EGEE 120
Oil: International Evolution

Chapter 37: Crisis in the Gulf


1989 was the miracle year in which the East-West confrontation, or the Cold War, was over. The communist Eastern Europe regimes and the Berlin Wall had all collapsed, and the Soviet Union was in a historic transformation from political and economic changes as well as ethnic nationalisms. German reunification was solidly on course, with Germany poised to be the dominant power in Europe. Japan was viewed as the global financial powerhouse, and future confrontations were expected to be based on money, markets, and economic growth.

Oil, except for its environmental concerns, had become unimportant and just another commodity. There were no concerns in the U.S. about supplies, as proven reserves had increased from 670 billion barrels in 1984 to 1.0 trillion barrels in 1990. It should be noted, however, that the world reserves were still concentrated in five major oil producing countries in the Persian Gulf plus Venezuela. Demand was growing, American production was declining, U.S. imports of oil were climbing, and at its highest point, conservation was slowing, efforts to develop alternatives had become anemic, the security margin (the difference between demand and production) was shrinking, low prices and low security of supplies were the order of the day, and the world was moving to heavy dependence on Middle East oil again! Even with the conflict and tension between energy and the environment unresolved, energy issues seemed like a footnote and a thing of the past.

In July 1990, Saddam Hussein, under the pretext of serving as the enforcer of OPEC’s new quota system and threatening Kuwait and the United Arab Emirates if they cheated, amassed 100,000 troops on the border with Kuwait. Interestingly, the only OPEC country that was cheating by mid July 1990 was Iraq! He promised Egypt and Jordan that he had no plans or intention of hostile action but was only there to serve as a deterrent for cheating. On August 2, 1990, however, Iraq invaded and annexed Kuwait, claiming that Kuwait belonged to Iraq and that the Western imperialists (the British) were the ones who had arbitrarily partitioned the two countries to deny Iraq of its oil.

After the invasion, there was Iraqi plundering of Kuwait. On the basis of oil, but not cheap oil, as a critical element in global balance of power and stability, the world, led by the U.S., had to act, and the U.S. helped to put up an unprecedented international coalition to face up to Iraq. With the embargo, 4 million barrels of oil were lost from world supplies, similar to 1973 and 1979, and, as expected, uncertainty, fear, and anxiety caused a sharp rise in prices and the fall of financial markets.

Shortly after the start of the Gulf War, the invasion of Kuwait by Iraq, oil went from $30 to $40 a barrel, but within hours it had plunged to $20 a barrel, well below what it was even before the war. The Strategic Petroleum Reserve (SPR) was used, and besides, demand for oil was falling with the passing of winter. With the extreme success of the initial attacks and the use of the SPR, fear was removed, and supply and demand pushed the price down.

Iraq’s withdrawal from Kuwait led to an oil-related environmental disaster, and it was intentional. Iraq withdrew from Kuwait with vengeance and vindictiveness by initiating the largest oil spill in history (still is), setting Kuwait and its oilfields on fire, and destroying them if it could not have them. More than 600 oil wells were set ablaze creating a huge environmental damage/catastrophe.

The war showed the effectiveness of the energy security system built around the International Energy Agency (IEA) and the Strategic Petroleum Reserve (SPR). IEA provides a framework for the coordinated response and exchange of timely and accurate information among nations. SPR also demonstrated that given time, markets will self-correct, adjust, and allocate. All six major oil price disruptions from 1950 -1991 had shown that logistics and supply systems can adapt to minimize the impact of shortages. For example, in the 1970s, the issue was not one of real shortage but the disruption of the supply system and the confusion of who owned the oil. Also, in the 1970s, the U.S. political system was paralyzed and in disarray, with no rational and coherent policy. And, of course, Watergate was a major part of the problem.

The industrial world faced a resurgent wave of the environmental movement. The first wave that came in the 1960s and early 1970s focused on clean air and water and accelerated the switch from coal to fuel oil for heating and power generation. The second was concentrated on slowing or stopping further development of nuclear power. The third wave that started in the 1980s was in reaction to climate change/global warming and its devastating effect on forests, weather changes, and natural disasters. Among the most significant energy related environmental disasters or events since the 1980s are the Chernobyl nuclear accident in 1986, the Exxon Valdez oil spill accident in 1989, and the 2010 BP Deepwater Horizon oil spill in the Gulf of Mexico. It is clear that the drive for energy security will coexist with the third and future waves of environmentalism as we develop sustainable energy policies.

Chapter 37 - Crisis in the Gulf

  • Introduction
  • Iraq Moves
  • Miscalculation
  • The New Oil Crisis
  • The Lessons of Security
  • The Age of Oil

Questions to Guide Your Reading:

  • What major global event happen in 1989?
  • Who emerged as the sole superpower?
  • Why was oil a key factor in the Gulf War?
  • What is evidence that the US energy security approach worked?
  • How was the return of environmentalism a harbinger of 2003-present?