The Coming Oil Revolution

Edward L. Morse

From Foreign Affairs, Winter 1990/91

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Summary:  Predicts that oil prices will rise sharply in the 1990s, with "more bargaining leverage again falling into the hands of exporting countries". Whatever the outcome of the Kuwait crisis, OPEC will never be the same again. For French version, see Edward L Morse 'La révolution pétrolière à venir' Politique Étrangère 55/4 Winter 1990 pp793-798.

Edward L. Morse is Publisher of Petroleum Intelligence Weekly. He was Deputy Assistant Secretary of State for International Energy Policy, 1979-81.

With one swift stroke Iraqi President Saddam Hussein's takeover of Kuwait seems to have overturned the rules of international oil. No matter how the chain of events triggered by Baghdad's military aggression unfolds, the Organization of Petroleum Exporting Countries (OPEC) will no longer be what it once was. Commercial ties between oil-producing countries and their main markets in the consuming industrial countries will be transformed, investment patterns will shift radically, and energy policy in the United States will take on a new meaning.

Saddam Hussein is not responsible, however, for more than accelerating an already rapid pace of change that was transforming the petroleum sector even before last summer. The immediate repercussion of the international embargo of trade with Iraq and occupied Kuwait was a doubling of the price of oil. But even without the recent turmoil in the Middle East, higher oil prices-about $40 a barrel-were almost a certainty for the late 1990s.

No one can dispute that the unfolding of events in the gulf will have a significant short-term impact on oil markets; Iraq's invasion of Kuwait has made it virtually impossible to return to the oil order of the past. Any outbreak of war will obviously affect more than oil prices, as will any continuing U.S. military presence in the gulf, where the legitimacy of traditional political regimes has been sorely challenged. Whether Saddam Hussein will survive the U.N.-imposed embargo, or a war, and whether either will result in an Iraqi withdrawal from Kuwait remain open questions. In any case, the world's new petroleum arrangements will be influenced far less by the denouement of the military situation in the gulf than by developments in the oil arena itself.

The emerging structures of the international petroleum industry make for a more moderate price environment in the long term than was the case in the 1970s. But fostering such an environment will require major policy shifts in key countries, especially the United States. We are entering a new political era in oil matters that requires international cooperation not only in maintaining political stability but also in sustaining tighter ties between oil-producing and oil-importing countries. Such cooperation will be difficult at best. It could turn out to be nearly impossible if, as the decade progresses, the United States is seen as a country that uses military force in order to sustain the appetite of its population for low-priced fuels.

II

Saddam Hussein's power grab came at a time when the major post-World War II institutions, which molded the environment in which the international oil system was embedded, were undergoing radical change.

The Western liberal economy was predicated on the separation of high politics (i.e., the use of force and other security concerns) from low politics (the economic rules whereby participating nations skirmished with one another principally over the rules of distribution, but in which everyone basically agreed that all parties could benefit from an ever-increasing economic pie). The use of force was permissible outside this "lower" realm, but it ...

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