Oil is not all evil

Oil as a cause of military conflict AND as a promoter of peace

Eran Sthoeger
Aug 22, 2017 · 6 min read

The endeavor to obtain control over natural resources, and oil in particular, is thought to be a potential driver of military conflict. Kuwait’s lucrative oil reserves were the backdrop for Saddam Hussein’s decision to invade his small and wealthy neighbor in 1990, which, in turn, led the US along with many other states to take military action to oust Iraqi forces from Kuwait in Operation Desert Storm. While the potential of the sharp decline of oil prices has the potential to further escalate interstate tensions over a still-lucrative resource, at the same time it may also produce the opposite effect: it may incentivize sovereign states to resolve their disputes peacefully in order to tap into existing oil reserves and thus prevent conflict.

The decline of oil prices since the end of 2014 has impacted and continues to impact sovereign states and their economies in various ways, to the benefit of some and the detriment of others. In domestic markets, a sharp change in value causes conflict of interests between host countries and oil companies and their investors as each try to maximize their gains under existing arrangements. Lower oil prices also means lower profit margins. This in turn bring these actors to reevaluate prospective and ongoing projects, shift priorities, minimize risk and scrap investments once thought to be profitable.

When the interests of economic actors shift, the potential for conflict increases. In the private sector, conflict expresses itself through litigation, where the party that stands to lose its investment due to the rapid decline in oil prices will, naturally, look for ways to avoid its contractual obligations. Furthermore, a drop in prices means a smaller pie. And when the pie shrinks and there is less to share, every piece of the pie counts and justifies the high costs of litigation, and more pieces of the pie are needed to meet the same bottom line.

The same goes for the relations between sovereign states. Countries have varying interests, between oil importing countries and those which rely on oil to drive their economy and, as importantly, between the oil producing and exporting countries themselves. As OPEC members and Russia look to cut supplies to raise prices, the US and Canada, as both oil producers and big market consumers, see many benefits to their economy from lower oil prices.

However, in an international system that, at best, has limited avenues for adjudication and enforcement, the ramifications of this conflict-resulting dynamic on the relations between has much more destructive potential. In the world if international relations, conflict can still cause military hostilities, and in the worst case, all-out war.

The potential for military conflict is extremely relevant to disputed maritime zones. According to the Centre for Energy, Petroleum and Mineral Law and Policy of the University of Dundee, less than half of the potential maritime boundaries in the world have been agreed. When it comes to disputed maritime areas, these are in many ways, still ‘unchartered waters’ and prone to conflict. There are known or potential oil and gas reserves in many of these cases and the ultimate location of the boundary can determine to whom go the spoils. In the meantime, the underlying oil reserves remain in the ground until these disputes are resolved and the oil companies can start producing oil under the authority of the rightful state-owner of the oil fields.

To some extent, the role of low oil prices as a potential driver of conflict is already playing out in the South China Sea, where Chinese expansion-driven politics have received much attention over the last few years. China has embarked on an expansive policy, claiming sovereignty over the disputed Spratly and Paracel Islands, resulting in an aggressive military stance and the construction of artificial islands to enforce its claim and presence. The US, for its part, has carried out “freedom of navigation operations” in the South China Sea since 2015, most recently sending the USS Stethem, a guided-missile destroyer, on 2 July, to sail within the 12 nautical mile territorial sea of Triton Island, currently held by China, and claimed by Taiwan and Vietnam as well.

Another key actor in the South China Sea, the Philippines, has attempted to curve China’s actions by resorting to litigation, by bringing some of the aspects of the dispute before an arbitral tribunal under the auspices of the United Nations Convention on the Law of the Sea in 2013. In July 2016, having rejected the legal basis for China’s claims to the majority of the South China Sea, the tribunal held that China had violated the Philippines’ sovereign rights by interfering with Philippine fishing and petroleum exploration and constructing artificial islands. China refused to participate in the proceedings and has rejected the tribunal’s award, claiming that it lacked jurisdiction over the matter, opting to continue its unilateral course of conduct.

No doubt, the dispute over the area between China, Vietnam, the Philippines, Taiwan, Malaysia and Brunei dates well before the decline in oil prices at the end of 2014. That said, one of the drivers of China’s policies, and that of its neighbors, Vietnam, the Philippines, Taiwan, Malaysia and Brunei, are the potential natural resources believed to lay under the vast waters of the South China Sea. Though the exact quantity oil and gas reserves is unclear, it has been reported that China itself estimates that there are some 125 billion barrels of oil and 500 trillion cubic feet of gas yet to be tapped in the South China Sea.

However, not all hope is lost. Recent developments in other parts of the world show that lower oil prices leading to tension and conflict can also incentivize sovereigns to litigate, rather than escalate, their maritime disputes, in order to reap benefits in a tough market.

Equatorial Guinea and Gabon, two oil exporting countries, both claim the islands of Mbanié, Cocotier and Conga in Corisco Bay, an area believed to hold vast deposits of oil, in a dispute dating back the 1970s. In 2004, the two countries agreed to jointly develop those resources while resolving their border dispute in parallel. Some things are easier said than done, as it turns out, and the joint development scheme never advanced, as the two countries continued to argue over the boundary while the United Nations attempted to mediate between them for years. Finally, in the midst of a period of the lowest oil prices since the 1990s, the parties agreed that it was time to settle the dispute once and for all: In November 2016 they finally agreed to submit their maritime boundary dispute for adjudication before the International Court of Justice, ending decades of fighting, and allowing at least one of the two to profit from the oil deposits in the disputed area.

Not too far to the South-East, in the Gulf of Guinea, two other oil producing countries, Ghana and Cote d’Ivoire, are soon to put their maritime dispute behind them. In September 2014, Ghana initiated proceedings before the International Tribunal for the Law of the Sea, to determine the maritime boundary in a triangular area claimed by both States, where oil production was already underway by Tullow Oil, a company headquartered in the UK, under a Ghanaian license. While the area was claimed by both countries at least since 2009 if not longer, it was only at that point that continuing oil production free of any doubt as to the true owner of the resources became essential.

It is, of course, impossible to assert that the drop of oil prices in recent year is by itself a driver these recent cases, or even the most important consideration. But much like with the private market, the drop in oil prices affects the interests of sovereign states and provides an incentive to maximize potential profits and securing enough pieces of the oil pie. It is possible, and encouraging, that perhaps with the exception of power nations such as China, this will lead to the peaceful resolution of maritime disputes rather than conflict, which will also lead to increased development of resources in disputed waters, enlarging the pie for the private sector as well. Hopefully, in the not-so-distant-future, oil will have no role to play in our lives. But until then, low oil prices may also have a positive effect on resolving international disputes and allowing for more energy resources to be tapped by oil producing companies.

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Eran Sthoeger

Written by

Litigator, consultant, advisor, and expert in public international law and international maritime law

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