linearly on the unproduced fraction (Deffeyes, 2006, p. 40), a number of assumptions must be made. For instance, to assume that the aggregation of all regional annual oil production distribution fits a bell curve is to assume that the future path of global oil production will inversely mirror its past trajectory where a cheap and expanding oil supply will be followed beyond the peak by an expensive and decreasing one (Caffentzis, 2008, p. 315). One underlying assumption is that the larger and easily accessible fields will be depleted earlier than smaller and more difficult to extract fields (e.g., Klare, 2008a, p. 42). Nevertheless, for this to be true, one also has to assume the existence of a fully competitive market where the price of crude oil net of extraction costs grows steadily at a rate equal to the rate of interest (Hotelling, 1931). Yet, if one were to make these assumptions, as it will be shown below, there would be no reason to worry about oil depletion: The world economy, in response to price increases, will change its production technology and consumption patterns gradually, moving away from oil and instead substituting alternative, less scarce, resources.

Nevertheless, Hubbert’s (1956) calculations did not take price into account (Deffeyes, 2006, p. 41). But more important, even if one were to take the price of oil into account, one would have to do so by acknowledging that historically, it has never been determined in competitive markets and that it has not been growing along an efficient extraction path. On the contrary, the long-run secular path of the price of oil reflects either the fall in costs brought about by technological progress or the various historical transformations and shifts in the market structure and the geopolitics of global oil production (Roncaglia, 2003). Moreover, the relatively high level of prices since the 1970s has allowed for the exploitation of expensive and difficult to extract oil fields (e.g., North Sea), whereas large and easy to extract fields continue to remain relatively underexploited (Roncaglia, 2003, p. 646f). And finally, in the past three decades, in part due to more effective exploration technologies and in part due to the high price of oil, the oil reserves have increased steadily, bringing the reserve-to-production ratio from 29 years in 1980 to 42 years in 2008 (British Petroleum, 2009).

Without doubt, the growing body of research and popular literature on “peak oil” has generated an increasing literacy among the general public about the coming end of the oil era. Nevertheless, the effects of this literature on the public perception have so far been mixed. On one hand, the dissemination of this particular kind of geological “petro-knowledge” increased the social legitimacy of high energy prices in the eyes of the general public. It is worthwhile to note that international oil companies, in 1971, as soon as it became clear that the formation of the Organization of the Petroleum Exporting Countries (OPEC) and the nationalization of oil in the Middle East would limit their control over the flow of oil and lead to increases in the price of crude oil, “abruptly abandoned their cornucopian calculations of oil as an almost limitless resource and began to forecast the end of oil” (Bowden, 1985; cf. Mitchell, 2009, p. 419). On the other hand, the often apocalyptic and Malthusian tone of the books and documentary films in the genre make it a daunting task for ordinary citizens to tackle this complex issue. In short, while simple geological analyses of “peak oil” provide a necessary baseline in beginning to think about the political economy of oil, they fail to do justice to the complexity of the political, economic, and cultural processes that shape the exploration, production, distribution, and consumption of oil.

Oil as a Means of Consumption and Exploitation: Global Oil Demand

President Franklin Delano Roosevelt’s meeting with King Abd al-Aziz Ibn Saud aboard an American ship in the Suez Canal in 1945 marks the beginning of a very important transition in the history of oil as a strategic commodity. Until the end of the World War II, the Middle East remained under British control. Nevertheless, as the war was drawing to a close, the United States decided to replace Great Britain as the leading Western military power in the region, fully aware not only of the wartime strategic importance of crude oil (recall that Hitler’s two big defeats came in El-Alamein and Stalingrad, both on his way to the sources of oil, the Arabian peninsula and Baku, respectively) but also of the necessity of this strong source of energy for the postwar reconstruction (in Europe) and demand-led economic growth (in the States). In a sense, given the fact that the construction of new roads was a centerpiece of the New Deal even before the war (Yeomans, 2004, pp. 43-44), Roosevelt’s courtship with King Ibn Saud and the oil-for-protection agreement between the United States and Saudi Arabia in the postwar era should not have come as a surprise. Today, the United States is the largest consumer of crude oil in the world, accounting for a quarter of the total consumption, followed by the European Union and China (British Petroleum, 2009).

The process of the gradual but secular growth of the U.S. demand for oil began in the 1920s, with the rapid adoption of motorcars as the individualized means of transportation and the first wave of suburbanization that it made possible. This “new mobile American way of life” came to an early grinding halt with the 1929 stock market crash and the onset of the Great Depression (Yeomans, 2004, p. 43). In this sense, the New Deal and the subsequent post-World War II Keynesian demand-led growth strategy transformed this incipient mode of organization of daily life into one of its central components. In the 1950s, the second wave of suburbanization and the construction of the interstate highway system made the American auto industry the driving force of postwar economic growth.

This particular macroeconomic role of the suburban and mobile lifestyle made the demand for oil highly insensitive to changes in price. American consumers’ dependence on oil was not limited to their demand for gasoline to fuel their cars with which they drive to work, to school, and to the shopping mall or to their demand for heating oil to keep their increasingly bigger suburban houses warm. The entire infrastructure of the mass production and transportation of (agricultural and industrial) consumer goods was also dependent upon increased mechanization and therefore upon increased demand for oil and oil-based products (e.g., petrochemical feedstocks, lubricants).

The relatively low price elasticity of demand for oil means that the consumers are highly dependent on oil in their consumption and cannot easily reduce their demand or switch to substitutes when its unit price increases (Cooper, 2003). Nevertheless, it is important to understand the historically dynamic nature of the price elasticity of demand. For instance, in the late 1970s and early 1980s, when the real price of oil increased dramatically due to supply disruptions caused by the Iranian Revolution in 1978 and the start of the Iran-Iraq War in 1980, the demand for oil declined by 16%. On the other hand, a similar increase in the price of oil during the 2000s did nothing to affect the steady growth of the U.S. consumption of oil (Hamilton, 2008). A possible explanation is that during the earlier price hike, consumers in the United States were able to substitute away from the nontransportation uses of oil, whereas in the current price hike, consumers had much more limited substitution possibilities in transportation uses of oil. In other words, the price inelasticity of the American demand for oil may be increasingly becoming a function of its suburban and mobile lifestyle.

Nevertheless, it is important not to reduce the growing and highly inelastic demand for oil to a mere effect of consumerist and materialistic “American way of life.” Industrialization and the mechanization of the production process as a secular and global tendency throughout the twentieth century may be the underlying factor that drives the secular growth of the demand for oil. A number of commentators who investigate the matter from the perspective of Marxian political economy argue that the increasing reliance on nonrenewable sources of energy itself is an unintended consequence of the political and economic struggles of the working classes throughout the twentieth century (Caffentzis, 2008; Midnight Notes Collective, 1992). Viewed from this perspective, both the social Keynesianism of the post-World War II era and the increasing mechanization of the labor process throughout the century are seen as responses of the capitalist states and enterprises to the demands and resistance of the working classes (see also Mitchell, 2009). According to Marxian labor theory of value, human labor is the only new value-creating energy, and the capitalist system and its social institutions (the state, the corporations, the legal system, the ideological processes, etc.) have evolved through the past two centuries, in part, to manage and maintain the continual production, appropriation, and distribution of the surplus value by the working classes. These commentators, by noting the fact that “most energy derived from oil in capitalist society is involved in producing and transporting commodities and reproducing labor power [i.e., the consumption of consumer goods]” (Caffentzis, 2008, p. 318), argue that ever-growing demand for resilient and labor-saving nonrenewable resources in modern capitalist societies is an effect of the increasing difficulty of maintaining this system of exploitation.

Indeed, the gradually increasing demand for oil in newly industrialized countries such as China and India suggests that the driving cause may not simply be the “American way of life” but rather the class antagonism and the endless search for higher rates of surplus value extraction that propel both the increasing mechanization of the labor process and the increasing commodification of the reproduction of human capacity to labor. After the energy crisis of the 1970s, the U.S. economy went through a “neoliberal” restructuring, which led more and more American companies to outsource their production of consumer goods to developing countries such as China, where the value of labor power is significantly cheaper (Harvey, 2005). Today, a significant portion of the growing demand for oil in China (and other developing economies such as India and Brazil) is fueled by increased industrial production for the U.S. (and other advanced capitalist economies’) consumer goods market (Gokay, 2006, p. 141). These cheap consumer products, in turn, made it possible for the increasingly precarious U.S. working class to continue to afford an increasing standard of living despite the fact that the real wages have remained stagnant since the early 1980s (Resnick & Wolff, 2006).

Oil as a Strategic Commodity: Price Formation and “Scarcity” Maintenance

The standard neoclassical theory of the optimal pricing of exhaustible resources was established by Harold Hotelling in 1931 during a period when oligopolistic arrangements over the exploration, production, transportation, refinery, and distribution of oil were being struck both in the United States and in the Middle East to prevent the price of oil from falling below its cost of production (Bromley, 1991, pp. 95-98; Yergin, 1991, pp. 244-252). In this essay, Hotelling (1931) theoretically demonstrated that, under competitive conditions (and under very stringent, and unrealistic, assumptions pertaining to information, preferences, and technology), the price of an exhaustible resource, net of the cost of extracting the marginal unit of the resource, must grow along an efficient extraction path at a rate equal to the rate of interest (see also Devarajan & Fisher, 1981; Solow, 1974). While the price grows along the efficient extraction path, the output (facing a stable demand) will decline asymptotically toward zero (Devarajan & Fisher, 1981, p. 66). Hotelling’s analysis included a discussion of how under monopoly the price of oil will be initially higher but rise less rapidly and, accordingly, the depletion of oil reserves will be retarded. One important underlying presupposition of this analysis, as noted above, is that the price increases will “provoke changes in both production technologies and the consumption structure leading to substitution of the scarce resource with other, relatively less scarce, resource” (Roncaglia, 2003, p. 646).

While Hotelling’s (1931) analysis is very useful in demonstrating the sheer impossibility of realizing competitive optimal outcomes in concrete, real economies, it has very little to offer in explaining the institutional complexity and historical trajectory of the political economy of the formation of the price of oil. In contrast to the abstract analyses of increasing “extraction” costs and optimizing firms found in the neoclassical tradition, the political economy approach offers an analysis of the oil industry as a multilayered process that involves the exploration, production, transportation, refinery, and distribution of oil (Bromley, 1991, pp. 87-90). In fact, it is possible to trace the history of the global oil industry and the changing institutional arrangements of price formation as different ways of organizing this multilayered process in response to shifting political, cultural, economic, and natural conditions.

Throughout its first century, the oil industry has been organized through the oligopolistic collusion of vertically integrated, large international oil companies (IOCs) that mobilized expert knowledge and expansive technology at all layers of this multilayered process, ranging from “upstream” activities such as exploration and production to “downstream” activities such as refinery, trade, and marketing. Under the “concession” system, which reigned until the early 1970s, IOCs used to purchase from sovereign states the rights to explore and exploit natural resources in return for fixed royalties. During the 1920s and 1930s, British Petroleum, various offshoots of the divided-up Standard Oil, and Royal Dutch/Shell controlled the oil industry, signing up “Red Line Agreements” among themselves to coordinate their activities in what used to be the Ottoman Middle East (Kurdistan, Iraq, Trans-Jordan, Arabian peninsula, and Gulf region; Yergin, 1991, pp. 184-206). But beginning with the 1950s, the anticolonialist, working-class struggles along with the emerging nationalist sentiments in oil-rich countries (e.g., antiracist labor strikes in Saudi Arabia, Baathist Arab socialism in Iraq, Iranian nationalism, Bolivarianismo in Venezuela) led to the formation of OPEC in 1960 in order to claim ownership of their resources and to enable oil-rich nation-states to exert greater control over the international oil market (Bromley, 1991; Mitchell, 2002, 2009; Vitalis, 2009). Nevertheless, the emergence of OPEC and the increasing role that national oil companies (NOCs) take in controlling the “upstream” of the industry did not necessarily lead to the demise of IOCs. On the contrary, as the industry shifted from an era of “free flow” to that of “limited flow” after 1974, they continued to remain highly profitable: They not only continued to account for nearly 10% of the net profits of the entire U.S. corporate sector (even better than their heyday in the 1930s), but also the rates of return of the large, U.S.-based IOCs remained above that of the Fortune 500 average—the dominant sector of the U.S. capital (Nitzan & Bichler, 2002, pp. 220-223). This is, in part, because IOCs have continued to work with the governments and the NOCs of the resource-rich nation-states by entering into upstream joint ventures and by continuing to control downstream business. But this is also because the costs of expanding the oligopolistic coalition are borne by the consumers of petroleum (as a means of both consumption and production): In comparison to the free-flow era (1920-1973), the average price of crude oil has tripled during the limited-flow era (1974-2008), from $15 to $45 (in 2008 dollars) (British Petroleum, 2009). Because resource-rich countries do not always have the necessary wherewithal to explore and exploit their resources, they tend to be dependent upon the expert knowledge and financial power of IOCs.

While oil production in an individual oil field, in contrast to the exploration for oil, tends to be predicated upon a basic level of technology, relatively high fixed costs, and economies of scale, neoclassical economists argue that the overall oil production at the level of the industry betrays increasing costs: “The more is produced, the more must one draw upon higher-cost sources” (Adelman, 1972, p. 5). Nevertheless, as noted above, historically, the areas that are exploited first have not necessarily been the easily accessible ones. In fact, the peculiar oligopolistic institutional configurations of the oil industry and the relatively extended periods of high prices have enabled relatively low-cost fields (such as those in Saudi Arabia due to its role as a “swing” producer) to remain underexploited while making relatively expensive fields (such as those in the North Sea, United Kingdom) economically viable for exploitation.

To appreciate why this is so, it is necessary to recall that, while there is a finite amount of oil under the surface of earth, within the myopic temporal horizon of the oil market, the problem historically has been the surplus, rather than the scarcity, of oil. The case of East Texas in 1930, when the price of a barrel of crude oil dropped to 10 cents per barrel as a result of uncontrolled competition and collapsing aggregate demand due to the Great Depression, is a well-known example of such cases of sudden flooding of the market with cheap oil in the absence of coordinated price fixing and sales regulation. Nevertheless, the surplus problem, or this tendency for overproduction in the oil industry, is more structural than it may initially appear. To begin with, at any given moment, given the nature of the industry, there is always an easily accessible excess reserve of oil (both above and under ground). This gives the producers the opportunity and incentive to overproduce and increase their revenues in the short run by undercutting competition (e.g., governments that wish to finance an accelerated military buildup, the individual companies that wish to increase their market share or cash flow or both). In this precise sense, the historical trajectory of the price of oil can be read as a series of shifting institutional (oligopolistic) arrangements, based on a shifting and changing balance of power between petro-states and multinational corporations that collude to keep competitive impulses at bay.

The first thoroughly global configuration of the oil industry can be traced back to the 1930s. In the United States, the Texas Railroad Commission intervened in the East Texas “collapse” and divided the demand among the producers in proportion to their production capacity (“pro-rationing”) and stabilized the domestic supply of oil. In the Middle East, the so-called Red Line Agreement of July 1928 and the infamous Achnacarry Agreement inaugurated the particular mode of oligopolistic arrangement that would regulate the allocation of the concessions among the Seven Sisters (Exxon, Mobil, Socal, Gulf, and Texaco from the United States and Royal Dutch/Shell and British Petroleum form Europe) until the 1970s. The oligopolistic domination of the Seven Sisters entailed the presence of a sizable surplus profit (monopoly rent) in the oil sector over a very long period of time. The concessions granted complete control over production across extensive areas for 60 to 90 years with complete control over pricing. And because the global price was determined according to the high-cost Texas crude as the benchmark, the Seven Sisters earned windfall profits from their low-cost production in the Middle East until the arrival of OPEC (Bromley, 1991).

Increasing demands for the nationalization of the local subsidiaries of IOCs that began in the 1950s and 1960s (e.g., Iran in 1951, Kuwait in 1960, Saudi Arabia in 1960, Iraq in 1964) culminated in the gradual nationalization of Aramco and a series of price increases in 1973-1974 in response to the 1973 Arab-Israel War and the United States’ support of Israel. From this point onward, first Saudi Arabia and then OPEC as a whole began to play the role of the “swing” producer in the global oil market. A swing producer is defined by its capability to maintain an unused excess capacity of oil that can be switched on and off to discipline producers who may be tempted to undercut competition by producing above their allotted quotas. For an individual producer to be an effective swing producer, it has to have large enough and easily accessible (low-cost) excess capacity (Mitchell, 2002).

In the 1980s, in response to the price hikes of the late 1970s, the global demand for oil slumped, and OPEC, led by Saudi Arabia, played the role of the swing producer by cutting the production levels to adjust the global supply to the declining global demand. Nevertheless, as if making a demonstration of the structural tendency of the oil industry to overproduce, non-OPEC producers continued to increase their production rather steadily until stabilizing at 55% market share in 2004—even though OPEC continues to control three quarters of the proven oil reserves (British Petroleum, 2009). Today, Saudi Arabia continues to be the largest producer of oil, with 13.1% of the total oil production, and is followed by Russia (12.4%), a non-OPEC producer (British Petroleum, 2009). Some projections suggest that “total OPEC capacity is likely to fall significantly short—by the upwards of 5 million barrels per day—in the next decade” (Nissen & Knapp, 2005, p. 3) and that the Saudi Arabian production with 1.5 to 2 million spare capacity will not be able to make up for the difference, leaving “the global oil market with no institutional mechanism to control the upside of oil pricing” (Nissen & Knapp, 2005, p. 4). Nevertheless, significant evidence demonstrates that recent increases in the price of crude oil (U.S.$97 per barrel in 2008) cannot be simply explained by increasing global demand (its rate of growth has slowed down as the prices began to increase in 2005) or by supply problems or shortages (the proven oil reserves have been growing faster than consumption growth in recent years, and a number of low-cost substitutes, such as oil sands and oil shales, have become economically viable) (Hamilton, 2008; Wray, 2008).

A more realistic explanation suggests that the price increases are caused by “index speculation” that takes place in the futures markets for crude oil (Wray, 2008). Since the mid-1980s, actual negotiations and deliveries of oil contracts have been made based on the price of crude oil determined in spot and futures markets—where traders buy and sell futures contracts to either hedge against price fluctuations or to, plain and simple, speculate. The regional base price of the New York Mercantile Exchange (NYMEX) is represented by West Texas Intermediate—the type of crude that flows into the United States from its main ports on the Texas Gulf Coast. In contrast, the regional base price of the Singapore exchange is that of the Dubai crude. Even though the volume of trade in these markets may be very high, only a fraction of all trades ends up being realized, whereas most transactions are either “compensated” before expiration or rolled into newer futures contracts (Roncaglia, 2003, p. 655). While traditional speculative activity takes “the price risk that hedgers do not want,” index speculators take only long positions by buying and holding a basket of commodities futures. Because these baskets are based on one of the commodity futures indexes (SP-GSCI and DJ-AIG), such speculative activities are named “index speculation” (Wray, 2008, pp. 63-64). But because these indices are based on the aggregation of different commodities (e.g., cotton, copper, corn, wheat, crude oil, natural gas) with varying weights (petroleum-related products account for 58% of the weighted average of SP-GSCI and DJ-AIG), the index speculators are insensitive to individual prices; they are only interested in the value of the index. As index speculation as an activity became popular (practiced by hedge funds, pension funds, university endowments, life insurance companies, sovereign wealth funds, banks, and oil companies themselves), the volume of money that flowed into the indexes grew from U.S.$50 billion in 2002 to U.S.$300 billion in 2008, and along with the influx, the price of crude oil has increased dramatically (Wray, 2008, pp. 66-67). Without doubt, increasing prices may have also encouraged further index speculation—but it is important to acknowledge the role that speculative activity plays in determining the price of oil in the short run (Hamilton, 2008).

Increasing importance of spot and futures markets in determining the price of crude oil might give the impression that, provided that the speculative excesses of traders are regulated, the oil markets are becoming more and more competitive and the price is approximating toward the market-clearing equilibrium price. Yet, it is equally possible to interpret the increasing importance of futures markets both as a smokescreen to distract the general public from the enduring collusive arrangement between OPEC NOCs, IOCs, and the governments of oil-consuming, advanced capitalist economies, “allowing them all to bypass antitrust regulations,” and as a mutually agreed upon mechanism for price formation, which would limit price competition among producers (Roncaglia, 2003, p. 656). To the extent that the supply of oil continues to be controlled by OPEC and the global demand for oil continues to grow at a secular pace, the futures markets, at their best, merely reflect these underlying oligopolistic forces (see also Hamilton, 2008).

Moreover, while the high oil prices driven by the speculative activity in commodities markets may bring windfall profits for both NOCs and IOCs, in the long run, high oil prices are not necessarily the best configuration for the economic interests of oil-producing economies either: Sustained high prices tend to provoke consumers to substitute away from oil-based sources of energy, slowing down the demand growth and rendering the market susceptible, once again, to overproduction. In fact, price instabilities caused by speculative activities have adverse effects on the macroeconomic stability of both net-exporter and net-importer economies. In short, the post-1970s reconfiguration of the oligopolistic control of the oil industry is not necessarily a stable one and requires continuing attention, maintenance, and management— if necessary, by means of military intervention and occupation (Moran & Russell, 2008).

Even the division of labor struck between NOCs and IOCs, where the former controls exploration and production and the latter refinery and distribution, is not a stable arrangement. Even though IOCs seemed to have survived the nationalization wave of the 1970s unscathed, retaining their profitability, they nonetheless produce only 35% of their total sales and own only a mere 4.2% of the total reserves. For this reason, they have continuing incentives, along with the U.S. government, which has historically sup-ported them, to reestablish their control over the upstream end of the industry (Bromley, 2005, p. 252). In this regard, the new Iraqi Oil Law of 2007, which marginalizes the role of Iraqi National Oil Company by opening nearly two thirds of the oil reserves to the control of IOCs, constitutes an instance in which the IOCs and the U.S. government explore the possibility of tilting the balance of power within the post-1970s oligopolistic arrangement in their favor.

Petro-States: Democracy, Economic Growth, and Class Conflicts

The term petro-state designates not only the “energy-surplus” oil-producing states but also “energy-deficit” oil-consuming states (Klare, 2008b; Mitchell, 2009). Economic growth and political stability of both producer and consumer states depend upon the uninterrupted and stable flow of oil between them. For the oil-producing states, the steady flow of oil provides a steady flow of revenues with which they can undertake public investments in infrastructures, purchase weapons and military technologies, induce economic growth through fiscal policy and transfer payments, redistribute income, invest in and incubate nonextractive sectors to replace the oil industry once the resources are depleted, or invest in international financial markets (sovereign wealth funds). For the energy-deficit advanced industrial states, the steady flow of “reasonably priced” oil can facilitate the smooth flow of transactions within the economy, sustaining a stable macroeconomic system, low unemployment levels, low levels of inflation, and sustained economic growth (in terms of the rate of growth of gross domestic product [GDP]).

Nevertheless, because there is a wide range of diversity among producer petro-states, it would be wrong to offer an ahistorical, general theory of state formation in petroleum-dependent economies. For instance, the dramatic failure of Nigeria’s national project of petroleum-led development (Watts, 2006) cannot be lumped together with Venezuela’s recent efforts to redistribute oil revenues to historically marginalized and impoverished sectors of the population (in particular, the urban poor and the indigenous populations). Similarly, while both the United States and China are energy-deficit petro-states that are dependent upon a steady flow of oil, the former is a global military power that has explicitly declared that it is ready to use “any means necessary, including military force” to protect its access to petroleum (the Carter Doctrine of 1980), whereas the latter is a fast-growing, export-oriented, state-controlled capitalist economy whose most important trade partner is the United States (Klare, 2004). Despite this internal diversity, it is still meaningful to suggest that a distinctive feature of the political economy approach to petro-states is to study the question of state formation in petroleum-dependent (producer or consumer) economies by analyzing the historical evolution of the political institutions, economic mechanisms, and social technologies as petro-states navigate, negotiate, govern, and manage their internal socioeconomic contradictions and class conflicts within the continuously realigning international geopolitical and economic context.

It is argued that energy-surplus countries tend to suffer from a deficit of democracy. Underlying this widespread perception is the assumption that oil revenues provide antidemocratic, authoritarian governments with the wherewithal to either buy off or repress political dissent (e.g., Ross, 2001). “Dutch disease” is the economic version of such “oil curse” arguments. Here the argument turns around the assumption that a booming natural extractive sector leads to stagnation or even deindustrialization in the manufacturing sector, leading to an imbalanced economic growth (e.g., Sachs & Warner, 1995). While such analyses of the “oil curse” may initially seem to capture some of the salient features of political economies of energy-rich oil states, they tend to obscure more than they reveal.

Political versions of the “oil curse” tend to represent the antidemocratic and authoritarian nature of these governments as a natural development, one that is bound to emerge given a presupposed natural human proclivity toward rent seeking in the absence of well-established property rights and competitive markets. Nevertheless, recent studies of the historical trajectories of state formation in producer petro-states suggest that antidemocratic, authoritarian governments emerge not because of oil revenues but rather to generate oil revenues in the first place. For instance, the emergence of Saudi Arabia as an authoritarian and sovereign oil state is intimately bound up in a history of repression of the antiracist, anticolonialist labor movement among petroleum workers (in particular, throughout the 1940s and 1950s; Vitalis, 2009) and the gradually increasing reliance of oil production on precarious immigrant workers (Midnight Notes Collective, 1992). Similarly, economic “Dutch disease” arguments tend to abstract from the international context within which economic policies are usually devised and implemented in many of the oil-rich yet underdeveloped economies. For instance, to be able to study the political economy of Nigeria as a failed state, it is necessary to look beyond the bureaucratic corruption and understand not only how the exploitation of oil from the Niger Delta has historically been based upon the oppression of indigenous peoples and cultures but also how the structural adjustment policies implemented throughout the 1980s and 1990s under the guidance of the International Monetary Fund (IMF) and World Bank have destroyed the social (multiethnic) and political (federal) fabric of the country by dismantling the welfare state through privatization and austerity programs (Midnight Notes Collective, 1992; Watts, 2006).

In contrast to energy-surplus countries, consumer petro-states appear to be much more democratic (with the exception of China). Nevertheless, there are two ways in which this assumption needs to be questioned. The first is the growing importance of economics and economic expertise in shaping the various aspects of the way states govern the “ordinary business of life.” As discussed above, beginning with the Great Depression, the development and deployment of social Keynesianism (in the form of aggregate demand management policies) and New Deal liberalism (taking the shape of Great Society programs in the postwar era), which emerged as “a response to the threat of populist politics” during the 1930s, provided “a method of setting limits to democratic practices and maintaining them” (Mitchell, 2009, p. 416; see also Caffentzis, 2008-2009; Hardt & Negri, 1994). Second, throughout the postwar era, the United States consistently acted as an imperialist power conducting covert interventions in producer petro-states (hence shaping their formation) to protect the interests of the Seven Sisters (e.g., Iran in 1953, Iraq in 1963, Indonesia in 1965; Vitalis, 2009). As the Keynesian demand-led economic growth strategy (where wage increases followed productivity increases), along with the cold war geopolitical strategy of communist containment, became increasingly dependent on maintaining the free (and cheap) flow of oil through neocolonialist practices, the U.S. military began to gain increasing importance, gradually transforming the United States into an advanced national security state (Nitzan & Bichler, 2002). In the process, the sphere of democratic politics ended up being either usurped by the increasingly technical nature of economic expertise or regularly suspended by the concerns of national security (including ones pertaining to energy security).

As the era of free-flowing oil came to a close in the mid-1970s, the scope of democratic decision making in advanced capitalist social formations began to be limited with increasing vigor. The oil crisis came at a moment when the Keynesian regime of accumulation was not able to contain the working-class demands for an increased share of the social surplus (beyond the productivity increases), and the high price of oil quickly became an excuse for subsequent wage cuts (Caffentzis, 2008-2009). The attendant economic liberalism, which had been brewing at the Institute of Economic Affairs in London, the Mont Pelerin Society, and the Economics Department of the University of Chicago since the end of the World War II, emerged “as an alternative project to defeat the threat of populist democracy” (Mitchell, 2009, p. 417). Under the neoliberal regime of accumulation, the relationship between the state and the market was radically reconfigured, where the latter began to pursue a policy of active economization of the social life through marketization of social relations, privatization of the public sector, com-modification of the commons, liberalization of trade, and financialization of daily life (Harvey, 2005). As life became more and more governed through market relations or market-based solutions, the postwar accord between the capitalist and the working classes broke down, wages ceased to increase in lock-step with productivity increases, and the tax cuts that were sanctioned by supply-side economics meant the dismantling of the welfare state and the reduction of government involvement in the economy to military Keynesianism (Resnick & Wolff, 2006). For the working classes of the consumer petro-states, the neoliberal deal meant, on one hand, stagnant wages, increasing work hours (and productivity), and increasing labor market insecurity (the decline of full-time employment and the rise of precarious forms of labor) and, on the other hand, lower income taxes (but higher social security taxes), cheaper goods (trade liberalization), and increasing access to credit (financial deregulation) (Wolff, 2009). As if this was not enough to limit and diffuse the threat of democratic populism, after the attacks on September 11, 2001, and the subsequent invasion of Afghanistan and Iraq, neoliberalism took a neoconservative turn and further limited the sphere of democratic politics in the name of national security. To conclude, as we enter the twentieth-first century, given the fact that the petroleum-based modernization strategies of both producer and consumer states are in deep, structural crises, it may be useful to entertain the hypothesis that the “oil curse” is a disease that inflicts not only producer but also consumer petro-states.

Conclusion: The “Real” Cost of Oil

Much of what has been discussed in this research paper so far has aimed at elaborating a political economy approach (as distinct from the standard neoclassical approach) to explain the concrete social and natural processes that make up the political economy of oil: the social construction of its natural limits; the social construction of the global oil demand; the social, economic, and political institutions that produce the price of oil; and the question of state formation in petroleum-dependent economies. An important assumption of the standard neoclassical approach is that, as the price of oil increases, over time, the world economy will gradually adjust its production technology and consumption patterns, substituting away from oil to alternative, less scarce resources. The political economy approach elaborated in this research paper suggests that there are a number of reasons why this may not be the case.

Let us leave aside for a moment the fact that the price of oil has historically been determined through oligopolistic arrangements (even when the buyers and sellers refer to spot and futures markets) and let us ask whether the windfall profits of the oil industry (shared between the oil-producing petro-states and their NOCs and IOCs) are invested in the research and development of viable alternatives to oil. Historically, petro-dollars have been extended as credits to developing countries (leading to the debt crises of 1980s), have enabled exploitation of more high-cost offshore fields (thereby delaying the need to develop alternatives), have been used to finance military buildups (the Middle East became the leading consumer of weapons and military equipment), have been used to invest in alternative business lines (e.g., the “financial sector” in Dubai, the “knowledge economy” in Qatar), and have been used to invest in financial markets (Davis, 2006). To say the least, none of these and other potential uses of the oil revenues necessarily facilitate the development of an alternative to oil. Moreover, the neoliberal tendency to try to solve all social and economic problems within the short-term horizon of market-based solutions makes it difficult to initiate and coordinate a concerted effort for the development of alternatives and the transformation of the production technology and consumption patterns at a global scale. Such a concerted effort requires a public recognition of the “real” costs of oil—namely, the human and real economic costs of energy wars, the ecological costs of the use of carbon-based sources energy, the social and economic costs of the distributional conflicts that are caused by climate change, the social costs of the “oil curse” both in producer and consumer petro-states, and the social and economic costs of economic crises that are triggered by the speculation-driven price of oil. For this precise reason, the main task of the political economy of oil in the twenty-first century should be to generate a widespread public recognition of the “real” costs of oil.