March 14, 2009

The misery of oil companies


One of the facile claims bandied around the Iraq war is that it has nothing to do with oil. these claims are just thrown around, and the people who throw them show sub-zero intellectual curiosity. Mearsheimer and Walt, for example, wrote their famous book arguing that the Israel Lobby is behind U.S. policy in the Middle East. I scanned the book for all their discussion of oil. You'd assume they'll spend some work on debunking or relating to alternative arguments. You'd assume wrong. There are altogether two measly pages about oil in the book, with a level of analysis that doesn't even raise to the level of "shoddy":
Many Americans believe that that [the Iraq war] was a "war for oil" (or for corporations like Haliburton), but there is little direct evidence to support this claim and considerable evidence that cast doubt on it. ( The Israel Lobby, p. 230)
You'd think M&W would examine that evidence they allude to, argue with the arguments of those who make these claims. They might look for example for such formations as the "energy task force." They might have read Gregh Palast's very detailed chapters about the Iraqi oil industry in Armed Madhouse and debunked them. But why bother? What are they, intellectuals? Scholars? Investigative journalists? After reading their statements on the subject the word that comes to my mind is Avi Shlaim's "hackademics."

Instead of opening with it, they finish their "analysis" with the sentence
The oil companies, as is almost always the case, wanted to make money, not war (p. 255)
Which is of course true, but how do oil companies make money? Is that not something that must be understood before making sweeping claims about which foreign policy benefits oil companies? Not for our experts. They just decide, without bothering to investigate the economics of oil and the business model of oil companies, that
If Arab petrodollars or energy companies were driving American policy, one would expect to see the United States distancing itself from Israel and working overtime to get the Palestinians a state of their own....one would expect Washington to curry favor with big oil producers like Saddam Hussein's Iraq, Gaddaffi's Lybia, or the Islamic Republic of Iran. (p. 143)
But why would one expect that? Do oil companies make more money when peace appears to be advancing in the Middle East? Hardly, the Clinton years and the Oslo process were one of the worst periods in the annals of oil companies. What about oil producers? Don't oil majors need to cultivate them? Yes, but not always. U.S. oil majors have always had good relations with some oil producing governments but not with all. You'd suppose that as experts on U.S. foreign policy these authors would have read John Blair's seminal book "Control of Oil." But the book, which is foundational to discussions of oil and U.S. foreign policy in the Middle East, is not even mentioned and there is no evidence our experts know it exists. Otherwise they might have known that Iraq has been traditionally the country in which oil companies prefer not to dig:
Although its original concession of March 14, 1925 covered all of Iraq, the Iraq Petroleum Co., under the ownership of BP (23.75%), Shell (23.75%), CFP (23.75%), Exxon (11.85%), Mobil (11.85%), and Gulbenkian (5.0%), limited its production to fields constituting only one-half of 1 percent of the country’s total area....From almost the beginning of its operations IPC not only suppressed production in Iraq (as well as in nearby lands) but went to considerable lengths to conceal that fact from the Iraqi government... (Blair, Control of Oil).
Mearsheimer and Walt note that the Arab Oil Embargo cost the United States 2% of GDP in the first year. This is supposed to buttress their claim that support for Israel does not help Americans. But their curiosity is very selective. The same embargo caused the profits of the oil majors to skyrocket. By the way, you don't have to "dig" to find this out. The oil companies are happy to tell you that:
...the immediate result of OPEC's move was to boost sales and profits at all the oil majors. Mobil Oil's sales nearly tripled between 1973 and 1977 to $32 billion, and 1974 profits hit record highs, prompting a barrage of congressional and media criticism that was answered by Mobil Oil's own public relations department. (fundinguniverse)
So it did help some Americans after all. But then what can you expect from someone who can write that
The overwhelming goal of U.S. foreign policy is to ensure the safety and prosperity of the American people. (337)
This pollyanna perspective is motivated. Mearsheimer and Walt promote a Washington that is technocratic, capitalist and corporatist, and whose conversation is limited to the topics of conversation approved in the leading Harvard departments that churn out the besuited servants of the corporate state. From this vantage point they wish to debate how best the U.S. can project power" (333) into the Middle East and they exalt about "the profound disagreement among [presidential candidates] on almost every...important issue facing the United States" except Israel (4). I must have missed the vehement debate about the fact that one in every forth jailed person on the planet languishes in the American Gulag. I also missed the spirited debate about the need to support the new democratic experiments in Ecuador, Venezuela and Bolivia. Was the necessity of the Drug War that is destroying Mexico debated when I wasn't paying attention? The stilted conversation in Washington is unbelievable narrow and limited to an extremely limited menu of options, whether on healthcare, banking, war, or anything else except cultural wedge issues. The narrowness of the conversation on Israel is somewhat more extreme that other similarly narrow debates. Although even than is arguable. How many U.S. representatives call for cuts in the defense budget? The exaggeration of the Lobby and its uniqueness is part and parcel of the thrust of the book to defend the underlying innocence and justice of the exercise of U.S. power, supposedly now polluted by the all too successful Lobby. And part of that is portraying oil companies as the poor victims of Douglas Feith's arrogance.

Just as an exercise, I picked up the biggest oil company, Exxon Mobile, for a little perfunctory inspection. If you had bet all your fortune on Exxon Mobile 10 years ago, about the time you learned that a former oil executive, George W. Bush, was running for the White House, you'd have today (pretax) more than doubled your wealth. You'd have in fact grown it by 123%. That is already impressive in a time when money seems to be vanishing like smoke. But it is still misleading. As a competitive owner of capital, what you'd really care about is how your success compares with the Joneses (or the list of top Billionaires, pick your choice). Well, if the Joneses invested all their wealth in the stock market, say the SP-500 index (a good proxy for U.S. corporate "prosperity"), at about the same time, their wealth is now 71% of what it use to be when George Bush made his entry into national politics. If you and the Joneses used to be equally wealthy neighbors, you are now almost three times richer than they are thanks to betting on oil. (And don't even mention the Greenbergs, who believed Jews were the best investment and gave all their money to Uncle Bernie.) Of course, you still did a lot worse than your friends who actually run Exxon Mobile, with their exorbitant "compensation packages," stock options and what not. Hard to be wealthy these days.

What about Iraq? Why care about the bottom line when the news are so grim? Don't know about Mearsheimer and Walt, but I pay my bills in dollars, not in anecdotes.

How is this possible that Exxon Mobile was such a good investment, depsite the growing Arab hatred towards the U.S., the bungled occupation, the tough posture of the Maliki government, the travails of the Iraqi Oil Law, etc.? To begin with, Exxon Mobile has so little business in Iraq that the country isn't even mentionned in its annual report. Do they even need new Iraqi fields? Maybe some day. Iraq has anywhere between 60 and 400 billion oil barrels underground. That is a lot, and it will be valuable to access it one day, with oil reserves depleting and consumption rising. The US government is doing what it can to ensure that pie doesn't fall in the "wrong" hands. But that does not mean that oil companies are suffering from not getting these contracts today. There is hardly any reason to hurry. The oil can stay there, underground, until it is profitable for US oil majors to let it see the light of day. For now, it is more profitable to wait. How so? Well, listen carefully to the management of Exxon Mobile:
In the Upstream a $1 per barrel change in the weighted-average realized price of oil would have approximately a $375 million annual after-tax effect on Upstream consolidated plus equity company earnings. (10-K, 2008)
Got this? A $3 rise in the price of oil is worth over a billion dollar a year to Exxon Mobile and its owners. A $30 rise is worth $11 billion a year. Last year Exxon Mobile made a net profit of over $45 billion, roughly the GDP of Ecuador (or Luxembourg)! If this is pain, let us all suffer.

The fluctuations in the price of oil is thus the single most important factor affecting profits. But how does one convince oil prices to rise? The US government has some good advice:
Events in crude oil markets that caused spikes in crude oil prices were a major factor in all but one of the five major run-ups in gasoline prices between 1992 and 1997, according to the National Petroleum Council’s study “U.S. Petroleum Supply - Inventory Dynamics.” Rapid gasoline price increases occurred in response to crude oil shortages caused by the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990. (EIA, Gasoline Price Primer)
Here's the graph:





See why Iraq can contribute more to the wealth of Exxon Mobile's owners when its oil stays firmly in the ground? And why the fact that U.S. foreign policy often results in wars, revolutions, and instability in the Middle East is not keeping oil executives awake at night?

Don't get me wrong. I have no interest in the craven denials about the influence of the lobby on U.S. foreign policy. The Israel lobby (and the smaller Jewish lobby) are major ruling class formations. They matter, and they are powerful and nefarious. They must be exposed, opposed and stopped. But they must not be used as scapegoats in the service of rescuing U.S. imperialism from its growing internal contradictions. This a rotten goal resting on an equally rotten analysis.



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