Reduction of the vulnerability of the global oil TIMUN by nikeborome

VIEWS: 64 PAGES: 9

									Forum:               ECOSOC

Issue:               Reduction of the vulnerability of the global oil market to natural disasters, terrorist
                     attacks and political unrest

Student Officer:     İlteriş K. Canberk

Position:            President of ECOSOC

Report Written By: İlteriş K. Canberk, Arda Şener, Furkan Narinoğlu




Introduction

         Oil is any product that is liquid and it is the most important raw material for a lot of
chemical products, including pharmacy products, pills, solvents, fertilizers, pesticides, and any
kind of plastics. Oil is also vital for other industries and the maintenance of industrial civilization
itself, thus, the oil industry and consequently the oil market hold utmost importance for all the
nations. Although new technologies are in the process of development, the product is considered
as the most important energy resource in our age. Statistically, it comprises of a large percentage
of the world‟s energy consumption, ranging from thirty-two percent to forty percent for Europe
and Asia, up to fifty-three percent for the Middle East. Other regions consumption is not much
different; South and Central America (44%), Africa (41%), and North America (40%). The world
consumes 30 billion barrels (4.8 km³) of oil per year, with More Economically Developed
Countries(MEDCs) such as United States and United Kingdom being the largest consumers. For
instance, the United States consumed 25% of the oil produced in 2007. Undoubtedly, oil market
is the largest market in the whole world if we include the production, distribution, refining, and
retailing steps.
       Basically, the stats represented show how important is the oil market and reduction of its
vulnerability for some countries.



Definition of Key Terms

Natural Disaster


       A natural disaster is any event or force of nature that has catastrophic consequences, such
as avalanche, earthquake, flood, forest fire, hurricane, lightning, tornado, tsunami, and volcanic
eruption as defined by the dictionary.com.
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Terrorist Attack


        The definition of the terrorism is still nebulous. Comprehensive Convention on
International Terrorism is currently deadlocked because of the different definitions proposed by
the different sides. However, throughout the report you should use the terrorism and terrorist
attacks as any kind of systematic use of terror especially for political or economic purposes.


Political Unrest

       Political unrest is the any kind of political disorder that appears in a country or between
countries. Embargoes and sanctions can also be considered as political unrest.


Primary Production


       Primary production is the first step of the industry. It makes use of the natural resources.
Fishing, mining, forestry and farming are examples of primary production. Oil production is also
a type of production since it is an extractive industry. Primary production is the earliest form of
industry.

Secondary Production


       Secondary production is the second step of the industry. In this step, the goods are
manufactured or processed. It includes mostly the construction and changing raw materials into
goods and services. For example, refining the oil is a type of secondary production.

Tertiary Production

       Tertiary production is the third step of the industry. It supplies goods, products and
services to the public. It basically helps primary and secondary production to run smoothly.
Examples of tertiary production are transportation, banking, insurance and communication.

General Overview

       In order to analyze the different aspects of the oil market, the concept of oil market pricing
and the general process should be fully understood. The relationship between supply and demand

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determines the price of fuel. If demand grows or if the supply decreases for a reason, prices
would be pressurized upwards. According to the same relationship, if demand falls or the
abundance of the supply increases in the market, the prices would drop to a certain level.
        The same interrelation is also applicable at the secondary level. If the price of an oil
product is too high at the retail level, the customers would start to move their business to another
retailer with a lower price. Than, the first retailer, after losing a certain amount of volume, would
reduce the prices in order to gain its customers back. The competitions occurred between them
causes the prices to drop. Although, retailers sell the oil of major oil companies, they still have a
considerable amount of force on the prices and flexibility. They can add to the prices and make
them higher than the standard income rate or force the major companies to reduce their prices, if
the demand drops drastically.
        The government regulations for air pollution and taxes are other factors affecting the
market. They have the power to limit the amount of oil that can be used in order to control the
pollution or just create extra taxes in order to discourage people. Also, there might be some very
concrete differences between two different countries‟ tax which also creates a great different in
the oil price.


Effects of Natural Disasters on the Oil Market

       In all the sectors, any change on the supply and the demand can affect the prices in both
the short and long term.
        If the supply decreases for a reason, which might be a natural disease, the demand may
exceed the product supply and this relation definitely pulls up the prices. For instance, the
Hurricanes Katrina and Rita caused the oil prices in United States and Gulf of Mexico to increase
5% in a very short term in 2005. Even the people living outside of those areas were affected by
the excessive prices. The main reason was the imbalance between the supply and the demand.
Oils, including other component of it, should be moved from a region to another. When these
hurricanes happened, the supplies were reduced by more than 10 percent since the transportation
was also not much possible. However, the demand in the country remained the same. Thus, the
prices were pulled up.
       The hurricanes explained on the paragraph above are basic examples of how oil market is
vulnerable to the natural diseases. Even the problems in the transportation of oil cause serious
effects on the prices, therefore, making the market and its beneficiaries vulnerable. All the
disaster happens on the route of a transportation vehicle, forces the route to be changed, therefore,
making the cost of the transportation higher than its usual form. It shows how easily a disaster
can affect the oil price. On the other hand, any damage caused on the pipelines stops the oil flow

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as well as creating extra costs to fix it.


Effects of Terrorist Attacks on the Oil Market

        Because of its high vulnerability, the oil market has always been an interesting target. The
actions include striking pipelines, damaging tankers, attacking refineries and oil fields. All these
actions have two intentions: undermining the internal stability of the regimes that they are
combating with and weakening the other international trade powers in their region. These kinds
of attacks are especially dense in Middle East, Africa and Latin America. However, they have
never been considered as a serious risk to the industry.


       The 9/11 attacks on World Trade Center and the Pentagon which are the symbols of
United States‟ economic and military power, global terrorist organizations such as the al Qaeda
began to treat the world‟s energy system as a major vulnerability and an open target. This is a
way for them to damage America‟s economy which greatly depends on the oil and the world‟s
economy in large scale. As quoted from an official from al Qaeda the "umbilical cord and lifeline
of the crusader community" is seen as the oil industry. Speaking more statistically, oil forms 96
percent of the United State‟s transportation energy and a crucial material for the primary and
secondary stages of every commodity including the toothpaste or shampoos. On the other hand,
United States import over 50 percent of its oil which makes up to ten million barrels per day,
because the oil reserve that it possess is not sufficient. Specialists stated that the dependency
would even increase to 70 percent in the upcoming years. These are the basic facts showing how
important the oil is for any modern country.


Major Parties Involved and Their Views

        Although there are not certain parties in this issue, especially MEDCs care more about
both the natural disasters and the terrorist attacks, because their economy is more dependent on
the oil market. On the other side, LEDCs are trying to stop political unrest and stabilize their
regime in order to create more solid oil policies. In the past there has been a lot of cases where oil
prices was affected from political unrest and terrorist attacks.

OPEC

OPEC, Organization of the Petroleum Exporting Countries, was established in 1965 in order to
ensure the stabilization of oil prices internationally, eliminate harmful and unnecessary
fluctuations and safeguard the twelve‟s countries‟ individual and collective benefits. These
countries include Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi

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Arabia, the United Arab Emirates and Venezuela. Thus, OPEC forms a major party for the issue
of the oil market and has a very considerable force.
The Arab countries in this organization can also be considered as a separate side. In 1973, the
persistency of the Israeli-Arab war caused in the oil embargoes imposed on United States and
Western Europe by the Arab countries in the organization while the others refused to do so.
       The USA
       United States is one of the major importing countries with a little oil reserve. Thus, it is
very crucial of the government of US to stabilize the oil market and keep its continuity. The
government also began to find ways to prevent from the natural disasters after the Katrina
Hurricane. It is also interested in the situation of the oil reserves in Iraq before the US troops are
withdrew from the region.
       Iraq
      On the other hand, the Iraqi government is in the process of transition. The priority of the
government is to cure the debts that were inherited from the previous regime. Thus, the requested to
use the Development Fund from the UN and granted. In the resolution of S/RES/1905 (2009), the Iraqi
prime minister addresses the Secretary-General of UN on the current situation of the oil reserves in the
country. Bearing in mind that the major income source of Iraq is the oil reserves, reducing the
vulnerability of the market holds a crucial importance.



Important Events & Chronology
1965                Foundation of OPEC; Organization of the Petroleum Exporting Countries was
                    founded in order to defense the rights of the exporting countries‟ rights and stabilize
                    the oil prices.

1973                Israeli-Arab Conflict; The conflict forced the Arabic Export countries to imply
                    embargoes on Israel.

1980-1986           1980s oil gluts: the slowed economic activity in industrialist countries caused the
                    demand to be dropped. Consequently, oil prices were also dropped.

2001                11 September Attacks: two hijacked passenger planes crushed in to twin towers. The
                    terrorist attack affected all the markets in US as well as the oil market.

2005                Katrina Hurricane: the hurricane happened in the Gulf Coast affected the oil market
                    in US since most of the oil reserves are located in that area.




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Past Attempts to Solve the Issue
       Until now, OPEC held 3 Summits with the attendance of Head of States and Governments
that hold the greatest importance among all the OPEC meetings. Solemn Declarations have been
published as results of these summits.
      „‟ They reviewed the present world economic crisis, exchanged views on the causes of the
crisis which has persisted for several years, and considered the measures they would take to
safeguard the legitimate rights and interests of their peoples, in the context of international
solidarity and co- operation.
They stress that world peace and progress depend on the mutual respect for the sovereignty and
equality of all member nations of the international community, in accordance with the UN
Charter. They further emphasize that the basic statements of this Declaration fall within the
context of the decisions taken at the VI Special Session of the General Assembly of the United
Nations on problems of raw materials and development.‟‟


      Algiers, Algeria, 4–6 March 1975
      Caracas, Venezuela, 27–28 September 2000
      Riyadh, Saudi Arabia,17–18 November 2007
Failed Attempts to Solve the Issue
        Although one can‟t conclude that a failed attempt to solve the issue has been actualized,
The Philippines government can set an example of a failed attempt to fight the oil crisis which is
the ultimate result of the oil industries‟ vulnerability.
       In 1999, The Philippines government decreased its power on the oil market. Such decrease
of power by the government is called deregulation. Deregulation would help the government to
secure oil prices level despite natural disasters, terrorist attacks etc. Deregulation couldn‟t help
The Philippines in competing in the oil market. Decrease in the oil supplies would result drastic
changes in the oil industry; deregulation couldn‟t be enough to fight against the increasing prices.
Possible Solutions

       For certain, natural disasters and their effects are inevitable. Thus, the ways to reduce their
effect on oil reserves should be found. If the disaster happens near the oil reserve, as it is the case
in Katrina Hurricane, it makes it impossible to refine it properly. As quoted from the Jolene
Robin-McCaskill report “The normal production in the Gulf of Mexico is 547.5 million barrels of
oil and 3.65 trillion cubic feet of gas annually. In preparation for Hurricane Katrina, 17.1 million
barrels of oil and 84.2 billion cubic feet of gas were shut in. The production of oil in the Gulf of
Mexico fell by 1.4 million barrels a day. This accounted for 95% of the daily production of oil.
The equivalent of 3.4 billion cubic feet of natural gas per day was shut in. This is over 34% of the

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daily production of natural gas in the Gulf of Mexico. Two weeks after Hurricane Katrina struck
the Gulf of Mexico over 120 oil and gas platforms were still shutdown. Nearly 60% of the gulf‟s
daily production of oil and gas remained blocked from the market due to the evacuations of
personnel in preparation for Hurricane Katrina.‟‟ Another aspect of the natural disaster is the
difficulties in the transportation, if the disaster happens on the transportation route.


       The only way to reduce the vulnerability from the natural disasters is to find alternative
resources. If the number of the reserves can be increased, in case of a disaster, the amount of
supply provided by the effected one can be provided by the other functional reserves. On the
other hand, alternative types of energy can be used as a substitute. The less dependency on the oil
would drop the amount of increase in the demand.


       Another solution that you can come up with is a regulatory mechanism between different
nations. There are limited number of reserves on the world and if one of them starts not to
function, the others can easily compensate that one. However, the problem in for this mechanism
to work is that the owners of these reserves are different nations. Thus, this framework must be
international. OPEC is an exemplary mechanism, however, it just includes major exporting
countries. A similar mechanism for consuming countries can provide a solution for the
fluctuations in the oil prices.


        Although the major energy consuming countries posses very limited oil reserves, they are
generally wealth in alternative resources. For instance, the coal - held in abundance by the U.S.,
China, and India, among others –is a clean and cheap way to produce methanol, a hydrogen rich
fuel that can be used by vehicles. Other resources such as rich agricultural waste can also be used
to produce ethanol, Electricity produced from the alternative resources such as nuclear, wind,
solar, hydropower and clean coal technologies is also another option that is able move vehicles
with similar performance and less pollution. Such a transition would not create any problem
since the modern vehicles are being produced flexibly.


      Developing better techniques for combating terrorism would be a more conventional
method to deal with the issue.


Useful Links
1.   “http://www.slideshare.net/ami_goel/oil-price-and-india-presentation”


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        The link includes a report on India‟s approach to changing oil prices. The report analyzes
the oil prices in India; it also inquires the reasons behind such prices. It‟s a very comprehensive
which could provide, how a specific country reacted to changes in the oil industry to those in
need of a solution.
2.       “http://upcommons.upc.edu/revistes/bitstream/2099/3075/1/vulnerability%20of%20modern
         %20energy%20systems.pdf”
        The URL contains an article written by Nikolaus Spersberger, an academician in
“Wüppertal Institut.” The article is debating on the vulnerability of the energy sources. Oil, being
one of those energy sources, is mentioned numerously in the article. The writer also provides
statistics and charts related to oil demand and use in the world. Furthermore, the article also
discusses possible solutions as well as assessments of previous attempts to solve the issue.
3.       “http://docs.nrdc.org/energy/files/ene_10031601a.pdf”
       The URL contains a research on the use of money spent on gasoline by the US. Details on
the use of gasoline by all states is given. It doesn‟t mention a solution or an approach to oil‟s
vulnerability but it certainly does provide useful information on the US‟ oil dependency.


4.     “http://theenergycollective.com/robertrapier/44636/oil-infrastructure-and-terrorism-
–-part-i”
        The link contains article discussing the reasons behind the vulnerability of oil industry.
Especially, terrorist attacks are discussed. The article provides a map of oil pipes in the Middle
East region. Lengths of the oil pipes in the countries situated in the Middle East is given. That
information may reflect such countries dependency on either oil export or import. Furthermore,
the article is assessing the reason behind the dependency to oil as well as the vulnerability of its
sector.
5.       “http://www.saching.com/Article/ON-THE-SUBJECT-OF-GLOBAL-OIL-CRISIS--
         HOW-SHOULD-THE-PHILIPPINES-SOLVE-IT-/1807”
        The URL contains a detailed article on the Philippines‟ approach to the oil industry related
issues. The importance of a such approach is the fact that is has been developed a decade ago.
This would provide a spectrum of ideas on the issue. The article would reflect if anything has
changed during the previous ten years.
Bibliography

         "What affects fuel pricing." The Price of Fuel. The Price of Fu el, n.d.
          Web. 11 Oct 2010.
          <http://www.thepriceoffuel.com/whataffectsfuelpricing/>.

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   Gal Luft and Anne Korin, . "Terror's next target ." IAGS. IAGS, December
    2003. Web. 11 Oct 2010. <http://www.iags.org/n0111041.htm>.

   Robin-McCaskill, Jolene . "Natural Disa sters and Oil: The Effect of
    Hurricane Katrina on Oil production in the Gulf of Mexico." (June 6,
    2006): n. pag. Web. 14 Oct 2010.
    http://water.stanford.edu/nur/GP200A%20Pap ers/jolene_mccaskill.pdf

   Jenkins, Arthur. Bussiness Studies A. for AQA. Hodder Education, 2001.
    Print.

   Perry, George24 L. "The War on Terrorism, the World Oil Market and the U.S. Economy -
    Brookings Institution." Brookings - Quality. Independence. Impact. 24 Oct. 2001. Web. 17 Oct.
    2010. <http://www.brookings.edu/papers/2001/1024terrorism_perry.aspx>.

   "OPEC." Wikipedia, the Free Encyclopedia. Web. 17 Oct. 2010.
    <http://en.wikipedia.org/wiki/OPEC>.

   OPEC Solemn Declarations. Rep. Organization of the Petroleum Exporting Countries, Mar. 2009.
    Web. 18 Oct. 2010.
    <http://www.opec.org/opec_web/static_files_project/media/downloads/publications/Solemn_Decl
    aration_I-III.pdf>.




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