The Oil Market Caught between Economics and Politics: The Persian Gulf Crisis

  • Alberto Clô
Chapter

Abstract

The “Gulf crisis” began on the night of Wednesday 1st1990 with the invasion of Kuwait by Iraqi military forces. It ended at dawn on February 28th 1991 with U.S. President George Bush’s announcement of the order for a cease-fire to the coalition army, acting under the auspices of the UN, but to which the United States had made by far the biggest contribution and, in the main, directed. The cease-fire occurred after the complete liberation of the tiny Arab Emirate, after a demonstration of overwhelming military superiority, and after Iraq had accepted every one of the resolutions adopted by the United Nations against its action (“Energia”, 1990, 1991).

Keywords

Saudi Arabia Middle East Arab Country OPEC Country Commercial Stock 
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Notes

  1. 1.
    The possibility of, the reasons for, and methods of a conflict between Iraq and Israel were discussed in “The Economist” of April 22nd 1990 in the article The elephant and the hawk.Google Scholar
  2. 2.
    It has been calculated that between 1982 and 1989 Saudi Arabia, Kuwait and the Arab Emirates provided Iraq with $30 billion zero-interest loans and that it gained a further 15 billion from the sale of oil produced in the Neutral Zone (equally controlled by Kuwait and Saudi Arabia), the area that was ironically to become the Gulf’s first scene of war.Google Scholar
  3. 3.
    The country which has the greatest influence in the region, through the Arabian Gulf and its oil, will retain its superiority as a super-power, without rivals that could compete“, declared Saddam Hussein on that occasion. ”This means that if the peoples of the Gulf, together with all the Arabs, are not careful, the region will be governed by the will of the United States… Oil prices would be fixed according to one point of view: to foster American interests and ignore the interests of others“ (”The Economist“, September 29th 1990).Google Scholar
  4. 4.
    The reconstruction of “The Economist” of September 29th 1990 starts with the first signal of February 24th 1990, with the meeting of the Arab Cooperation Council quoted in the text, then passing to the second signal of April 2nd, when Saddam Hussein announced he had chemical weapons at his disposal which could destroy Israel. The third signal came on May 28th, with the above-mentioned attack on the United States at the meeting of the Arab League. The fourth was on July 17th, when Saddam Hussein gave advance notice of a possible invasion of Kuwait. The fifth and last was on July 25th when the Iraqi troops began to move towards Kuwait.Google Scholar
  5. 5.
    The quota system was re-introduced by OPEC from September 1st 1986 after the suspension coinciding with the oil counter-shock. However it was only on January 1st 1989 that there was full agreement between the 13 member countries on the distribution of the quotas, although the rich countries did not afterwards respect it.Google Scholar
  6. 6.
    Particularly: harsh weather, transport difficulties of refined products on the river Rhine, maintenance work on the North Sea oil rigs, and a crisis of Romanian exports of products with the fall of the Ceausescu regime in January 1990.Google Scholar
  7. 7.
    As well as the losses caused by the lower prices of crude oil, Saddam Hussein accused Kuwait of stealing crude oil, from 1980, produced in the oil fields of Rumaila, whose borders have been contested by Iraq since 1961, valued of $2.4 billion.Google Scholar
  8. 8.
    To the ingenuous question of an American senator as to why “the liberation of Kuwait was of such vital interest for us… to make us ready to risk thousands of American lives if necessary” (The Economist“, November 17th 1990), the best answer, by no coincidence, was provided by the editorialist of the influential magazine ”Oil and Gas Journal“ (January 14th 1991): ”because the United States has chosen its role of leader country in the importation of oil. It has decided to import rather than to produce an essential resource for its economy. Thus it cannot ignore or neglect its oil interests in the Middle East… the choice not to produce energy involves the decision to fight to defend the oil of others… for the United States the military and energy choices of the past can today involve war“, as was in fact to happen a few days later.Google Scholar
  9. 9.
    For this aspect, and the main implications deriving from it, cf. Pinzani (1991).Google Scholar
  10. 10.
    The unused non-OPEC extraction capacity of crude oil was only 0.3–0.4 million barrels a day, the refining capacity not more than 1–2 million barrels a day. The US refineries had a utilisation rate in July of around 93%: very nearly the technical maximum.Google Scholar
  11. 11.
    Table 7.2. sums up this data in part. A lower exportation of crude oil for 3.95 million barrels a day emerges, equal to about 18% of the entire trade calculated on the markets in July 1990, and of products for 0.95 million barrels a day, 11% of product trade. From a qualitative perspective, the crisis removed medium-densitycrude oil at 31° API gravity (though with values for some oilfields higher than 35° API) with a fairly high sulphur content, around 2.4%, but above all it removed high-quality medium-light products (naphtha, gasoline, diesel oil) obtained from the sophisticated Kuwaiti refineries, in no way replaceable, as regards specific and productive potential, by other refineries. The combination of an inferior quality of crudes to replace those lacking with an inferior quality of plant able to refine them in Japan and Europe, thus meant that to obtain the same amount of high-quality products required by the market, larger amounts of crude would have to be processed than before. The supply crisis, given the same demand, was therefore worse than its nominal value suggested.Google Scholar
  12. 12.
    Cf. Graham (1990, 1991 ). The calculation of this cost takes into account the losses suffered by countries such as Turkey and Egypt due to the embargo decided by the UN. Until mid-November 1990 the cost for Saudi Arabia stood at $22 billion. Japan also later agreed to contribute the sum of $9 billion towards the cost of the war.Google Scholar
  13. 13.
    Due to the reduced role that energy would play in the formation of revenue compared to the Seventies, and due to the reduced purchasing power of the dollar, so that the $20 of nominal increase recorded in the first eight weeks of the crisis were equal to $14.5 in 1979 and to $7.5 in 1973.Google Scholar
  14. 14.
    Among the principal supporters of this type of proposal were Verleger (1990b), who had made a closer examination of the decisive role played by the stocks in the 1978–79 crisis, and the Saudi former minister Ahmed Zaki Yamani (1990). On this subject also see Clô (1990b).Google Scholar
  15. 15.
    During the months of the crisis practically nobody worried about what was happening in the Third World. One of the few was Philippe de Latour (1990), who suggested transforming part of the useless financial aid to poor countries in the form of real aid and also in the form of oil supplies. This proposal was more extensively set out in the journal “Energia” (de Latour, 1991 ).Google Scholar
  16. 16.
    The cost of imports of crude oil in India increased in 1990 by 40% to $5 billion, corresponding to 1/3rd of all the currency expenditure of the country.Google Scholar
  17. 17.
    A capacity that was initially estimated at 3.6–4.4 million barrels a day by the well-informed PIW (August 27th 1990) for additional flows available for not more than 90 days, without in other words causing damage to the oil fields (sustainable capacity), and in 4.2–5.3 million barrels a day for peaks of production available for not more than 30 days (surge capacity). Other sources were more cautious, with estimates of the excess capacity at 3.7 million barrels a day according to the “Financial Times”, (August 9th 1990) and of 3–4 million barrels a day according to the “Oil and Gas Journal” (August 13th 1990 ).Google Scholar
  18. 18.
    According to “Le Monde”, October 11th 1990, Saddam Hussein had a number of medium and long-range missiles at his disposal, and perhaps one, the Tamouz- 1, with a range of 2,000 km. For risks to the infrastructures, see PIW (August 27th 1990) and “The Economist” (January 12th 1991).Google Scholar
  19. 19.
    Two thirds of the 590 million barrels of strategic stocks of the United States were, for example, made up by heavy qualities virtually incompatible with processing plants and the structure of final consumption. See “Oil and Gas Journal” (August 13th 1990).Google Scholar

Copyright information

© Springer Science+Business Media New York 2000

Authors and Affiliations

  • Alberto Clô
    • 1
  1. 1.Bologna UniversityItaly

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