The International Petroleum Economy: A Rebirth of Liberalism?

THE INTERNATIONAL PETROLEUM_____ ECONOMY: A REBIRTH OF LIBERALISM? Edward L. Morse JT ew sectors of the economy are more politicized than energy. In industrial and developing countries, and among opec and non-OPEC members alike, there exists no clear consensus on the desirability of integrating energy in general, and petroleum in particular, into the public sector. Energy security—access to reliable, uninterruptible sources of energy at reasonable prices to consumers—is widely accepted as a public norm, but the mixture of private and public initiative in the exploration, development, production, distribution, and pricing of fuels remains, after two decades of worldwide debate, a contentious issue. Since the birth of opec in Sepember 1960, the international oil economy has undergone a fundamental transformation, characterized by the transference of decision-making on oil pricing, exploration, production , and distribution from American and European oil companies to national governments, especially those of opec, and their oil companies. Over the course of the past two decades, oil became the world economy's premier fuel, while the United States' self-sufficiency in oil eroded and America became the world's largest importer of petroleum. With the increased dependence of the United States and its allies on imported oil, the vulnerability of the industrial democracies to supply interruptions became a major political issue. As a result, political interventions in the petroleum economy grew to be the accepted norm in oil-consuming as well as oil-producing countries. Edward L. Morse is currently director of international affairs for Phillips Petroleum Company. A SAIS graduate ('66), Dr. Morse was assistant professor of international relations at Princeton University in the early 1970s. From 1977 to 1978 he was executive director ofthe 1980s Project for the Council on Foreign Relations. He served as deputy assistant secretary of state for international energy policy until 1981. 143 144 SAIS REVIEW By the end of the 1970s, the governments of most oil-importing countries undertook petroleum policies that diverged in fundamental ways from free market principles. The United States imposed price controls on domestic crude oil and petroleum products, in part to "protect" consumers from pricing decisions taken by the opec governments . An allocation mechanism was instituted for emergencies associated with oil supply disruptions, and the International Energy Agency became a cornerstone of allied cooperation to prevent blackmail through selective oil boycotts, such as that imposed by a number of Arab governments after the Yom Kippur War of 1973. Other Western governments created national oil companies, because of the belief that private companies could no longer be relied upon either to secure oil supplies, or to tie down bilateral government-to-government supply arrangements. Meanwhile, producing-country governments pared the autonomy of foreign oil companies further—first by removing their freedom to determine prices; later by removing their freedom to set production levels; then by eliminating offtake entitlements and imposing destination restrictions; and finally by replacing foreign oil companies in downstream as well as upstream operations. This two-decade transformation seemed to be leading inextricably to the replacement of a predominantly private market with a publicly dominated, highly politicized set ofinteractions. The bargaining relationship between private firms and governments shifted dramatically in favor of the latter, as the concession system was effectively terminated and replaced by production-sharing arrangements. Indeed, many observers noted an ineluctable abridgement of the role of private firms regarding service or risk-contract arrangements—those whereby, for a fixed fee or rate of return, a private company brings in technology and expertise, while the exploitation and distribution of any reserves is determined exclusively by governments. International petroleum supply and demand, actual and projected, seemed to support this view. Throughout the 1970s net additions to international oil reserves failed to replace annual oil consumption. Price increases, whether annually regulated by opec or resulting from supply disruptions (the 1973-74 embargo, the Iranian revolution in 1978-79, and the Iran-Iraq war in 1980), were accompanied by reductions in the freedom of private companies. No government could resist the temptation to wrest from private firms an increasing share of the oil rents, whether by expropriation, the invocation offorce majeure on contractual obligations, or the imposition ofincreasingly ingenious fiscal mechanisms such as the...