The life and times of black gold

The Political Economy of International Oil
January 27, 1995

We have here an extremely good, concise and well-balanced discussion of the political economy of international oil with particular reference to those countries which are, or were recently classed as, less developed, together producing some 40 per cent of the world's oil. Those countries whose per capita incomes have become very large because they have a small population relative to their oil incomes, such as Saudi Arabia, Libya, Abu Dhabi and Kuwait, are referred to as "ex LDCs" as contrasted with those oil producers whose economies are expected to continue to develop in a more fundamental sense. The ex-Soviet Union, which was the second largest world oil producer in 1992 is not considered since to do it justice would require a book of its own. On the other hand the development of world oil has been so dominated by seven giant companies, five of which were from the United States which then consumed a quarter of world oil, that the political economy of the world industry cannot be discussed apart from US government policies towards the oil industry.

The story is a long and intricate one but George Philip has succeeded brilliantly in pushing his analysis to the heart of the issues in few words. Against the background of his analysis of the political economy of US and international oil he discusses the effect of oil revenues on the nature of economic and political development in Third World producers. In the US the small producers were initially very important and had a strong influence on the government antimonopoly policy which resulted in the break-up of Standard Oil in 1911. Partly because of the attitudes to and policies towards the large oil companies, these were increasingly induced to look abroad and they successfully entered those countries where oil resources were important and costs much lower than those in the US. The host countries soon realised that there were great opportunities for renegotiations of the original agreements to their advantage and with this the "real political history of oil in LDCs begins".

Philip traces this history from the earlier imperialism to the rise of "corporate liberalism" after the Second World War, discussing the differences between developments in the western hemisphere and those in the Middle East and elsewhere and the changing role of governments and companies as what he calls the "transnationalisation" of the oil industry and the changes in the taxation systems progressed. The more liberal attitudes of the US government which came with the Roosevelt era intensified the changes in intergovernmental relationships. Philip specialises inter alia in Latin America and his chapter on Latin American developments, the analysis of the attitudes of the US and UK, particularly with respect to the Venezuelan pressures for a greater income from oil in the late 1930s, and the Mexican expropriation of 1938 is of special interest.

As production expanded in the established oil-rich countries and new countries entered the industry, oil became very cheap in spite of the changes in the taxation systems after the Organisation of Petroleum Exporting Countries (OPEC) was formed in 1960. As demand grew rapidly, the industrial importing countries became increasingly dependent on the exporters from developing countries with the apparently paradoxical result that they became less able to influence their governments' policies; oil prices began to rise significantly in the early 1970s. Then came the successive "oil shocks" between 1973 and 1978. These had, together with other considerations, permanent effects on the composition of the industry and the ensuing complicated relationships are perceptively analysed.

One of the major themes of this book relates to the effects of oil and oil money on the political and economic progress of the oil producing countries, for it is these countries which account for by far the greater part of internationally traded oil. It is striking how little this particular tradeable commodity has contributed fundamentally to economic development in most of the great oil exporters of the Third World. Some of the most important have become very rich on oil revenues but at the same time have very small populations and little potential for substantial and sustained development of their economies. But others with relatively large populations and economic potential have allowed themselves to become dependent on oil revenues and have a poor development record. Only a very few, and they are ones that have made active efforts to reduce their dependence on oil money, have been reasonably successful in promoting genuine development. Philip briefly explores the implications of this excessive dependence on money for a successful economic development.

He also notes, and this may become internationally even more important, the tensions arising from the growing power of the rich oil producers in the Gulf and Africa with economic and social values far removed from those in the US and Europe. "Such tensions will be difficult for the main first world consumers of oil, because their interests will lie in one direction and their values in a very different one." The Iraqi war was a tragic example.

Edith Penrose is emeritus professor of economics, University of London, and INSEAD, Fontainebleau, France.

The Political Economy of International Oil

Author - George Philip
ISBN - 0 7486 0490 1
Publisher - Edinburgh University Press
Price - £35.00
Pages - 220pp

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