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(Archived Jan 31, 2005)
 

Commentary: An Introduction to Petropolitics

By RICHARD A. FINEBERG
August 2004

(This section was last updated Oct. 7, 2004)


Is oil just another commodity, or does petroleum play a fundamental role in determining the course of society? During the Second World War, Germany and Japan went as far as their petroleum supplies would take them, but no further. Later in the century, oil price spikes were frequently followed by severe economic decline. Today petroleum's economic wallop, though still significant, has declined somewhat due to the increasing economic importance of the service sector. But the social results of petroleum development may be more significant than the direct economic effects. This analysis looks consequences of petroleum development through the lens of a theory known as petropolitics.


Some observers use the term "petropolitcs" to describe "the extent to which the world's largest, and arguably most destructive, industry influences and dictates policy and politics — particularly in the United States today."1 The first part of this analysis outlines the empirical bases for the theory of petropolitics. The second part examines the relevance of this theory to Alaska's experience managing the only super-giant oil field developed in the United States in the last 75 years.

Part I. The Theory of Petropolitics

 Oil Change: Petropolitics Briefing Book 2004 declares that "collective addiction to oil is at the root of at least six fundamental issues facing our nation, and our planet, today: corporate-driven globalization, global warming, poverty, war, terrorism, and undue influence of money on the political process."2 In the Petropolitics Briefing Book, political economists Terry Lynn Karl and Ian Gary offer this summary introduction to the political and economic effects of petroleum development:

Study after study demonstrates that, as a group, countries dependent on oil as their leading export have performed worse than other developing countries on a variety of economic indicators; they have performed worse than they should have given their revenue streams; and poverty within their borders has been exacerbated rather than alleviated over the past two decades. . . .

When taken as a group, all "rich" less developed countries dependent on oil exports have seen the living standards of their populations drop — and drop dramatically.

For most countries, including Algeria, Angola, Congo, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Peru, Qatar, Saudi Arabia, and Trinidad Tobago, this development failure has been very severe, plunging real per capita incomes back to the levels of the 1970s and 1980s. 3

In her 1997 book, The Paradox of Plenty: Oil Booms and Petro-States, Karl explains that these paradoxical, negative outcomes result from the interaction between political institutions and economic forces. According to Karl, when petroleum is discovered in places where strong, coherent political institutions do not exist, the results are apt to be grim, if not devastating, for the local population. At the start, the oil industry needs permission to operate and therefore helps a weak central government strengthen its control. Cronyism and corruption are the probable result as government, in turn, becomes dependent on the support of industry to funnel money to friends, family, military, political supporters or favored class and ethnic or religious groups. In economic terms, because major oil projects are capital intensive, only the biggest players are able to get into the game. Government officials, anticipating high profits from development (and/or needing more revenue for military spending to control their population or wage war), borrow for additional investments. At the same time, industrialization and agricultural development plans flounder as commodity prices, driven by demand for newly introduced foreign goods, rise to soak up whatever currency that is not diverted to debt financing for more resource development. Traditional occupations, cottage industries and small-scale farming languish. The atrophy of the non-oil sector is known as the Dutch Disease.4

When weak states attempt to cope with bonanzas in other commodities - such as gold, copper, diamonds, nitrates, guano, wheat and sugar - similar problems are liable to occur. The term "resource curse" is sometimes used to refer to the frequency with which the economic performance of mineral-driven, resource-rich economies significantly lags that of resource-poor countries.5 Two factors may set oil apart from other resource booms: size and duration. Karl observes that the extremely high level of cash inflows unique to petroleum booms is liable to adversely affect regulatory, extractive and distributive actions. Meanwhile, the value of petroleum and its slow depletion permit petro-states to borrow and pay for their choices later, without having to squeeze their populations.6 From the petropolitical perspective, these characteristics make resource booms different; the only question is, is that difference one of degree, or of kind?

Karl launched her inquiry into the effects of petroleum development after OPEC founder Juan Pablo Perez Alfonzo of Venezuela exclaimed during a 1976 interview that his country was "drowning in the devil's excrement." Perez Alfonzo told Karl, "[t]en years from now, twenty years from now, you will see. Oil will bring us ruin." With rise of OPEC during the 1970s, oil prices soared from $3.00 to $40.00 per barrel, government revenues increased with them. The influx of money gave rise to new aspirations for a bright future in which lesser-developed nations could catch up with developing nations. These high hopes were soon shattered memory. Even before the decline of oil prices in 1985, petroleum exporting countries were plagued by what Karl described as "bottlenecks and breakdowns in production, capital flight . . . double-digit inflation, and overvalued currencies," accompanied by political turmoil: the Shah of Iran overthrown, Nigeria oscillating between military and civilian rule, Algeria on the brink of civil war, Mexico and Venezuela struggling desperately to preserve their political systems.7

To Karl, it seemed that the dire outcome of oil development Perez Alfonso predicted two decades earlier had come to pass. Nevertheless, she did not conclude the negative outcomes of oil development are inevitable. Over time, she argued hopefully, the vicious cycle of petroleum development can be broken through the adoption of wise economic policies, diversified tax structures, professional civil services and more representative and equitable institutions.8

The change for which Karl hopes was not evident in early 2004, as indicated by the paragraphs from the Petropolitics Briefing Book quoted earlier in this discussion. In November 2003, the World Bank Group (WBG) Extractive Industries Review (EIR) recommended that the WBG "should phase out investments in oil production by 2008 and devote its scarce resources to investments in renewable energy resource development, emissions-reducing projects, clean energy technology, energy efficiency and conservation, and other efforts that delink energy use from greenhouse gas emissions."9 Noting that oil and coal projects will continue to be a major source of energy and economic improvement for the world's poorest people, the World Bank management group declined to adopt the EIR proposal but called for increasing investment in renewable and clean energy sources and greater selectivity in the funding of extractive industry projects.10

Today, many of the world's major oil companies are based in the United States, which possesses three percent of the world's oil reserves but consumes approximately 26 percent of the world's daily oil production. By comparison, the Persian Gulf holds approximately 65 percent of the world's oil reserves.11 To redress this imbalance, the United States seeks to develop sources of oil outside the Middle East by actively pursuing development in areas such as sub-Saharan Africa and the Caspian Basin.12 Whether the U.S. is the creator or just another victim of the petropolitical phenomena can be debated; Vice-President Dick Cheney belongs to the victim school. In 1996 Cheney, then CEO of the oil field services company Halliburton, told an energy conference in New Orleans that "[t]he problem is that the good Lord didn't see fit to put oil and gas reserves where there are democratic governments." Cheney's proposition is not exactly true. As shown in Table 1, three of this nation's ten largest petroleum suppliers in 2003 — Norway, the UK and Canada — fit most people's notion of democratic regimes. All three have diversified economic sectors, which further insulates them from the oil malady described by Karl.

According to the petropolitical theory, the remaining seven countries among the top U.S. petroleum suppliers are all potentially vulnerable to the petropolitical malady. From this perspective, it is not surprising that every member of this group does in fact exhibit symptoms, ranging from dictatorship or repression, civil insurrection or military conflict war and/or a lower general standard of living than one might expect of a country taking on petroleum revenues other nations might envy (see Table 1). While corroboration is not causation, in the complicated world of social analysis, it is not often that one finds such clear support for a theory. During the past three years the all seven of these nations have seen increased U.S. military aid and arms sales or transfers, with two exceptions: Saudi Arabia, which has purchased outright more than $37 billion in U.S military equipment in the last decade, and Iraq, occupied by the United States in 2003.13 The negative outcomes associated with the major U.S. petroleum suppliers may not be conclusive. Nevertheless, the pattern is significant and warrants further analysis.

Table 1. Major U.S. Petroleum Suppliers and the Petropolitical Syndrome

Rank
(2003)

CountryDescription

1.

Canada

[Diversified economy; democratic institutions]

2.Saudi Arabia

U.S military assistance protects Saudi dynasty against internal and external animas while "human rights record remained poor . . . . security forces continued to abuse detainees and prisoners, committed torture." (U.S. State Department Human Rights Report, March 2003)

3.Mexico"Federal and state law enforcement officials and one member of the military were accused of committing unlawful killings . . . documented reports of disappearances." (U.S. State Department Human Rights Report, March 2003)
4.VenezuelaTurmoil and petroleum development intertwined through most of the 20th century;b the U.S. government is alleged to have aided in attempted coup against President Hugo Chavez in 2002.
5.NigeriaAfrica's largest oil producer for decades has enriched a tiny elite while environmental health problems and impoverishment plague inhabitants of oil producing areas who traditionally lived from fishing, cassava, palm oil and other crops. The military dictatorship that hung Ogoni spokesperson Ken Saro-Wiwa in 1993 was relaxed after death of Sani Abacha in 1998; Niger Delta production was halted in 2003 due to civil unrest.
6.IraqDictator Saddam Hussein was ousted by military invasion in 2003.
7.U.K.[Diversified economy; democratic institutions]
8.AlgeriaIn the past ten years, as many as 150,000 people have been killed in Algeria's war against its own people.
9.AngolaAfter a 27-year civil war, Oxfam reports that 78% of the rural population live in "deep poverty."
10.Norway
[Diversified economy; democratic institutions]
Sources:
      Rank - Total petroleum imports supplied to the United States in 2003 (U.S. Energy Information Agency, Monthly Energy Report, March 2004, Table 3.1.
     Thumbnail Descriptions — From "Oil & War: Military Assistance to the United States' Top 10 Oil Importers," in Oil Change: Petropolitics Briefing Book 2004 (Foreign Policy in Focus and the Sustainable Energy and Economy Network), pp. 31-34, supplemented by: (a) Michael Klare, "Oil & Politics — Bush-Cheney Energy Strategy: Procuring the Rest of the World's Oil," Petropolitics Briefing Book, pp. 5-7; (b) Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States (University of California Press, 1997), ch. 4-8. (c) "Bush-Cheney Energy Strategy: Procuring the Rest of the World's Oil," p. 9; Michael Renner, "Oil & War — Fueling Conflict," Petropolitics Briefing Book, p., 29.
     (For information on recent U.S. military ties, see "Oil & War: Military Assistance to the United States' Top 10 Oil Importers.")
 To this point, the argument has been made that the petropolitical curse differs — either in degree or in kind — from other forms of the "resource curse." It has further been suggested that the petroleum malady is evident in the countries that fuel the energy needs of the United States. What are the consequences of this disease?

One potential assessment tool is Human Development Index (HDI), which was initiated by the United Nations Human Development Program in 1990 to evaluate trends in the long-term well-being of people around the world.14 The HDI attempts to measure standard of living in terms of three factors: (1) changes in life expectancy, (2) adult and youth literacy and school enrollment levels and (3) figures for gross domestic production (GDP) and per capita GDP. This index is not perfect. One defect of the HDI is that if national leaders enrich themselves at the expense of the general population, the average per-capita income would not reflect a corresponding improvement in the standard of living for the general population. The HDI also has been criticized for failing to consider ecology issues or factors such as social stress induced by energy development. Despite these shortcomings, the HDI the index represents an improvement over a one-dimensional assessment based solely on gross domestic product.15 Because it provides a consistent set of criteria for assessing changes in living conditions, the index can be of use in assessing whether petroleum revenue is more blessing or curse to the people of petro-states.

Table 2 summarizes changes in the HDI between 1995 and 2001 for the eight major U.S. petroleum suppliers for 2003 for which index data were available.16 In reading this table, the following background may be of use. The HDI listing divides countries into three categories, depending on their level of human development — low, moderate or high. In 2001, the "high human development" group included 55 nations. Canada, the United Kingdom and Norway- the three major U.S. petroleum suppliers with well established democratic institutions and diversified economies — all ranked near the top of the HDI index. Mexico also fit into the "high" group, ranking 55th, just above the dividing line between "high" and "medium categories. As a general rule, over the six-year period under consideration improvement in the scores for nations in the "low" category was significantly greater than that of nations in the "high" category.

 

 
 
Table 2.

1995 and 2001 HDI Rankings of Major U.S. Petroleum Suppliers in
2003 v. Oil Production and Price

Rank of petroleum Supplier
(2003)

Country Oil ProductionWorld Avg. Oil PriceHDI Index
HDI Rank
199420001994200019952001
(2001)
(000 barrels per day)
$15.62$18.57
Change, '95-'01
.........................................
18.9% (3.7% real)

 

 

U.S. Suppliers with Diversified Economy and Democratic Institutions (3)

1.Canada22802710.929.937
8
7.U.K.26752880.916.930
13
10.Norway27553365.924.944
1







3-Country Avg. 25702985.923.937
7.3
Change, '95-'01
16.1%.....................................................................1.5%
 

U.S. Suppliers without Diversified Economy and Democratic Institutions (5)

2.Saudi Arabia89659115 .746.769
73
3.Mexico32653450.771.800
55
4.Venezuela26753321.765.775
69
5.Nigeria18802103.452.463
152
8.Algeria13001580.668.704
107







5-Country Avg. 18,08519,568 .680.702
91.2
Change, '95-'01
8.2%.....................................................................3.2%
 
Unranked U.S. Suppliers without Diversified Economy and Democratic Institutions (2)*
6.Iraq5201580n.a.n.a.
n.a.
9.Angola555735n.a..377
164
Sources:
     Rank as U.S. Petroleum Import Source — Total petroleum imports supplied to the United States in 2003 (U.S. Energy Information Agency, Monthly Energy Report, March 2004, Table 3.1 (includes natural gas).
     Oil Production — BP, The Statistical Review of World Energy, 1995 and 2001.
     Oil Price - BP, The Statistical Review of World Energy, 2001 (1992-1994 and 1998-2000 WTI average; real increase calculated from 1993 and 1999 prices using U.S. CPI-U, March 2004).
      HDI (Human Development Index) Rankings — From: United Nations Development Program, "Human Development Index Trend," The Human Development Report, 2003 Human Development Indicators 2003
     * Iraq's HDI rank was not reported and Angola (ranked 164th in 2001 with a .377 score) was not reported in 1995.
 

Analysis of the HDI scores of the major U.S. petroleum suppliers most vulnerable to the resource curse for which comparative ratings are available — Mexico, Venezuela, Saudi Arabia, Algeria and Nigeria — confirms doubts regarding the putative benefits of petroleum development. Consider:

  • During this period the five lesser-developed major petroleum suppliers for which HDI data are available recorded an average gain of 3.2% on the index. The improvement in HDI scores for these five oil exporters was virtually identical to the improvement for all 91 nations showing low or moderate levels of human development.17 Thus, petroleum wealth did not set these petroleum exporters apart from other lesser-developed nations on the HDI index in any discernible way. With the inclusion of Iraq — not included on the HDI but reported to have seen a 50% decrease in GDP during the last two decades18 — the average improvement shown by the major U.S. petroleum suppliers during this period would significantly lag that of the 91-nation group.
  • On average, between 1995 and 2001 the 30 countries in the low ranking group on the HDI index raised their HDI scores by an average of 4.0%. By comparison, Nigeria — Africa's largest petroleum exporter and the only country in this cohort from the low HDI group — experienced index improvement of 2.43%. Put otherwise: oil-rich Nigeria significantly lagged its cohort.
  • To test whether the major U.S. petroleum suppliers were representative of petroleum exporting nations, two substantive alterations to the list were considered: First, the next four largest petroleum importers to the United States were added to the list in Table 2.19 Second, the list of major petroleum suppliers to the United States, including both oil and natural gas, was replaced with the list of major crude oil suppliers.20 These substitutions resulted in a reduction to the lesser-developed petroleum exporting group's HDI improvement between 1995 and 2001 while increasing the gap between increased oil production and improvement on the HDI.

The apparently strong correlation between petroleum development and the negative outcomes summarized in the preceding tables could be the result of many different factors (or even, perhaps, coincidence). For this reason, the data in Tables 1 and 2 cannot be regarded as proof of the petropolitical theory. Nevertheless, the dark thread of petroleum development can be seen running through a tapestry of repression, economic stagnation, a widening gap between rich and poor, war and political instability in a disturbing pattern.

Many of the historical facts on which petropolitical thinkers base their analyses can be found in Daniel Yergin's Pulitzer Prize-winning history, The Prize: The Epic Quest for Oil,Money and Power.21 Yergin's 1989 book became a number-one best seller and was translated into 12 languages. Although Yergin's historical narrative of petroleum's century is consistent with the story told by the petropolitical thinkers, he does not belong to this school. To Yergin, the history of "the world's biggest and most pervasive business" reflects "the profound influence of chance and fate."22 Yergin devotes his careful historical research and elegant prose to describing the important role that petroleum development plays in world events. But he is not inclined to contemplate causes. For example, Yergin never even mentions the term "Dutch Disease," long synonymous with resource development followed by economic stagnation. To the petropolitical thinker, the significant developments of which Yergin writes are not matters of anecdote, circumstance or coincidence. Rather, the petropolitical thinker focuses on the forces set in motion by what Yergin calls "the epic quest for oil, money and power" to unravel the dark threads of the petroleum development tapestry.

While many people are familiar with Yergin's widely celebrated history of petroleum, it is probable that far fewer people have been introduced to the petropolitical writing of Klare or Karl. In view of the strength of the evidence supporting the petropolitical view of petroleum development, this theory deserves a wider audience.

Part II. Petropolitics and Alaska

By virtue of its democratic tradition, one might expect that Alaska has some resistance to the maladies of petropolitics. Nevertheless, a glance at Alaska newspaper headlines quickly reveals that Alaska, like lesser-developed nations that suffer from the negative results of resource development, is an oil exporter that has encountered difficulty translating petroleum wealth into a stable, diversified economy.

Consider the long-running debate over how best to cushion the state of Alaska's economy — and the state government budget — against declining North Slope production and the gyrations of oil prices. The discussion revolves around proposals to balance the state budget by using the Alaska Permanent Fund, a petroleum savings account that has grown to nearly $28 billion in less than three decades. That's approximately three times the amount of the royalty revenues and special legislative deposits of petroleum settlement windfalls and annual inflation-proofing deposits.23 Some view the Alaska Permanent Fund as a model for handling petroleum revenue wisely.24 Others find it difficult to understand how the citizens of a state with a $28 billion nest-egg think they have a revenue shortfall.

The Alaska state legislature also funds an annual Permanent Fund Dividend (PFD) payout to all Alaskans.25 Some observers have recommended that that post-war Iraq should attempt to combat the resource course by setting up an Alaska-style dividend program.26 This proposal has been mentioned favorably by observers ranging from NGO representatives to U.S. Secretary of State Colin Powell and former Alaska Governor Jay Hammond, one of the founders of the Alaska program.27 Despite those enamored of the PFD program, others believe that the Alaska PFD program is fundamentally flawed because

. . . sending royalty checks to each Alaskan fosters pro-extraction and anti-conservation bias . . . (which tends to) buy citizen support for more extraction, which could pervert public policy processes . . . and prevent more sustainable development options.28

Criticism of the PFD program is seldom heard in Alaska. Indeed, many Alaskans want to put the dividend program into the state constitution, guaranteeing automatic and direct payout of a small percentage of Alaska's oil wealth to all citizens without annual legislative approval. When discussion of state fiscal issues comes up, a robust chorus of "don't touch my dividend" immediately drowns out meaningful discussion of whether to use a portion of Permanent Fund income to balance the state budget. For example, in 2004, the governor declared that solving the state's fiscal crisis was his top priority. To that end, he convened a three-day, statewide gathering of civic leaders to make recommendations to the Legislature on four revenue management issues. One measure would have enshrined the PFD in the state constitution; conspicuously absent from the governor's agenda was any mention of the fundamental problem of generating new revenue to balance the budget.29 As the end of the 2004 legislative session neared with no movement on the governor's plan to use the resources of the Permanent Fund, if necessary, to balance the state budget, the Governor urged the State Senate "to pass a Permanent Fund endowment plan in order to avoid a potential economic crisis" and "reminded Senators of the painful lessons of the economic recession that hit Alaska in the mid-1980s, when oil prices dropped to $9 per barrel and a high rate of state government spending had to be reduced by $1 billion over four years."30 Talk of a state budget crisis despite savings nearly 15 times greater than the annual state general fund operating budget (approximately $2 billion) suggests that the PFD program may be distorting Alaska's public policy dialogue. In any event, the proposal to lock in future PFD payments in the state constitution in the face of putative revenue shortfalls seems peculiar, if not illogical.

Alaska's skewed public policy perspective is also evident in the absence of clear and comprehensive public information on the division of petroleum wealth. When oil prices average $32 per barrel — $10 per barrel over the Alaska Department of Revenue's long-range forecast — the industry retains more than half of the windfall. By comparison, Alaska gets about 20 percent, with the remainder going to the federal government.31 In one year, this $10 per barrel equals $3.65 billion in windfall gains; in rough terms these gains are divided approximately as follows:

  •  Industry - $1.9 billion
  •  State - $0.7 billion
  •  Federal Government — $1.0 billion.32

In any event, the vast preponderance of the industry gain goes to three companies that control more than 90 percent of North Slope production and own a similar share of the Trans-Alaska Pipeline System (TAPS). No wonder BP, ConocoPhillips and ExxonMobil and their pipeline subsidiary the Alyeska Pipeline Service Co. spend so much money advertising their good works in Alaska.

The myopic nature of Alaska's fiscal debate is also reflected in the work of the Alaska House of Representatives' Special Ways and Means Committee. Created in 2003 to look at the state's fiscal problem, the committee held hearings for more than a year without examining the state's the largest provider of new revenue, the petroleum fiscal system. Near the end of the 2004 legislative session, the special committee finally held a hearing on a measure that provide more equal sharing by closing loopholes in state tax provisions that enable the oil industry to avoid paying severance tax on most new fields and severely reduced severance on all but the largest producing reservoir in this nation. The bill, assigned by leadership to four committees; the bill never made it out of the first committee.33

Another important petroleum-related fiscal issue the Special Ways and Means Committee and the Conference for Alaskans failed to consider is the matter of excessive Trans-Alaska Pipeline System (TAPS) tariffs or shipping charges. Pipeline tariffs are important to petroleum development for two principal reasons:

  •  Lower pipeline tariffs encourage exploration and development by reducing total transportation costs for prospective developers;
  •  Lower pipeline tariffs increase state revenues because transportation costs are subtracted from the price of a barrel of oil before royalty and severance taxes are calculated.34

In June 2004, the Regulatory Commission of Alaska (RCA) ruled, for the second time in 18 months, that the owners of the Trans-Alaska Pipeline System (TAPS) over-charge shippers by more than $1.00 per barrel of oil pumped through the 800-mile pipeline.35 The first decision — a detailed, 486-page order issued in November 2002 after a five-year proceeding, found that the TAPS owners were charging shippers 57% more than the amount necessary to recover all costs and earn a reasonable profit on their pipeline investment.36 Shortly after the initial decision was issued, the Alaska Department of Natural Resources estimated that excessive TAPS tariffs were reducing state revenues by $110 million per year.37

Excessive TAPS tariffs result from a 1985 settlement agreement between the Alaska Department of Law and the TAPS owners that established a methodology for computing TAPS tariffs, ending eight years of litigation at the Federal Energy Regulatory Commission. The RCA calculated that the 1985 agreement enabled TAPS owners to charge shippers $9.9 billion more than just and reasonable costs between 1977 and 1996.38

Don't start counting the money; there are complicating factors. The RCA order sets TAPS tariffs only for in-state oil shipped between 1997 and 2000; earlier years were not an issue in this case moreover, the Federal Energy Regulatory Commission (FERC) governs rates for interstate shipments, which constitute more than 90% of the oil shipped on TAPS. But if the tariff levels ordered by the RCA had governed all TAPS shipments since start-up in 1977, the state would have at least $2.5 billion more for schools, roads and other public purposes.39

The TAPS owners, who have spent approximately $15 million on this case, aren't giving up any part of their pipeline booty without a fight; they have contested the RCA tariff determination for recent and subsequent years in commission proceedings and have appealed the RCA decision in court.40 The RCA has presented the state with a unique opportunity to correct its previous, misguided course. Just and reasonable TAPS tariffs will have a far more salutary effect on state revenue and future oil development than almost anything else the state might do to encourage continued petroleum development. Strangely, however, the state is not pursuing this course with vigor. While state officials pay lip service to the benefits of lower tariffs and have entered into negotiations to revise the tariff methodology,41 the Department of Law also continues to file briefs in the RCA court case that are aligned with the interests of the pipeline owners.42

Alaska's environmental policies seem similarly bent to the interests of the large oil companies that dominate the North Slope; again TAPS is a good example. In late 2002 and early 2003 the state and federal governments renewed the terms of the right-of-way agreements for operating TAPS for 30 years. The occasion provided a unique opportunity to review and modify the state and federal right-of-way agreements drafted 30 years ago to ensure that the governing language that would reflect operating experience, scientific and technical developments or changes in economic conditions.43 But government officials failed to utilize the opportunity to ensure that the governing agreements assure that environmental risks would be minimized during the next three decades. Instead, public officials, renewed state and federal right-of-way agreements without significant revision, ignoring apparent violations of operating requirements and arbitrarily dismissing substantive concerns raised by informed citizens during the hearing processes.44

With lease renewal in hand, the TAPS owners immediately began completing plans to automate pump stations and reduce pipeline personnel by approximately 25 percent.45 Government monitors obligingly granted approval of a modified oil spill response plan, even though studies crucial to determining how to deploy the remaining personnel and equipment to ensure the effective spill response had yet to be undertaken.46

Ironically, it is clear from public statements and internal directives that the operators of TAPS are motivated by the desire to cut costs as TAPS throughput declines.47 For a corporation whose primary mission is to make money for its shareholders, cost containment is a primary — and, generally speaking, legitimate — focus. But cost cutting does not always make sense. Despite the understandable (but greedy) wishes of the TAPS owners, as the pipeline ages, it is liable to need more maintenance, close operating supervision and environmental protection — not less. In this situation, government decisions effectively determine the bottom line on environmental expenditures; consistent with their perception of risk, which may or may not match public assessment, managers will try to cut costs to the minimum necessary to meet regulatory requirements.

Meanwhile, on the North Slope itself, a similar pattern of cost-cutting places both workers and the environment at needless risk. Ignored or downplayed by Alaska news sources, problems in the heart of Alaska's oil patch often fester for years. Major disclosures frequently appear in major foreign or national press outlets before Alaska news organizations will cover the story.48

In sum, on a number of important petroleum-related fiscal issues, Alaska does not appear to be pursuing the long-term interests of its citizens. Meanwhile, the public fiscal policy discussion is fixated on the tension between the Permanent Fund Dividend, government services and a balanced budget, while a diversified economy remains a dream. On the environmental front, approval of TAPS right-of-way renewal in 2002 and the revisions to the pipeline's oil spill contingency plan in 2003 are cardinal examples of the petroleum industry's chronic failures to provide promised environmental protection. Government regulatory failures enable the industry's sub-par performance in both areas.

The transparency associated with Alaska's relatively well-developed political institutions provides a wealth of facts that can be used to build case studies for understanding the effects of petroleum development on political and economic systems. Could Alaska's inability to translate its oil wealth into a political and economic system capable of insulating its citizens from the vicissitudes of changing oil prices and declining production from the North Slope oil complex and the failure to provide optimal environmental protection on TAPS and its be manifestations of the petropolitical syndrome experienced by other petro-states? Depending on one's predilections regarding these matters, the facts presented here may illuminate mechanisms that contribute to the petropolitical syndrome; alternatively, the same facts may be re-arranged and coupled with other facts to reach different understandings of petroleum development.

In any event, the willingness — or unwillingness — of political leaders and the general public to ascertain the facts and then assess their possible application to credible theories of petroleum development may measure the degree to which the petropolitical syndrome is alive and well in Alaska.

 
 

Notes to "An Introduction to Petropolitics"

1.  "What is Petropolitics," Oil Change: Petropolitics Briefing Book 2004 (prepared for a conference sponsored by Foreign Policy in Focus and the Sustainable Energy and Economy Network in Washington, DC, Jan. 6-8 2004), p. 1.

2.  "What is Petropolitics," p. 1.

3.  Terry Lynn Karl and Ian Gary, "Oil & Development: The Global Record," in Petropolitics Briefing Book, p. 35.

4.  This description is condensed from Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States (Berkeley: University of California Press, 1997), pp. xvi, 3-7, 15-19 and 275. For a discussion with Professor Karl on current developments, see "'Petropolitics': Oil's Impact on Global Politics," Washington Post, Jan. 6, 2004.

5.  See, for example: Richard Auty, "The 'Resource Curse' in Developing Countries can be Avoided".

6.  The Paradox of Plenty, pp. 40-43.

7.  The Paradox of Plenty, pp. xv, 3-5.

8.  The Paradox of Plenty, p. 242.

9.  Extractive Industries Review, "Striking a Better Balance: The Extractive Induistries Review," November 2003, p. 7 (Consultation on the future role of the World Bank Group in the Extractive Industries; The EIR was established by the WBG in 2000 in response to protests over WBG lending policies to extractive industries.

10.  "Draft World Bank Group Management Response" (to the Extractive Industries Review), June 4, 2004, pp. i, v.

11.  BP, "Oil — Proved Reserves," Statistical Review of World Energy 2003.

12.  Michael Klare, "Oil & Politics — Bush-Cheney Energy Strategy: Procuring the Rest of the World's Oil," Petropolitics Briefing Book, p. 9; Michael Renner, "Oil & War — Fueling Conflict," Petropolitics Briefing Book, p., 29.

13.  "Oil & War — Military assistance to the United States' Top 10 Oil Importers," Petropolitics Briefing Book, pp. 31-34.

14.  United Nations Development Program, "Human Development Index Trend," The Human Development Report, 2003 (Human Development Indicators 2003.

15.  Ambuj D. Sagar and Adil Najam, "The human development index: a critical review," Ecological Economics, 1998 (vol. 25), pp. 249-264

16.  The 2001 HDI index does not provide comparative data for Iraq and Angola.

17. The 91 countries in the low and moderate development groups on the 2001 HDI that were also rated in 1995 showed an average improvement of 3.19% (from "Human Development Index Trend").

18.  Janet Matthews Information Services, "Special Report Iraq Economy-Assessing Iraq's Economic Future," Quest Economics Database, MEED Weekly Special Report, June 30, 2003.

19.  The 11th through 14th largest petroleum suppliers to the United States (including natural gas; shown with HDI rank in 2001 and % improvement between 1995 and 2001) were: 11. Russia (#63 - 1.7%); 12. Kuwait (#46 --0.24%); 13. Colombia (#64 - 2.77%); 14. Ecuador (#97 - 1.53%). (Total petroleum imports supplied to the United States in 2003 from U.S. Energy Information Agency, Monthly Energy Report, March 2004, Table 3.1; HDI rankings from "Human Development Index Trend.")

20.  When crude oil replaces total petroleum supplied, Gabon (#118 on 2001 HDI, unranked in 1995 ["Human Development Index Trend"]; the World Bank noted in 2001 that in Gabon, despite a relatively high per capita income that masks large inequalities, "pockets of extreme poverty are growing in urban areas" and more than half the residents of the three largest cities lack access to electricity or running water, high per ["The Global Record," pp. 36, 39]) replaces Algeria (a major supplier of liquefied natural gas but not crude oil).

21.  Daniel Yergin, The Prize: The Epic Quest for Oil,Money and Power (New York: Simon and Schuster, 1991), pp. 13-15.

22.  In the prologue to The Prize,Yergin promises to develop three major themes, which he summarizes as follows:

     Although it was widely believed that oil had lost its strategic significance, at the beginning of the 1990s "oil once again became the focus of global conflict." According to Yergin, the petroleum industry is "the world's biggest and most pervasive business," an industry that "starkly and extremely defines the meaning of risk and reward — and the profound impact of chance and fate."
     Oil is "intimately intertwined with national strategies and global politics and power."
     Having toppled King Coal as the power source for the industrial world at the end of the 19th century, oil became the lifeblood of suburban communities and transportation systems of the 20th, the source of fertilizer components, plastics and chemicals that are the bricks and mortar of contemporary civilization; almost universally celebrated as a symbol of human progress, "with the rise of the environmental movement. . . the oil industry in all its dimensions is at the top of the list to be scrutinized, criticized and opposed" (The Prize, pp. 13-15).

23.  See: Alaska Permanent Fund Corporation, "FAQ".

24.  See, for example, Robert Goodland, Sustainable Development Sourcebook for the World Bank Group's Extractive Industries Review: Examining the Social and Environmental Impacts of Oil, Gas and Mining, World Bank Group, November 2003, p. 81.

25.  Alaska Permanent Fund Corporation, "Permanent Fund Dividend".

26.  See: "Nancy Birdsall and Arvind Subramanian, "Saving Iraq From Its Oil," Foreign Affairs, May-June 2004.

27.  See: Thomas I. Palley, "Combating the Natural Resource Curse with Citizen Revenue Distribution Funds: Oil and the Case of Iraq, Foreign Policy in Focus (Special Report), December 2003. According to the Citizen Policies Institute, which advocates using Alaska's Permanent Fund Dividend "as a model for the rebuilding of Iraq, on April 29, 2003, Secretary of State Colin Powell told the U.S. Senate Foreign Relations Committee "if they [the Iraqis] had access to that [oil royalty] money directly, as in the case of Alaska . . . a decision will be made to start a business, or educate a child, or build a house, or buying clothing-it will circulate in the economy. It will contribute to the economy".

28.  See, for example, Sustainable Development Sourcebook for the World Bank Group's Extractive Industries Review, p. 81.

29.  Office of the Governor of Alaska, "Governor Appeals to Delegates," Feb. 10, 2004 (Press Release No. 04-023;). See also: Tom Moran, "Conference members named: 10 from Interior among those joining convenors to debate permanent fund," Fairbanks Daily News-Miner, Jan. 30, 2004, p. A1.

30.  Office of the Governor of Alaska, "Governor Appeals to Senate to Pass Permanent Fund Endowment, Avoid 1980s-Like Economic Disaster," May 4, 2004 (Press Release No. 04-083).

31.  This has been the situation for the last 18 months (at this writing, in early August 2004, oil prices were over $40 per barrel and rising).

32.  In fact, the federal "take," based on the nominal 35 percent corporate income tax rate, is probably over-stated; correction would increase the industry's share.

33.  See: Representative Les Gara, "The Alaska Fair Share Bill: A Rational Approach To Fixing Alaska's Oil Tax Laws" (background paper on HB 441), Feb. 4, 2004; and minutes of the Ways and Means Committee, Alaska State House of Representatives, April 16, 2004.

34.  See: Richard A. Fineberg, The Big Squeeze: TAPS and the Departure of Major Oil Companies Who Found Oil on Alaska's North Slope (a report to Oilwatch Alaska), October 1997, Ch. 1.

35.  Regulatory Commission of Alaska, Order Rejecting the TAPS Carriers' 2001-2003 TSM Intrastate Filings, Rejecting the TAPS Carriers' Post-2000 Revenue Requirement and Rate Filings, Establishing Permanent Post-2000 Intrastate TAPS Rates, Requiring Refunds, Ordering Release of Escrowed Funds, Letters of Credit, and Bonds; Approving Filings and Affirming Electronic Rulings, June 10, 2004 (Order P-03-4 [34]).

36.  Regulatory Commission of Alaska, Order Rejecting 1997, 1998, 1999 and 2000 Filed TAPS Rates; Setting Just and Reasonable Rates; Requiring Refunds and Filings; and Outlining Phase II Issues, Nov. 27, 2002 (Order P-97-4 [151]).

37.  Allen Baker, "State weighs pipeline fees — $110 million: If rates are cut, Alaskans, small producers benefit," Anchorage Daily News, Dec. 31, 2002, P. A-1.

38.  Order Rejecting 1997, 1998, 1999 and 2000 Filed TAPS Rates.

39.  See: Walter B. Parker, "Lower pipeline tariffs deserve look," Anchorage Daily News, Jan. 3, 2003, p. B-4 (guest opinion); and Richard A. Fineberg, "Pipeline owners overcharge shippers," Anchorage Daily News, July 15, 2004, p. B-6 (guest opinion).

40.  See: "Indicated TAPS Carriers' Statement of Points on Appeal," in BP Pipelines (Alaska) Inc., ExxonMobil Pipeline Company, Mobil Alaska Pipeline Company, Phillips Transportation Alaska, Inc., Unocal Pipeline Company, Williams Alaska Pipeline Company, LLC, and the State of Alaska, Appellants, vs. Regulatory Commission of Alaska (Appellee), Alaska Superior Court Case No. 3AN-02-13511 CI, Dec. 6, 2002.

41.  Alaska Department of Law, "State and TAPS Owners Enter MOU" (press release), Jan. 27, 2004.

42.  See: Brief of Appellant State of Alaska in BP Pipelines (Alaska) Inc., ExxonMobil Pipeline Company, Mobil Alaska Pipeline Company, Phillips Transportation Alaska, Inc., Unocal Pipeline Company, Williams Alaska Pipeline Company, LLC, and the State of Alaska, Appellants, vs. Regulatory Commission of Alaska (Appellee), Alaska Superior Court Case No. 3AN-02-13511 CI, March 1, 2004.

43.  For background on TAPS environmental issues see: Richard A. Fineberg, The Emperor's New Hose: How Big Oil Gets Rich Gambling With Alaska's Environment, Alaska Forum for Environmental Responsibility, June 2002.

44.  Stan Stephens, "Pipeline action wrong-headed," Fairbanks Daily News-Miner, Feb. 2, 2003 (guest opinion). (For additional information on the TAPS lease renewal decision and proceedings please contact the author of this paper.)

45.  Diana Campbell, "Alyeska to cut work force by 40%," Fairbanks Daily News-Miner, March 5, 2004, p. A1.

46.  "Alyeska garners conditional OK to modernize: Changes could mean fewer pipeline jobs in two years," Fairbanks Daily News-Miner, Jan. 2, 2004, p. A1.

47.  Sam Bishop, "Alyeska urged to trim costs: Pipeline owners call for more 'efficiency' on maintenance," Fairbanks Daily News-Miner, Jan. 2, 2004, p. A1.

48.  See, for example, Sheila McNulty, "BP's safety record in Alaska offers barrel of problems," Financial Times, Aug. 7, 2004; and "US regulators widen BP Alaska probe," Aug. 6, 2004.

 
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