Editorial: Let’s not ‘think’ of an oil embargo
Speaking at an informal summit of the Organisation of Islamic Conference (OIC) at Kuala Lumpur, the Malaysian prime minister, Mahathir Mohamed, said that the summit should consider using an oil embargo “to deter the United States from attacking Iraq”. Further elaborating the theme, he said that an oil embargo by the Islamic oil-producing nations could be resorted to “with regard to both the Palestine and Iraq”. But he was also careful to note that an embargo could prove to be a double-edged weapon, hurting the third world states more than the targeted United States. He clarified that the OIC had agreed “to think about the idea”. In the meanwhile, he recommended that the Islamic world should make common cause with the European states who were opposed to the war on Iraq. Mr Mahathir Mohamed must be thinking of a very sophisticated strategy of oil embargo that would neatly target only the United States and those siding with it and exclude those on the side of the Muslim world and its sympathisers. But even as far as the United States is concerned, it is likely to be affected by the embargo only partially. To be exact, only to the tune of 18 percent as that is the share of the Gulf in the American imports of oil. Today, the South Atlantic region supplies between 45 and 48 percent of oil imported by it. Combined with imports from Canada, the North Sea, South America (Venezuela and Mexico), Western East Africa (Nigeria, Equatorial Guinea, Angola and the Congo) the total non-Gulf oil represents 81 percent of the oil imported by the United States. During the Gulf War (1990-91) 27 percent of American oil had come from the Gulf. That could be one reason why the Organisation of Petroleum Exporting Countries (OPEC) pledged never to use the oil weapon again and has not proposed an oil embargo in response to the continuing Israeli acts of wanton cruelty in Palestine. Only Iran has been calling for one and it even cut its production in April last year for a month to demonstrate its willingness to use the “oil weapon”. But if the OIC states decide to use the weapon now they will have to take a close look at what happened when it was used by them in 1973. Though ostensibly provoked by the Ramadan war, the embargo was not only against America but also against the entire industrially advanced world using cheap OPEC oil to keep their economies going. The price of crude oil climbed immediately from 2.5 dollars per barrel to 10 dollars and then went up to 40 dollars in the spot market. If the purpose at that time was to deprive the United States of oil, the strategy failed because the oil got to it nonetheless through third party importers. It benefited the American and Western manufacturers of high-technology goods and weapons as prices of such items were hitched up. However, Iran was able to afford the new prices of such imported commodities because income from oil rose considerably, and some observers think that Iran in fact was encouraged by some Western advisers to resort to the embargo to acquire enough income to be able to buy American arms. The Arab oil producers also saw their coffers fill up but most of the new “petrodollars” found their way into banks in the West to slake the region’s thirst for weapons and luxuries. As Mr Mahathir Mohamed said, the crunch came on the poor third world countries which could neither afford the 40 dollar per barrel oil nor buy the Western capital goods at the new inflated prices. Pakistan was one of the countries that went belly-up: it had to massively devalue its currency, causing the industrial sector to collapse and borrowers to default on loans. As oil prices went up in 1974, alternative sources to oil became economically viable. The West, armed with nuclear technology, converted to nuclear power and opened up the heretofore uneconomical offshore wells in the North Sea. In 1980, OPEC collapsed under the burden of its own embargo when the prices collapsed below 10 dollars per barrel and there was a glut in the market created by buyers building up huge reserves. What happened to the “petrodollars” is another sad story. Enriched with oil money, Iraq fell upon an Islamic revolutionary Iran and spent billions of dollars borrowed from the similarly enriched Gulf states to prosecute a war that is believed to have cost over 160 billion dollars. Embargo-enriched Iran suffered a fall in oil production that it still has not regained and is today dogged by economic problems incidental to non-oil producing third world states. After the 1991 Gulf war, the oil producers now being asked to go for another embargo were further impoverished and their leader Saudi Arabia was forced to borrow billions of dollars to meet its budget deficits. In 1973, the Islamic states had 70 percent of the world oil market; today they have 40 percent of it, and that 40 percent mostly includes states that don’t support attack on Iraq. An oil embargo will not work but a cutback in oil production will definitely jolt the world market. The crunch will also come on the “potential” oil producers in the Islamic world now struggling to bring themselves on line on the Caspian littoral. Foreign capital and technology will converge again on these Central Asian and Caucasian republics and effectively wean them away from any collective OIC decision to resort to a new oil embargo. Therefore our advice to Mr Mahatir is: Let’s not think of such ideas. *