ENERGEX – 10th International Energy Forum 2004 | Energy & Society: 3–6 May 2004, Lisbon, Portugal

Geopolitical Issues Of Petroleum Industry And Its Impact On The World Economy

Daria Karasalihović, B.sc.1; Lidia Maurović, B.sc.2; Igor Dekanić, Ph.D.3

1 2 3 University of Zagreb, Faculty of Mining Geology and Petroleum engineering, Pierottijeva 6, Zagreb, Croatia, tel/fax.++385 1 4605 452; dkarasal@rgn.hr

Keywords: petroleum industry, geopolitical role of oil, oil reserves, oil production, market disturbances, politic factors, global economy

Abstract. At the beginning of the 21st century, the world primary energy consumption is still mainly based on oil and gas. In the past oil had dramatically changed human lives and the society at large. It has shaped world politics and affected the destiny of states. It has caused crises and clashes and has frequently dictated their outcome. Today oil directly impacts economic growth. Also, it has become an important factor of national economies, everyday life of people, political doctrines and strategic projections. Its possession or control became a mean to political hegemony. This explains the development and relations, causes and effects of oil, money and power that have changed the world economy in the past and still impact the global market. The strategic context of the global petroleum industry at the beginning of 21st century, particularly after 11 September 2001, is underlined by “circulus vitiosus”: market, politics, terrorism and oil. Therefore it is necessary to stress the significant impact that energy sources today have on complex market relations, hidden geopolitical monopolies, possible instability caused by political or market disturbances. For countries with smaller oil reserves and small oil companies it is not easy to choose the right strategy under mentioned circumstances. Countries like Croatia with small petroleum industry in the global terms can only follow the process of global approach and tend to integrate their national markets into larger regional and global markets by acceptance of set rules. This is inevitable in free market and here lies the “sword of Damocles” of the global oil market – uncertainty and unpredictability. The awareness that the tie between oil, money and power has changed the world in the past, and that will continue to shape our destiny in the future, is the prerequisite of successful energy strategy.

IntroductionGeopolitical role have been given to petroleum industry during the World War I, since it

was not possible to start or to win the war without oil. After the World War II the main geopolitical meaning of oil have been transferred into the concept of oil production control, but also political situation control of wider production region. At the beginning of 21st century, geopolitical role of oil has more than one meaning. It is implemented into mechanism of global political control and international relationships that have been directed by parties whose economy grounds are based on profit from oil and natural gas production.

Geopolitical role of OilGeopolitical issues of oil and other energy sources are part of complex market relations,

hidden geopolitical monopolies and possible instability caused by political or market disturbances. Market disturbances represent one of the problems of the inner stability of so called “corporate society” and political disturbances stem from relations between the West and Middle East Arab countries which dispose with about two thirds of total world oil reserves and about one third of gas reserves. Small countries like Croatia can only follow process and tend to integrate their national markets into larger regional and global markets by acceptance of set rules.

ENERGEX – 10th International Energy Forum 2004 | Energy & Society: 3–6 May 2004, Lisbon, Portugal

Fig. 1: Oil reserves distribution

Balance between global economy –politic factors, like global capital market, the role of international organizations, position of USA as a global superpower, and global geopolitical factors– global production and energy trade, military control of free market directions, multilateral international operations for peace preservation, makes the determination base for world political situation. Economy and political order principals are consequences of society development, but also they represent geopolitical domination instrument.

Fig. 2: “Circulus vitiosus”Circulus Vitiosus

The strategic context of the world of oil and gas at the beginning of 21st century, particularly after 11 September 2001, is underlined by “circulus vitiosus”: market, politics, terrorism and oil. Global terrorism and September 11 attacks have shown that free Middle East market routes and political control of region have been endangered. Those who control oil determine the main global economy parameters and by that, not only control over the Middle East region, but also global political control is secured. 1

TERRORISM

OIL

MARKET

POLITICS

ENERGEX – 10th International Energy Forum 2004 | Energy & Society: 3–6 May 2004, Lisbon, Portugal

Fig. 3: Oil production and refining capacities (source www.bp.com)

The key problem of contemporary energetic and the world as a whole is difference between global oil reserves, production and consumption distribution. Today, Middle East and African region represent 40 percent of world total oil production, but almost 80 percent of total refining capacities and consumption are located in North America, Europe, and industrialized eastern part of Asia. This fact shapes the main global oil market directions, but at the same time also influences the geopolitical tensions of modern civilization. 2

Fig. 4: Military presence in Middle East region

ENERGEX – 10th International Energy Forum 2004 | Energy & Society: 3–6 May 2004, Lisbon, Portugal

The Gulf wars have converted the control over the oil and the directions of its trade into the global political mean. The great democratic principals and international political order, prevention of spreading weapons for mass destruction and similar arguments, have become the way of covering the real reasons, money and power, and oil as a mean of one and the other.

Fig. 5: World primary energy demand

In the past few decades oil represented the main primary energy source with share of 40 percent of total energy consumption, and it is expected that this share will not increase in the future. This is partial consequence of fact that some industrial countries intend to replace oil consumption with natural gas and other clean energy sources, especially for electricity production purposes. The share of oil in total energy consumption will remain the constant because of its predomination in the transport sector for which the maximum growth is predicted in next few years. The global energy consumption increase could result with 2.2 percent increase in production or from 75 mil barrels a day to 119 mil barrels in year 2020. Global oil consumption increase will result in production capacity increase. The OPEC members, oil producing countries cartel could, in that case, become the biggest winner, but other production countries will keep status of competitive supplier, especially after supply increase from “off shore” Caspian basin, South America and deep see of West Africa. If the relation between supply and demand during next two decades causes huge increase of demand, and supply stays the same, OPEC could gain monopolistic market position. Therefore, global oil and gas market structure depends on increase of energy needs, with reference to growth rate of developing countries like China and India, and also on increase in their domestic energy resources and reserves discoveries outside classic production regions. 3

Aforesaid indicates that geopolitical pressures will be based on oil supply directions control, while global climate changes will keep initiate fossil fuels alternative development. With the growing population, life standard and energy consumption increase, world could face energy technology markets expansion with economical and technological limitations. Therefore, for long-term sustainable energy scenario, energy future has to be based on fossil fuel consumption and clean environment preservation at the same time. This is also substantiated with fact that an oil shortage is not expected in near future, and estimations show that there are sufficient oil quantities for next 50 years, with oil consumption less concentrated on electricity and power production, and more on transport and petrochemical industry.

World Primary Energy Demand

ENERGEX – 10th International Energy Forum 2004 | Energy & Society: 3–6 May 2004, Lisbon, Portugal

Fig. 6: Oil prices

At the beginning of 21st century oil pricing system is based on global oil role, world market supply and demand mechanism, and on geopolitical issues that influence market relations. Oil prices today are determined at the main mercantile exchange like New York or London. Also it is important to stress that in contemporary energy policy other energy resources prices are determined by oil prices. Natural gas prices like other energy prices follow oil market movements and oil price tendency. Also, geopolitical leadership of industrialized countries and petroleum industry market and technology management significantly influence global market conditions, and consequently oil prices.

The cheep oil era has gone forever. The global oil demand increase and growing world dependence on oil directly cause oil price increase that can not be significantly moderated even with new supply directions like Caspian region. In that way world becomes more and more dependent on Middle East, and western political and military arrangement in region provokes more instability and gives different terrorist factors justification for endangering fragile peace not only in region but abroad.

SummaryThe global oil market after decades of apparent relative stability enters global instability era

and has decisive geopolitical influence on oil prices. The global western political control is becoming more instable that specially affects Middle East, richest world oil region, and by that oil prices are becoming more unstable. Today, more than ever, oil causes that oil production and transport directions control becomes a key of global geopolitical domination.

References

1 I. Dekanić, S. Kolundžić, D. Karasalihović; Stoljeće nafte, Naklada Zadro, Zagreb, 2003.

2 www.bp.com3 www.eia.doe.gov