| The price of democracy |
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 Multinational oil companies have reaped record profits the last two years due to the high oil price. But behind the scenes, they are playing a longer game. Civil society should learn from their approach. Hovering around $70 per barrel – the highest level since the late 1970s[1]– the oil price has sparked focus on the theme of “energy security”, notably at this July’s G8 meeting. But this term is a misleading one, a cover for companies to take long-term control over oil and gas resources, at the expense of genuine security. What is needed is to replace it with a genuine concept of energy democracy. An oil price prediction In October 2004, the International Energy Agency, which is seen as the world authority on oil prices, predicted that the oil price would fall to $22 in 2006. They missed by a factor of three. Similarly way-out predictions are repeatedly made by financial analysts, by the US government and by OPEC, the Organisation of Petroleum Exporting Countries. So, asked to write about the high oil price, we decided to limit our predictions to the following: that those who spend their time predicting the price will, before too long, end up with egg on their face. Whenever the oil price is extremely high or extremely low, it seems to attract talk of a “new era” – in the current case, of permanently high prices. While some have associated the high price with depletion of the planet’s reserves, in fact rates of production depend as much on politics, economics and technology as they do on geology. These other factors – determining what proportion of the world’s oil is extracted and by whom – are more difficult to predict. Major oil and gas companies do not expend a huge amount of effort on predicting the price. Like predicting the weather, their game is more to consider what might happen, to be prepared for it, and to calculate how to use it to their long-term strategic advantage. Mega-profits One obvious consequence of the high price is higher profits for oil and gas companies. At the end of July, ExxonMobil announced profits amounting to $4.7 million per hour – the second highest in corporate history [2]. Such profits raise the question in oil- and gas-producing countries of whether the state is getting a fair share. Meanwhile, the high price shifts the balance of market power from company to state: with limited other available supplies, they have little choice but to accept the terms offered by producing governments. The oil price is one of the most important factors behind the change of contract terms in Venezuela last year (and more recently in Algeria and Indonesia), the nationalisation in Bolivia this year, and continued pressure on private companies in Russia and Kazakhstan. Conversely, during the low price of the late 1990s, the companies took advantage of the weakness of Asian nations following their financial crisis, to sign contracts which gave the companies very favourable terms, but outlasted the crisis and the low oil price. Thus despite the immediate boon of record profits, the high oil price creates a long-term challenge to multinational companies’ power over the energy market. Pushing the frontier Far from sitting back on their current windfall, oil companies are working to turn this dynamic to their longer-term advantage, taking on oil-producing governments both in their own countries and abroad. In the 1970s, the oil majors, nationalised out of the world’s largest oil provinces, moved into the more expensive North Sea and Alaska, a move enabled by the high oil price. Subsequent increased production in these areas built up extra capacity, which along with reduction in demand led to the drop in oil price of the late 1980s – and the containing of OPEC’s power. This approach was continued into the 1990s and the start of this century, with a rash of new oil and gas developments around the globe, especially offshore and in remote and pristine onshore areas. However, these projects have mostly been small compared to the giant provinces of the Middle East, Venezuela and Russia – which between them contain more than three quarters of the world’s known oil reserves. Oil production in the rest of the world has flatlined since the mid-1990s – while global demand has accelerated upward. The oil-soaked sands (usually extracted by strip mining) must be heated to high temperatures to release the oil. This is highly energy-intensive, expensive and environmentally damaging. Now, some oil companies are using the high oil price to develop these resources. Shell is one of the frontrunners. Already the operator of Canada’s $10 billion Athabasca Oil Sands project, this year the company bought a small Canadian oil sands company for $2.2 billion, and spent a further $400 million just on a set of speculative land leases. It is also pursuing oil shales in the USA and China. But while investing in this new frontier, the ultimate prize for oil and gas companies is to break back into the countries with giant reserves. The supermajors gained significant positions in Russia in the 1990s. Now attention is turning to the Middle East. Spreading “democracy” US Vice President Dick Cheney famously reflected on the distribution of oil wealth in 1996, when he was CEO of Halliburton, that “The problem is that the good Lord didn’t see fit to put oil and gas reserves where there are democratic governments.” In fact, the correlation is not the product of God’s mysterious will. Owing their political success to outside support, many governments – from Saudi Arabia to Azerbaijan to Colombia – have favoured the interests of the USA and foreign companies over those of their own populations. Equally in countries with a high degree of nationalism, oil has been associated with undemocratic governments, which have used oil income to fund high social spending with low taxation, dampening pressure for representation and democracy, and to build up their internal security forces to ward off protest. But what Cheney really meant by “democratic governments” was “governments supporting US interests” – a point echoed in May this year, when President Bush said he was concerned about “erosion of democracy” in Bolivia and Venezuela, referring to lack of “respect for property rights”. Although oil companies have mostly been cautious of being seen as too close to politics, one exception keen to show its allegiance to Uncle Sam has been the British company BP. American companies’ compliance with US sanctions has passed without comment, but BP made a point of not dealing with Iran, unlike other European companies. BP has also tried to link “democracy” with investor rights. At a conference in Dubai in March, the company’s head of policy Nick Butler commented: “By 2015 up to 80 per cent of supply will come from just three areas of the world. West Africa, Russia and overwhelmingly the Middle East ... Few of those countries are democracies and few are open to international investment.” But the oil majors have all echoed the call for opening reserves to foreign investment – often arguing that it is the only way to reduce the oil price. ChevronTexaco’s vice chairman Peter Robertson, for example, argued in March that “We should promote transparency and the free flow of energy trade and investment on a level playing field. By removing market barriers, we could increase production significantly and moderate the price volatility we face today.” Energy security – for whom? Companies have also tied access to reserves to “energy security”, the current buzzword on which this year’s G8 meeting focussed. Although “security” is a comforting word, and is dressed up in concern over energy poverty, the G8’s emphasis is on free market structures of energy provision – which will naturally favour those with most power in the market, the largest consumers of energy. Indeed, it is a sad irony that often people in major oil-producing countries suffer severe energy poverty, and the countries are forced to import expensive refined products, increasing the risk of smuggling and corruption. For example, Nigeria, the world’s eighth largest oil exporter, imports 76% of its gasoline, and 34% of its kerosene, at a cost of $3.6 billion. In the Niger Delta, the oil-producing region, firewood is the primary energy source for 73% of people, according to the UNDP’s Human Development Report. The G8 insists that the majority of investment must come from the private sector – in part by breaking open public sector oil and gas industries. The G8’s official declaration on energy security promised that “We will work to reduce barriers to energy investment and trade. It is especially important that companies from energy producing and consuming countries can invest in and acquire upstream and downstream assets internationally”. This model – giving multinational companies control – can worsen local access to energy in the producing country, as the companies prioritise exporting the oil to international markets. Nor does “energy security” lead to physical security. For Russia, “energy security” was a major reason for its two brutal wars with Chechnya, an important pipeline corridor. US policy towards the Middle East has also clearly had a destabilising effect. While this has pushed up the oil price, it has been to the USA’s medium-term advantage, with instability leading to governments offering oil and gas companies investment opportunities in order to help secure their position. Even Iran is now offering new production contracts, in an effort to win allies against potential US military action. Iraq, with 10% of the world’s oil reserves, is seen as the lynchpin. Since the start of the occupation, oil companies and the US and UK governments have worked hard to reshape the country’s oil sector. Now, following the formation of a permanent government, an oil law has been drafted to allow long-term production contracts to be signed with multinational companies. The draft law has been reviewed by the US Energy Secretary and by nine major oil companies – before even being seen by the Iraqi parliament. The combination of military force, and legal mechanisms for ensuring resources are taken to the wealthy consuming countries of the world, at the expense of local people’s needs, suggests a more accurate phrase might be not energy security but “energy imperialism”. Climate change In theory, a high oil price ought to increase the viability of alternative, renewable fuels, and of decentralised energy networks, and to encourage conservation. But such reaction has been limited – in part because rich country economies are less dependent on oil than 30 years ago, and so less responsive to the oil price. What response there has been has focused on securing greater oil and gas supplies, with nuclear the favoured alternative. British Prime Minister Tony Blair’s feeble attempt to raise climate change in last year’s G8 meeting has been subsumed into the energy security agenda. Now, UK policy, like this year’s G8 declaration, talks simultaneously about expanding the supply base of fossil fuels while urgently addressing climate change, apparently seeing no contradiction. Another reason for the lack of action to move to sustainable power generation is that energy infrastructure is geared towards centralised coal, gas and nuclear generation. And in transport, there is no significant replacement for oil [3]; while ownership of cars, and use of road and air transport, have continued to rise: a trend most politicians dare not challenge. One impact of the high oil price is that it increases public interest in scrutinising oil companies’ behaviour. Faced with this reputation risk, the companies have all dramatically scaled up the visibility of their advertising, not so much to sell products but more to ‘sell’ the corporations themselves as responsible organisations – including for some highlighting their role in renewable energy. BP and Shell are still among the world’s largest renewable energy companies – which gives them significant influence over the rate of change of any energy transition. Both companies insist that renewables will not provide a significant proportion of the energy mix for several decades. BP invests just 2.7% of its capital - $450 million per year [4]- in renewables, and Shell even less. Energy democracy We have noted that oil and gas companies are not just sitting back on their record profits. Likewise, civil society gains tactical advantages from the high price, but should use them within the longer-term context. For example, it would be tempting to surf the wave of resource nationalism, as a route to restricting the role of multinational companies. But the longer-term impact may be less democratic, more repressive governments. On the other hand, there is an opportunity to steer the rejection of foreign company control towards a lasting greater democratisation of decisions on oil policy – in which communities affected by the developments have a genuine say in how, and whether, they take place. It would be equally tempting to use the high price to call for an end to the oil age, hoping that potential supply constraints would get attention where environmental and social issues have failed. But we have seen that the policy response will favour not renewables but nuclear power, and greater interference in other countries’ energy policies. Conversely, climate change is no longer in any serious doubt – and presents the most compelling arguments for a transition in energy sources, and in rich countries a reduction in total use of energy. To borrow from David Korten, we should worry less about the ‘crisis of sources’ of fuels – whether the oil is going to run out – and more about the ‘crisis of sinks’ for their waste products – how much capacity the atmosphere has to carry greenhouse gases. Making climate change arguments now, to push for switching of energy use, can be effective, as environmental advocates within organisations will experience less resistance from finance managers. In this too, civil society should be guided by core principles of democracy and justice. While energy resources under the ground belong to the citizens who live there, the atmosphere is a global resource owned by all of the world’s people. There must be a strong concept of equity in how rights to atmosphere are divided in future climate regimes, taking into account who bears the responsibility for, and has benefited from, emissions to date. There should also be a concept of just transition, in which those most affected by an energy transition (such as oilworkers or oil-dependent countries) have a strong say in how that change takes place, and are supported by those who have gained from the fossil fuel economy. Meanwhile, the concept of decentralised energy, in which local, small-scale provision meets people’s needs sustainably, has gained welcome momentum recently. The high oil price has renewed talk of “energy security”, calling for increased supply of energy to wealthy countries and expansion of their corporations – at the expense of poorer countries that need energy for development, at the expense of oil-producing countries who deserve a fair deal for their natural resources, and at the expense of the world’s whole population which urgently needs serious action to cut greenhouse gas emissions. What we really need is energy democracy. Source: www.oilwatch.org Oilwatch Resistance Bulletin, No. 63 [1] In the 1970s, the nominal price was lower than now, but adjusted for inflation it was higher. [3] to produce a comparable amount of biofuels would require more land than is available
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