THE leaders of the seven most industrialized democracies today open their summit conference . . . to find a way out of the deepening world oil crisis, reported the Mainichi Daily News.
But did they find a way out? What was the result of this impressive summit conference held in Tokyo, Japan, this past summer, representing the leaders of some of the most powerful nations? Indeed, why was the meeting held?
Since the oil crisis of 1973, when the oil-exporting nations dramatically increased oil prices, the countries having to import oil have been hard pressed by inflation, recession and disorder in world money markets. For this reason, beginning in 1975, annual economic summit conferences were held to find solutions.
But are the nations better off now than they were four years ago? No, for there was even greater urgency at the Tokyo meeting because of the energy crisis of 1979.
So this summit meeting concentrated on energy. The main issues were: the oil supply, oil prices, inflation, the gap between richer and poorer nations, and international money woes.
However, as if to taunt the summit, on the very day its meeting opened, a three-day conference of the Organization of Petroleum Exporting Countries (OPEC) concluded in Geneva, Switzerland. Its result? The OPEC nations announced another large increase in oil prices, pushing the price as high as .50 (U.S.) a barrel, when not too long ago it was about one tenth that price! This increase, on top of others made this year, means that oil prices have risen about 50 percent in 1979!
What Was the Outcome?
What did the Tokyo summit accomplish? Since the main target was the oil problem, a joint declaration said: The most urgent tasks are to reduce oil consumption and to hasten the development of other energy.
The participating nations agreed to try to maintain, for about five years, a level of oil imports no greater than that of 1977 or 1978. However, some observed that this was not much help, since oil imports were at peak levels then.
The summit declaration also spoke of intensifying efforts to pursue the economic policies appropriate in each of our countries to achieve durable external equilibrium. In other words, each country will make its own decision as to what is appropriate economic policy.
One paragraph caused discomfort for Japan. It said: We deplore the decision taken by the recent OPEC conference. We recognize that relative moderation was displayed by certain participants. But the unwarranted rise in oil prices nevertheless agreed upon are bound to have very serious economic and social consequences.
The Daily Yomiuri reported: Foreign Minister Sonoda was displeased with the strong censure of OPEC. Why this sensitivity? Because Japan imports almost all its oil from OPEC. Thus the article concluded: One top Foreign Ministry official said after the Tokyo summit that Japan would take steps to placate the oil-producing nations.
Obviously, these seven nations did not achieve one of their most important goals—unity of action. Also, the problems confronting these, and other nations, are just as large now as they were before the Tokyo summit. Actually, they are larger, because the price of oil is much higher now.
Among the few countries that have a substantial influence over the prices of crude oil and natural gas, Iran is probably the most feared by the international community due to its strategic, geographic and geopolitical position in the Middle East and Central Asia.
Regularly coming into economic conflict with the United States over the last few years, Iran has successively rebuffed calls for it to expand the production level of the OPEC, threatened to take control of the Strait of Hormuz – where half of the world’s oil production is transported weekly, allegedly supported terrorist groups in Lebanon and Palestine and, in 2007, threatened to bomb half of the off-shore oil and natural gas platforms in the Caspian Sea if the Americans didn’t remove their troops from Azerbaijan.
There are a wide range of factors that influence oil prices, from piracy in the Indian Ocean to a rise in Chinese demand. But Iran now holds a special spot on the list since geopolitics have moved it center-stage.
It’s important to remember that Iran is the world’s fourth largest oil producer and also possesses the world’s second largest natural gas reserve. By such standards, Iran could hold half of the world hostage in terms of energy. So why hasn’t it happened yet?
Iran needs the Western world to buy its oil and its natural gas because, just like every country across the globe that relies on natural resources for the survival of its economy, the Islamic Republic needs to eat, needs to finance its infrastructures, needs to pay for its nuclear program and its military equipment. The problem is that Iran has allied itself with one of the most feared countries in the world in terms of energy and military power, the one and only motherland: Russia. The same Russia that has been providing Iran with unique missile guiding systems, with the latest Sukhoï and MIG combat planes, with access to some information on civil nuclear engineering, and the same country that was given an offer to join the OPEC two months ago by the same man who represents the Islamic Republic: Mahmoud Ahmadinejad.
Furthering this process, Iran recently offered Russia, Venezuela and a few Caspian Sea countries a place in the formation of a new cartel to control natural gas markets, using the same model as the OPEC. The day following this announcement, oil prices soared by and natural gas prices followed by about the same amount.
From a technical point of view, Iran cannot by itself determine the new crude oil prices, it requires the agreement of a majority of the OPEC council. From a practical point of view, it can influence it greatly, and at a very impressive speed. Over the course of 2008, crude oil price went up six times, leading to a ceiling price of 7 per barrel before going down again. Every single time, the rise in prices was the direct result of an action taken by Iran: testing new mid-range missiles, announcing the possibility of a cut in OPEC production, announcing civil nuclear tests, etc.
Overall, Iran has a considerable influence over crude oil and natural gas prices, but it’s never been very technical. One must understand the nature of Iranian provocation, and not respond to it by creating a “risk premium” or “fear premium” of . The western world still needs to learn how to do that, and it could take a few lessons from Russia on the matter.
Thibault Normand is the owner of Eastern Intelligence
He works as a free lance writer in business intelligence and consults on stratehic matters such as oil and gas business, in Eastern europe, Russia and Central Asia. Read more about him here : Who am I?
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