Carrot or stick?

A Subsidy could be considered as a carrot for oil producers and a sanction as the proverbial stick which can be used to bombard and punish petroleum companies and certain countries for their misdemeanors. But how are they used as a control mechanism and who are the controlling powers that wield them? Firstly let’s define a sanction. Where international law has been broken a court can apply a sanction to restrict trade in an attempt to control certain behaviour or reverse policies that have a negative effect on another group. The sanction will then be lifted once a balance has been restored to the point prior to where the unfavourable behaviour started.

For example Iraq invaded Kuwait to control the flow of oil. The first course of action is to impose economic sanctions by stopping the trade in oil. Iran builds a nuclear facility which some believe would cause a danger to others, again prompting oil sanctions. The same thing happened to Libya until the sanctions caused the desired change in behaviour. The reason oil sanctions are used with increased regularity is that countries generally rely on oil production to fund the majority of the state budget. This is seen clearly with new oil producing countries, they may have a very good cotton, tea or coffee exports, then oil comes in as the major revenue leader and the government starts to rely more on the oil exports than the cotton, tea or coffee production. Over time as the economical wealth of the country and citizens increases, petroleum becomes the only viable source for revenue growth within the country and when a sanction is applied to alter the behaviour of a government or leader, it can have a marked effect on the quality of life for those who live there.

So actions and implements the sanctions? The United Nations Security Council imposes the sanctions and the European Union (EU) implements them. Occasionally the EU may impose their own sanctions if they deem it necessary. Commonly assets can be frozen, travel bans implemented but these can have limited results. Therefore the flow of income through the curtailing of exports can produce a quicker and deeper impact. It can be argued sanctions imposed by the U.S alone do not have the same legitimacy and as a result the U.S will usually try to obtain EU agreement and backing. Recently such combined sanctions were being considered against Russia’s oil industry. This is due to Russia’s military involvement in Ukraine and the issues surrounding Yukos. The international court of arbitration ordered the Russian government to pay Yukos shareholders $50 billion. Why has this happened? Yukos was Russia’s major oil producer generating over 20% of the country’s petroleum requirements and as a result the owner Khodorkovsky became extremely rich. It has been argued that the Russian government broke up the company and transferred assets to Rosneft an oil firm, of which the majority is owned by the government, passing wealth from the private shareholders to the state. Recently as the West imposes these sanctions on Russia, President Putin has announced a $20 billion oil trade agreement with Iran effectively circumnavigating and nullifying the impact of the sanctions. This is a double blow for the EU and U.S as Russia is now helping Iran increase its oil output.

If sanctions are the agreement of states to impose restrictions on another state to change a behaviour or course of action, how effective are they when countries like Russia and Iran can still continue to trade? It is theoretically possible for a number of sanctioned countries to join together and trade exclusively with each other especially where petroleum and energy distribution is involved as it is a vital part of economic and social growth. The problem with sanctions is that if too many are placed against the wrong country, then you have the risk of conflict. Furthermore petroleum producing countries often work with international companies which are usually allowed to continue drilling operations while sanctions are in place. Why would there be a sanction placed on a specific country to prohibit oil and gas drilling and distribution and not impose it on the major E&P organisations? Simply if Exxon or BP started to lose money or the overall distribution of oil was vastly reduced then the cost to the consumer would increase. Look at it this way, a democratic government is elected by its citizens and if that government has decided to impose sanctions upon another and as a result the price of oil rises and then the cost of living, those elected individuals would find themselves on very shaky ground come election time.

We also have to face the reality that until the world finds a new cheap form of energy, petroleum will always be in hot demand and as a result there will always be buyers and sellers coming to the market place. I see sanctions as an effective tool for certain situations as a means to restrict trade when combined with other measures towards companies that are trading illegally, or against countries that use the profits to fund acts of terrorism. However to apply an oil sanction towards a country that is a mature heavyweight and has political, economic and military might to back up what they are doing, then sanctions have little impact and can in fact start a war. The problem is the need for oil is so great that whoever controls a region of oil production wields great influence within that region. Therefore due to instability with conflicting governments in the East, the West now tries to influence African leaders and gain control of rich production sites. Even China is trying to carve a stake within the African market. I would suggest clarity of thought and a maturity of action when applying sanctions, in the same way a subsidy can have both positive and negative impact, so can a sanction. Therefore let the flow of oil continue so that it can benefit the lives of local people allowing them to prosper, and to increase wealth within the global community for many years ahead.