Nov 19, 2018 in Exploratory

Oil and politics have always gone in hand because oil has become a vital commodity without which both developed and developing economies would not function properly. The structural power of oil producers and distributors shapes and determines the structures of the global political economy across countries, their economic enterprises, other political institutions and other professionals linked to the industry. Structural power presents the power to decide how things shall be done, the power to shape frameworks within which governments relate to each other, relate to corporate enterprises or people. Power lies with entities in a position to exercise control over people’s security with those able to decide and control the mode or manner in which goods and services are produced.

Power relations are a central concern for the oil and gas industry, and can be perceived as a source of both economic opportunity and risk. The trend towards more aggressive and nationalistic behavior suggests that global economic instability is on the rise. Therefore, it is not coincidence that geopolitics is one of the most debated issues shaping the global production networks and supply chains in the oil and gas industry. Power relations in the oil and gas industry is a broad term that can be applied to any relationships within a company, government or to any relationships a company or host government has with any external power in the industry. The relations could include interactions between different producers, government agencies, business interests and those with an international organization. This paper explores how power relations shape and affect various agents in the oil and gas industry supply chain using the GCC, GPN and GVC analytical frameworks.

Structure of the Oil Industry and Geopolitics

The oil and gas industry is subdivided into three segments: upstream, midstream and downstream. The exploration and extraction of crude oil fall in the upstream subsector. The midstream entails storage and transportation, while the downstream subsector consists of the refineries, marketing and distribution of the refined oil products. The supply chain of gas and oil falls within the upstream segment of the industry. The most critical feature of the oil and gas industry determined in this segment is the capacity of the site because the measurements identify and determine not only the size of the oil reserve but also the extraction rate. As it stands, most extraction companies tend to hold a certain quantity of unused capacity to respond to sudden or unexpected explosion of demand, usually as a result of geopolitical issues. Once the extraction of crude oil is over, the second phase predominantly involves transportation of the crude oil using trucks, rail, barges, and pipelines. Jet fuel, diesel, kerosene and other oil derivatives are synthesized after the transportation of crude oil to the refineries. To an extent, refinery capacity is closely related to demand that influences production boundaries.

According to Inkpen, the cost of oil and gas is not influenced solely by the operations in these segments, but also by external variables such as quality of the well, political turbulence and natural disasters. The geopolitical factors are certainly the riskiest exogenous factors that can shape the demand, supply and prices for oil and gas. For example, political instability and conflicts in the Arab world have always influenced oil prices around the globe. In addition, riots and conflicts in Latin American and African countries, such as Venezuela and Nigeria respectively, have influenced the buying pressure in the oil and gas market. Power relations, precisely geopolitics, create anxiety among market actors and increase prices because of civil wars, corrupt governments, unstable regional blocks and internal riots can put at risk the supply of oil or limit the amount available. Additionally, forms of government (military, communism or fascism) are not perceived positively by importing states because non-democratically ruling governments could intentionally limit the extraction or exportation of oil. Some of the issues that have influenced the supply and prices of oil in the past three decades include the Gulf War, Asian Economic Crisis, OPEC limitation of production, September 11, War in Iraq, Israel attack on Lebanon, the USA Sanctions on Iran, 2008/2009 credit crunch, Arab Spring and the most recently Syrian Civil War.

The Middle East is closely monitored by most oil importing countries, including the United States, China, Germany, India and Japan because 80% of the largest OPEC member states are located in the Middle East. The largest oil producers and OPEC members situated in the Middle East include Saudi Arabia, Iran, Iraq, Kuwait and the United Arab Emirates.

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GCC, GVC, and GPN Analytical Frameworks

In the past two decades, a large body of academic works about economic globalization, geopolitics, and the formation of the global production networks (GPN), global values chains (GVN) and global commodity chains have emerged (GCC).GCC, GVC and GPN frameworks focus on the location and role of the value-added producer services to explore the patterns of hierarchy in globally integrated industries. That is to say, they explore how value and power are captured, created and distributed among producers and suppliers linking distant producers. Given that oil wells or reserves are logistical nodes and sites of oil extraction in the global oil supply chains, and the host countries are potentially the center for refineries and oil related value-added services, the analysis of oil producing countries provides avenue for comparing both frameworks to understand the link between oil, power and politics.

The paper explores power relations through the GPN framework in relation to the analyses of GVCs and GCCs. GPN analysis is used as the basis for the discussion because its recent literature represent a significant contribution to earlier GVC and GCC analyses. Furthermore, GPN analysis plays a critical role in the understanding of geography and commodity flow. GCC consists of inter-organizational networks focused around a commodity, linking consumers, companies and governments within the global economy. Typically, the supply networks are situational, locally integrated, socially constructed and they emphasize the inclusiveness of economic organization. Under this framework, oil and gas chain begins with crude oil and ends with refined products available for purchase in the global market. As the refined products move between the distant producers and consumers, crude oil is refined at different locations. Every point along the supply chain is a node, which is linked with other nodes to form a broad global network. According to Gereffi, Humphrey & Sturgeon, the GCC framework has three dimensions: input-output structure, territoriality and governance structure. Central to the oil and gas industry is the governance structure pointing that there are power relationships or authority that dictates how material, human and financial resources are allocated within the oil and gas supply chain. Evidently, the governance structure is either buyer-driven or producer-driven. From this end, the GCC framework is beneficial in the sense that it focuses on the role of commodity networks in influencing power relations in the cross-border environment.

The Global Value Chain compliments the GCC analysis by including the aspect of added value. When individuals are engaged in oil and gas production, especially in producer-driven oil and gas chains, value is added to the refined commodity by application of innovative technologies in exploration, design, refinery and well and inventory management. Unlike the GCC approach, GVC has more sophisticated dimension of the idea of governance structure. GVC approach recognizes that the disintegration of oil production through inter-entity trade has significant dynamics but does not occur systematically or spontaneously. Instead, these governance processes are institutionalized or initiated as a result of strategic decision making by key factors, including large firms and governments. For example, The Arab oil embargo pushed Western democracies to enact strict measures to safeguard oil reserves. The 1973 oil embargo was a public relations disaster. Indeed, oil producers and refineries lost billions of dollars because they were forced to produce, export and sell less oil. However, the embargo demonstrated that oil could be used as a weapon to shape economic politics. The results transformed much in the contemporary history of oil and politics. The oil embargo forced Western democracies, especially the United States to become less dependent on Middle East oil.

The major weakness of GVC and GCC approach to the oil and gas industry is that they conceptualize the production and distribution of gas being essentially linear and vertical. In fact, the production and distribution of oil and gas is a complex network that can be either non-linear or multidimensional. As a consequence, the present paper favored analytical framework of the global production network (GPN) to provide an understanding of global commodity chain system over GVC and GCC analyses. As noted by Henderson et al. (2002), the GPN analysis framework is based on the power, value, and embeddedness. Thus, the GPN analysis is a combination of clustered value chain across entities and national boundaries. Additionally, the framework incorporates hierarchical layers of networks actors. The result is a conceptual framework in which oil and gas firms organize and control their global operations. The framework also covers the ways in which entities can be included into trade unions, non-governmental organizations (NGOs) and other entities within a locality. The subject of corporate social responsibility (CSR) also surfaces in the GPN framework. CSR is an organizational initiative or strategy aimed to give back to the society part of its accrual to help poverty reduction, environmental sustainability programs and facilitation of the prosperity of their localities. Unlike the GCC/GVC framework, the GPN gives emphasis to the territorial nature of regulators and the government as a major actor. GPN also recognizes that the oil and gas commodity chain is non-linear complex network of entities involved in extensive R&D, design, exploration, extraction, marketing and consumption of refined oil products, and the processes are structured geographically and organizationally at different spatial levels. Additionally, the framework acknowledges the dynamics and distribution of power within the complex networks of oil production and distribution. Further, GPN recognizes that oil and gas chains are influenced by non-firm institutions, including government agencies and trade unions.

Power Relations among Various Actors

The oil and gas industry plays a unique role in the global landscape, both economically and politically. Some of the world’s leading firms are, actually, oil and gas multinational corporations (MNCs), with some of the corporations having more than the annual revenues of some countries. In 2013, for example, Royal Dutch Shell had sales of $451.35 billion as compared to the GDPs of Iraq ($215.8), Egypt ($262.8) and Venezuela ($381.29). Outstandingly, Shell operates in Nigeria and its annual sales were slightly below Nigeria’s GDP of $462.98 (World Bank 2014). The importance of oil and gas in global politics, or rather the significance of the politics of gas and oil, and the critical role oil and gas would play in the modern geopolitics was recognized early on. The power of oil as a geopolitical weapon was evident in numerous occasions, including the 1973 Arab-Israeli conflict, the Gulf War and the recent activities of Islamic State of Iraq and Sham (ISIS) in Iraq and Syria. Naturally, less supply of oil in the global market translates to higher prices for consumers, especially in the importing countries.

The extraordinary wealth of MNCs and oil-related firms can make one think that it is the chief actor in the industry. However, as noted in GPN framework, global governance of the oil and gas chain is highly complex because it incorporates many actors at various levels. Exploration firms, states, MNCs, International Organizations, NGOs and social entities all influence the industry at different levels. Additionally, various oil producing countries indicate different traits in strategy and operations. Interest in the oil and gas industry is global, and most actors have a vested interest thereby shifting power relations at various nodes or levels of the supply chain network. For example, some actors, especially Western democracies are concerned about their energy security, while society movements and NGOs advocate for environmental sustainability due to the negative consequences caused by greenhouse gas emissions and climate change. Therefore, the numerous actors and spatial levels of supply chain governance represent a myriad of interests that contribute to the sophistication of power relations.

Globally, the oil and gas industry is represented by both producers and consumers, who often have conflicting interest because of the invariable power centers. Producing and consuming states differ in many aspects, including environmental issues, level of development, human rights and price conflicts. Such conflicts are exemplified by the riots and kidnapping in Nigeria, 2008 Russian invasion of Georgia, and most recently, Russia’s cut of gas supply to Ukraine. Russian moves have caused widespread criticism from foreign countries. As a result, the political and economic relations between Russia and the United States have soared. Despite the concerns, Russia continues to be one of the second largest producers and exporters of oil. Arguably, the oil and gas industry can be unresponsive to economic and political pressure from the international community. It follows that the extraction and distribution of oil seem to be beyond the structured power of the international community.

Nigeria is an emerging oil producer and exporter. It differs remarkably from Russia and Saudi Arabia in the sense that it has negligible influence in terms of global energy trade and diplomacy. Domestic instability affects the production and distribution of oil in Nigeria. Social movements and MNCs play larger role in the country than in two other countries. Saudi Arabia is a more influential as an oil producer than Nigeria because it has vast oil reserves and significant control of OPEC. As opposed to Nigeria, the government of Saudi Arabia is domestically powerful. Its strength is illustrated by the fact that, unlike other Arab states it was never hit by the Arab Spring. Russia enjoys its veto power in the United Nations Security Council which makes it influential. Additionally its vast resources is an economic weapon against the EU states and part of Eastern Europe.

The other significant aspect of power relations in the oil and gas industry is that numerous actors come to play. Power relations cannot be explored without highlighting the power of the aforementioned multinational corporations. Besides these International/Integrated oil companies (IOCs), many states have government owned national oil companies (NOCs), which influence the state industry. NOCs also work closely with MNCs. As highlighted in the GPN framework, states as actors play a critical role in the oil and gas industry. For instance, they work in hand with NOCs and serve as regulators in issues such as pricing and taxation. In addition, they influence issues such as Foreign Direct Investment (FDI) and CSR. Besides the state-based actors, NGOs and IOs also influence the balance of power at international level. The Organization of the Petroleum Exporting Countries (OPEC) and the World Trade Organization play a critical role in global production and distribution of oil by predefining oil output production quotas. Lastly, social movements as actors in the oil and gas industry influence the global production networks increasing global concern over environmental sustainability and the link between the consumption of oil and global climatic change.

Conclusion

Commodity chains in the global landscape are becoming vital features of the modern globalized economies. Global chain analysis, global production network analysis and global value chain analysis focus on understanding the function of global commodity chains. This paper is aimed at exploring how power relations affect or shape actors in the production network analysis employing the analyses of GVCs and GCCs. The oil and gas chain is highly exposed to geopolitics because most of the production and distribution processes are of great importance at national level economically, as well as politically. Some of the issues of great national significance include energy security and the relationship between NOCs and IOCs. The industry is at the center of national agenda in terms of corporate social responsibility. Other social aspects are often debatable at the national and global levels; they include democracy, corruption, and human rights. Civil society groups with membership from IOs, governments, and consumers continue to raise expectation over a sound contract between oil-based business entities and the society. The GPN analytical framework substantiates the concept of social movement and CSR. Additionally, it accounts for the industry standards, usually discussed when reviewing regulatory systems or institutions in the global oil and gas industry.

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