Oil no longer pawn in conflicts Growing, diverse supply has reduced battles between countries, firms

March 15, 1998|By Daniel Yergin and Joseph Stanislaw

If Saddam Hussein had held on to Kuwait in 1991, oil would have been at the center of world politics. Much of the world would have been worrying about security of supply, and Hussein would have gained a major call over the world economy. He could have used such an oil position as a large bargaining chip for achieving his ambitions for hegemony and weaponry.

But he didn't, and the fact that oil has not been central to the current confrontation with Iraq underscores how much has changed in the global oil picture. Not so many years ago, oil meant shortage, gas station lines and international conflict. Today, the picture is quite different: growing supply, a vigorous market and an emphasis on commercial cooperation instead of nationalistic standoffs. All this is reflected in the price. Even in the latest threat of a Persian Gulf military conflict, the price of oil remained lower, when corrected for inflation, than during the oil price collapse year of 1986, and it has declined in the days since the United Nations deal with Iraq.

Not so long ago, the oil business saw itself as a "sunset industry," doomed to disappear. Today, it has restructured and rebounded as almost a "sunrise industry," vigorously competing to meet growing world demand. At the same time, it is intensifying its efforts to meet environmental demands in every part of the business, from the wellhead to new gasolines.

How did this turn come about? Diversification of supply sources, depoliticization of relations between governments and companies and deployment of new technologies. Underlying all this has been the power of markets to sort out the problems of supply and demand.

On the eve of World War I, Winston Churchill, then first lord of the Admiralty, made plans to switch the Royal Navy from coal to oil, which meant dependence on oil from Persia. The need, said Churchill, was diversification. "Safety and certainty in oil lie in variety and variety alone," he said.

Churchill's dictum has been borne out in the years since the oil crises of the 1970s. At the time of the first crisis in 1973, development in the North Sea and Alaska was just beginning. Today, the North Sea produces more oil than any of the Organization of Petroleum Exporting Countries except Saudi Arabia, and Alaska's output is equal to that of Indonesia or Libya. Production is rising from such countries as Colombia and Argentina. Today, the United States draws about 50 percent of its oil imports from Western Hemisphere sources, compared with just under 40 percent 10 years ago. Many countries that exported small amounts, if any, 20 years ago are today putting significant volumes into the world market. The waters off West Africa are an exploration hot spot, ensuring that major new production from that area will be reaching markets after the turn of the century.

The political battles between countries and companies have receded. In the Middle East, oil appears to have become disengaged from the Arab-Israeli peace process, to the relief of most exporters, who are determined to demonstrate that they are reliable suppliers. Around the world, oil-producing countries established that they hold clear sovereignty over their resources. Having done that, they have shifted to a focus on maximizing revenues rather than struggling over symbols. As a result, doors that were slammed shut to the international industry in the 1970s or the 1950s - or indeed in 1917 with the Bolshevik Revolution - are reopening.

The most striking change involves what had been the Soviet Union. A century ago, Baku, on the western shore of the Caspian Sea, was the world's No. 1 source of oil. It remained a significant oil production center even after the Bolshevik Revolution, and it was one of Hitler's main goals when he invaded the Soviet Union in 1941.

But for decades, Baku was cut off from world markets. Today, Baku is the capital of the independent nation of Azerbaijan. Since the collapse of the Soviet Union, it has come to be recognized that the waters of the Caspian Sea and the nations that border it - Azerbaijan, Kazakstan, Turkmenistan - hold one of the world's great concentrations of oil and gas, perhaps second only to the Middle East.

These supplies are, however, landlocked. If they are to get to market, multibillion-dollar pipe-line systems must be built. The Caspian resource base could support several routes, and the specific decisions probably will be made in the next couple of years, assuring that large new supplies will be reaching world markets early in the next century.

The Caspian region is now a key oil player in the world. Russia itself is more problematic. Major new companies are arising out of the ruins of the Soviet economy. For the most part, Western companies have found it more difficult to do business in Russia than they had anticipated, although the scale of the potential resources is sufficient to keep them interested.

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