Oil and Unrest

What Uprising in the Arab World Means for Energy Supplies

With political unrest spreading across the Middle East and North Africa, 2011 might turn out to be as momentous a year for the global geopolitics of oil as was 1971. Many of the factors behind the current protests -- high unemployment, large income disparities, rising costs of living (especially for food), and ruling gerontocracies and kleptocracies -- have their roots in the emergence of the region's petro-states, a process that was cemented that year.

In 1971, the oil-producing countries of the Arab world tried to shift the balance of power between themselves and Western oil companies and consumers. Libya -- negotiating on behalf of itself and Algeria, Iraq, and Saudi Arabia -- declared that they, and not foreign companies, would set the price of oil flowing into Europe. As a result, prices to Europe, the main market at the time for traded oil, increased by 35 percent overnight. At the same time, members of the Organization of Petroleum Exporting Countries (OPEC) raised taxes on oil companies from 50 percent or less to as much as 80 percent. Also in 1971, Libya nationalized BP's oil concession in the country, and Algeria nationalized 51 percent of the French company CFP's operations.

That same year, the United States pulled out of the Bretton Woods system and moved away from the gold standard, effectively devaluing the dollar; OPEC, whose oil receipts are denominated in dollars, compensated by raising prices. Meanwhile, Libya began to use what Muammar al-Qaddafi, who had taken power in 1969, called his country's "oil weapon" against the West. The nation reduced its output from 3.35 million barrels a day in 1970 to 2.25 million by 1972, dropping even further to 1.6 million in 1973, when the Arab countries invoked an oil embargo in order to raise prices and revenue. In short, 1971 marked the beginning of a new era.

The oil trade that followed was marked by inherent conflict. As one OPEC country after another nationalized its oil industry, the integrated nature of the global oil trade, in which the international majors owned everything from the wellhead to the means of wholesale delivery, began to fall apart. Companies started looking elsewhere for oil, but with less success now that they no longer enjoyed easy access to low-cost supplies.

Register for free to continue reading.
Registered users get access to two free articles every month.

Or subscribe now and save 55 percent.

Subscription benefits include:
  • Full access to ForeignAffairs.com
  • Six issues of the magazine
  • Foreign Affairs iPad app privileges
  • Special editorial collections

Latest Commentary & News analysis