A V Rajwade: Oil prices: politics and economics

WORLD MONEY/ Prices are unlikely to soften any time soon

With oil prices crossing $ 44 a barrel last week, it is as well to spend a few minutes on the politics of oil. Indeed, the pricing of no other commodity involves as much politics. Much of the post-World War I history of west Asia revolves around oil.

The "seven sisters" "" the big oil companies, now reduced to four after a series of mergers "" had always worked, at least in that part of the world, both as profit-seeking private enterprises and as instruments of national policy for the UK and the US, in particular.

Perhaps the most important of the political relationships has been the one between the Saudi Arabian monarchy and the US. The pact was established towards the end of World War II "" assured supply of Saudi oil in return for American support of the monarchy.

It is difficult to imagine a more odd couple: an ultra-orthodox, Islamic, absolute monarchy and a liberal, technologically-advanced, multi-racial, secular democracy.

Indeed, Texan oilmen, like the two Bush presidents, have traditionally had close personal relations with the Saudi elite "" Fahrenheit 9/11, the phenomenally popular anti-Bush documentary, alleges that the president's first action after the terrorist attacks in New York and Washington, which shut down all US airports, was to arrange for thousands of Saudi citizens to leave the US in secret.

The US support for the Saudi monarchy has continued steadfast despite Saudis being the most generous donors to the madarasas (traditional Islamic schools that have often been breeding grounds for Islamic fundamentalists), and Saudi financial support to Pakistan's nuclear force.

But, obviously, these differences, which would have been major hurdles to developing close relations with the US (witness the experience of North Korea), become mere mundane details to be overlooked in the larger interest of oil politics.

For many countries, having oil reserves has often been more of a curse than a blessing. It is difficult to imagine that Iraq would have been attacked, first in 1991 in order to oust it from its occupation of Kuwait, or again last year, had it or Kuwait not been major producers of oil.

Even last year, as has by now been amply proved, the ostensible reasons for the war "" Iraq's alleged possession of weapons of mass destruction, its support for the 9/11 terrorist attacks in the US and so on "" were all false; the true motive was surely control of Iraqi oil. Nor have other countries been more fortunate "" the disastrous civil war in Nigeria a couple of decades back was the direct result of tribal rivalries over control of oil.

Even in pure economic terms, having huge oil reserves is not necessarily a blessing. It often leads to the so-called "Dutch disease", named after the experience of the Netherlands when it struck huge oil and gas reserves; this led to an appreciation of the domestic currency that made the Dutch industry uncompetitive, and hence the name.

Even in west Asia, the availability of easy oil money has merely led to an indolent population, and little development of non-oil sources of domestic economic activity. It is interesting to note that the most prosperous Emirate in the Gulf area is Dubai "" which has very little oil.

There is, of course, another side to the politics of oil "" this came into sharp focus in 1973 when OPEC broke the shackles of western oil companies, nationalised oil production and increased the price of oil many times over, in a bid to pressure the oil-importing countries to support the Arab cause vis-à-vis Israel. A possible repetition in 2004?

But, this possibility apart, what are the prospects and implications of the high oil price? Given that OPEC seems to have little surplus capacity; that Chinese demand is growing fast; the extremely fragile socio-political conditions in major producers such as Iraq and Saudi Arabia; the possibility of disruption in some Russian supplies; that oil demand peaks in the winter months and so on "" it's difficult to be optimistic about the price softening. In fact, some analysts are predicting a level of $ 50 a barrel by the end of the year. No wonder financial markets are jittery and business confidence less than robust. Coupled with the prospect of higher interest rates, the scenario for world economic growth does not look promising. As for India, do not be surprised if, with continued high oil prices, the current account goes back into the red.

Tailpiece: Even Western observers critical of the war in Iraq often contend that the world is a better place because of the removal of Saddam Hussein. One does not know about that but it would at least have been there for the thousand coalition troops, and tens of thousands of Iraqis who died in the war or in its aftermath. It has not changed for the victims of torture in the Baghdad prison; the torturers are, of course, different.

And, it is surely worse for the American taxpayers who have already spent a hundred billion dollars, for Iraqis with no civil services to speak of and facing a crushing burden of rebuilding devastated infrastructure, as also for the rest of the world with an erstwhile secular country now increasingly dominated by fundamentalists. Yes, the world is a better place because of the war "" for the shareholders of Halliburton, and for Mr Bin Laden's recruiting agents! Who else?

avrco@vsnl.com