International Terrorism and its Key Market

Göcer, Özgür

International Terrorism and its Key Market

Zusammenfassung

Inhaltsangabe:Introduction:
Politics has always been committed to fighting terrorism by using deterrence: Terrorists are best dissuaded from attacking through the threat of heavy sanctions and by using police and military forces to fight them.
The reaction to the terrorist attacks of September 11, 2001 is a striking example. The American president first declared a crusade against terrorists.
This crusade was, after some thinking, changed to a War against Terrorism. This war has been widely supported by a great many democratic as well as authoritarian countries. This war on terrorism is completely based on deterrence: Actual and prospective terrorists must be annihilated by killing them without any further ado, or they must, at least, be captured, held prisoner, or (perhaps) put on trial and sentenced to long or indefinite periods of time. It is expected that such harsh treatments impose such high expected costs on prospective terrorists that no individual will engage in terrorist activities in the future.
History, as well as recent experience suggests, however, that using deterrence in dealing with terrorism is ineffective and may even be counterproductive. The number of terrorist acts may well increase, rather than decrease. A policy based on deterrence also has a second disadvantage. It threatens civil and human rights in the countries engaged in fighting terrorism. Deterrence policy thus tends to undermine exactly those values it claims to protect. Even if deterrence were effective (which it is not) the world may end up significantly less democratic than before it was engaged in the war against terrorism.
Many people share these concerns but they do not see any alternative to deterrence. This contribution suggests that such alternatives indeed exists and are viable and that they are applicable both at the level of society as well as in businesses.
Two strategies are proposed here to deal with terrorism:
1. Decentralisation. A system with many different centres is more stable due to its
diversity, enabling any one part to substitute for the other. When one part of the system is negatively affected, one or several other parts may take over. A country that is the prospective target of terrorist attacks can reduce its vulnerability by implementing various forms of decentralisation: (1) The economy, by relying on the market as the major form of decentralised resource allocation. It refers to both decision-making as well as over space; […]

Leseprobe

Inhaltsverzeichnis

Özgür Göcer

International Terrorism and its Key Market

ISBN: 978-3-8366-0685-1

Druck Diplomica® Verlag GmbH, Hamburg, 2008

Zugl. University of Texas at El Paso, El Paso, USA, MA-Thesis / Master, 2005

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INTERNATIONAL TERRORISM AND ITS KEY MARKET

Page

Abstract

Introduction

II.

Deterrence

Policy

III.

Decentralisation 06

IV.

Offering

Alternatives

Terrorists

Application

Enterprises 10

VI.

Conclusions

VII.

Summary

VIII.

Prices

IX.

Background

Oil Prices

Illustration: U.S. Spot Price of Oil

Illustration:

Crude

Oil

Stocks

XI.

Reserves

and

Production

Spreadsheet:

Intl.

Oil

Consumption

XII.

Price

and

Markets

XIII.

Economic

Growth

XIV.

Exchange

Rates

XV.

Gasoline

Prices

XVI.

Industry

Structure

XVII.

OPEC Policy

XVIII. Inventories

XIX.

Exceptional Events

XX.

Sectoral

Demand

Patterns 26

XXI.

Countries

and

Regions

XXII.

Petroleum

Product

Demand

XXIII. Future

Projections

XXIV. Conclusions

(2)

XXV.

Introduction

(2)

Illustration:

Total

International

Attacks

Illustration:

Total

Casualties

(Dead)

Illustration:

Total

Casualties

(Wounded)

XXVI. Diplomacy

XXVII.

Law Enforcement

XXVIII.

Intelligence

XXIX.

Financial

Page

XXX.

Military

XXXI. Conclusion

(3)

Illustration: Total Facilities Struck

Illustration:

Type

Event 38

Illustration:

Total

Casualties

XXXII.

US Policy

XXXIII.

Note

XXXIV.

Role

Fighting

Terrorism

XXXV.

Definitions

XXXVI.

Antiterrorism

Assistance

Program

XXXVII.

Preface

XXXVIII.

Dirty

Money 44

XXXIX.

Criminal

XXXX.

Corrupt

XXXXI.

Commercial

XXXXII.

The

Western

Role

XXXXIII.

Magnitudes

XXXXIV.

Impact

U.S.

Interests

XXXXV.

Traditional

Explanations

XXXXVI.

Policy

Implications 48

IIIL.

Burying

the

Relic

IIL.

Summary

(2)

IL.

PART

Weighing

the

Risks

Reality

Check

Illustration:

International

Terrorist

Incidents

Nature

the

Threat

Why Us?

unpredictable

Future

PART

Corporate

Response

Cyber Terrorism

The

Story

Celtel 72

Conclusions

(4)

Permissions

References 76

Abstract

Deterrence has been a crucial element in fighting terrorism, both in politics and in

rational choice analyses of terrorism. However, there are two strategies that are

superior to deterrence.

The first one is to make terrorist attacks less devastating and less attractive to

terrorists through decentralization.

The second one is to raise the opportunity cost rather than the material cost for

terrorists. These alternative strategies will effectively dissuade potential terrorists.

It is here argued that they not only apply to society as a whole but can also usefully

be applied by business enterprises.

I. Introduction

Politics has always been committed to fighting terrorism by using deterrence:

Terrorists are best dissuaded from attacking through the threat of heavy sanctions

and by using police and military forces to fight them (Kushner or Wilkinson).

The reaction to the terrorist attacks of September 11, 2001 is a striking example.

The American president first declared a ,,crusade" against terrorists.

This "crusade" was, after some thinking, changed to a ,,War against Terrorism".

This war has been widely supported by a great many democratic as well as

authoritarian countries. This war on terrorism is completely based on deterrence:

Actual and prospective terrorists must be annihilated by killing them without any

further ado, or they must, at least, be captured, held prisoner, or (perhaps) put on

trial and sentenced to long or indefinite periods of time. It is expected that such

harsh treatments impose such high expected costs on prospective terrorists that no

individual will engage in terrorist activities in the future.

History, as well as recent experience suggests, however, that using deterrence in

dealing with terrorism is ineffective and may even be counterproductive. The

number of terrorist acts may well increase, rather than decrease. A policy based on

deterrence also has a second disadvantage. It threatens civil and human rights in the

countries engaged in fighting terrorism. Deterrence policy thus tends to undermine

exactly those values it claims to protect. Even if deterrence were effective (which it

is not) the world may end up significantly less democratic than before it was

engaged in the war against terrorism.

Many people share these concerns but they do not see any alternative to deterrence.

This contribution suggests that such alternatives indeed exists and are viable and

that they are applicable both at the level of society as well as in businesses.

Two strategies are proposed here to deal with terrorism:

1. Decentralisation. A system with many different centres is more stable due to its

diversity, enabling any one part to substitute for the other. When one part of the

system is negatively affected, one or several other parts may take over. A country

that is the prospective target of terrorist attacks can reduce its vulnerability by

implementing various forms of decentralisation:

(1) The economy, by relying on the market as the major form of decentralised

resource allocation. It refers to both decision-making as well as over space;

(2) The polity, by using to the classical division of power between government,

parliament and the courts. Decentralisation over space is achieved by a federalistic

structure, that delegates decision-making power to lower levels of the polity (states,

provinces, regions and communes);

(3) The society, by allowing for many different actors, such as churches,

nongovernmental organisations, clubs and other units.

Decentralisation is effective in reducing risk and uncertainty. A target's

vulnerability is lower in a decentralised, than in a centralised, society. The more

centres of power there are in a country, the smaller the chances that terrorists are

able to harm it. In a decentralised system, terrorists will not know which targets to

attack as any one part it that system can substitute for the other. An attack will have

a much smaller negative effect than in a centralized society. As a result, terrorists

will be dissuaded from attacking.

In contrast, in a centralised system, important decision-making power with respect

to the economy, polity and society is to be found in one location. This power centre

presents itself as an ideal target for terrorists and therefore is in great danger of

being attacked. If the centre is targeted and hit, the whole decision-making

structure may collapse and could so promote chaos.

2. Positive Incentives to Leave Terrorism. Actual and prospective terrorists could

be offered rewards for not engaging in violent acts. This represents a completely

different approach from the conventional anti-terrorist policy of deterrence, which

is based on coercion, or "the stick". By offering more favourable alternatives these

proposals seek to break the organizational and mental dependence of terrorists on

their terrorist organizations. They are given an incentive to relinquish terrorism. In

contrast, deterrence policy locks prospective and actual terrorists into their

organisation and provides no alternatives to staying on. When incentives to leave

the terrorist organization exist the interaction between terrorists and the

government is transformed into a positive sum game: both sides benefit. The

government's effort is no longer directed towards destruction. Rather, the

government makes an effort to raise the utility of those terrorists who choose to

enter the programmes offered. The government so provides alternatives to engaging

in terrorism. This strategy undermines the structure and cohesiveness of the

terrorist organisation. That its members do have an incentive to

leave is an ever-present threat to the terrorist organisation. When good outside

offers are available to the members of a terrorist group, its leaders tend to lose

power and authority. The terrorist organisation's effectiveness is thereby reduced.

The next section analyses the consequences of applying deterrence by focusing on

the incentives offered to potential terrorists. The problems of anti-terrorist policy

using deterrence will be pointed out. Section III presents the first alternative to

deterrence, namely decentralization. Decentralising prominent, potential targets

makes them less attractive to terrorists and can so reduce terrorist attacks. The

fourth section discusses the second strategy, the raising of opportunity costs

rather than the material costs to terrorists. Two specific strategies of raising

terrorists' opportunity costs are suggested.

The next section`s evaluate the weaknesses and strengths of the general strategy.

The following section considers the extent to which businesses may profit from

adopting the two strategies discussed. Followed by conclusions.

II. Deterrence Policy

The potential benefits of an anti-terrorist policy based on the use of force have been

widely emphasized by the governments undertaking it. However, the benefits are

difficult to pinpoint and even more difficult to measure, particularly because of

possible indirect and long-term effects. A basic problem is identifying how much

worse off (if at all) individuals would have been if a deterrence policy had not been

adopted. Constructing such a counterfactual situation is tricky especially as long-

run and macroeconomic as well as macro-societal effects have to be taken into

account.

1. Disadvantages

Some of the costs of employing a deterrence policy are readily apparent and

measurable.

First are the direct costs to the country applying a deterrence policy.

Most obvious are the substantial budgetary costs involved in the prevention of

terrorist attacks such as border controls and the collection and interpretation of

information by intelligence agencies. The more aggressive part of the deterrence

policy relies on the military, police and the various secret services. The total

number of employees and the size of the budget are difficult or even impossible to

know because most of this information is not public knowledge. The overall

budgetary cost of an anti-terrorist policy is certainly large.

The use of force deterrence policy always risks adopting means, which are

repressive. In the name of the "war on terrorism" constitutional civil and human

rights are undermined or completely suppressed. This concern has been discussed

frequently in connection with the anti-terrorist policy the United States and the

United Kingdom have adopted after September 11, 2001. For the citizens

concerned, this erosion of human and political rights represents the costs entailed in

a deterrence policy. Such a result plays into the hands of the terrorists and, if going

too far, proves completely counter-productive. Costs of this type do not only arise

domestically but also internationally. If a country, by adopting a deterrence policy,

violates the rules various countries have agreed upon, a cumulative worsening of

international relationships may take place.

The second type of costs produced by deterrence policy relates to its effects on

terrorists. It is generally agreed that complete deterrence is impossible. No country,

not even one that has exhaustive surveillance and punishing power will have the

ability to thwart all conceivable future terrorist activity. Experience has shown that

terrorists are capable of ever new responses to deterrence policy. They do not only

seek new ways of achieving their aims but also quickly substitute targets that are

impossible or too costly to protect.

Costs are raised further when terrorists move their attention from less to more

devastating objectives, resulting in more casualties and damage.

A coercive response tends to reinforce the cohesiveness and influence of a terrorist

group. At the same time it exacerbates nationalism and xenophobia in those

countries which have been associated with the terrorists.

Despite the many claims to its effectiveness, deterrence may even be

counterproductive. Based on a great many cases this position is supported by many

scholars. To quote again:

"There is a widespread misconception that using terror to defeat terror will

ultimately work. On the contrary, the evidence is that this policy is

counterproductive". Most observers agree that deterrence is not effective in

changing the target country's policy towards terrorism. A worthwhile evaluation

must make an effort to compare the use of force with other anti-terrorist policies.

The following two sections present two such alternatives.

III. Decentralisation

A country can to some extent be immunised against terrorist attacks by

decentralising activity, both with respect to the polity and the economy. The basic

idea is that a polity and society that sustains many different centres is difficult to

destabilise. The single centre becomes less essential for the polity and economy and

therefore loses much of its symbolic value. If one of the many centres is hit in a

terrorist attack, the other centres can immediately take over the tasks. Therefore,

the attraction to perform violent actions is diminished as they prove to have less

effect on the political stability and aggregate economic activity. Decentralisation as

an anti-terrorism strategy on a country level may take two forms:

Firstly, political power is distributed between a number of different political actors

(classical division of power, democracy and rule of law) and across various levels

of government (federalism).

Secondly, a market economy based on an extreme form of decentralisation of

decision-making and implementation is therefore less vulnerable to terrorist attacks

than a highly regulated and monopolised economy is.

IV. Offering Alternatives to Terrorists

An effective way to fight terrorism is to raise the opportunity costs to terrorists.

This strategy differs fundamentally from traditional deterrence policy, which seeks

to raise the material cost to potential terrorists. Indeed, the two approaches imply

quite different policies.

The opportunity costs faced by potential terrorists consist in the utility they could

gain by not engaging in terrorism. These are the activities they can undertake

outside of terrorism. Higher opportunity costs reduce the willingness of a

(potential) terrorist to commit terrorist activities. An increase in the opportunity

costs or, equivalently, a reduction of the costs of all other activities, therefore

reduces terrorism. This strategy has several advantages over other anti-terrorist

policies: Firstly, due to a wider scope of opportunities outside of terrorist activities

a member's dependence on the terrorist group is reduced. Exit is facilitated.

Secondly, a conflict between terrorist and other activities is created, which produces

tensions within the terrorist organisation. Nobody knows who will succumb to the

outside attractions and become a "traitor" by leaving the group. This uncertainty

diminishes the effectiveness of the terrorist group. In contrast, a deterrence policy

strengthens solidarity among the group members (see e.g. Wintrobe 2002a).

Thirdly, the interaction between the terrorists and the outside world is turned into a

positive sum interaction. The chances of finding a peaceful solution are improved.

An obvious possibility is to raise opportunity costs by increasing income in

peaceful occupations. The more an individual can gain from participating in an

ordinary, non-violent activity, the less he or she is inclined to engage in terrorism.

Recent experience with Palestinian suicide bombers suggests, however, that the

resulting effect is small, if it exists at all. A substantial part of them seem to have

above average education and therewith presumably better outside opportunities

than completely uneducated, destitute persons. For that reason, I propose three

more specific strategies to directly raise (potential) terrorists' opportunity costs.

Increasing interaction with terrorists by contact and discussion processes.

Terrorists could be involved in a discussion process, in which their goals and

grievances are taken seriously and which tries to identify whether compromises are

feasible.

Moreover, terrorists could be granted access to the normal political process. This

lowers the costs of pursuing political goals through legal means and hence raises

the opportunity costs of terrorism.

At first this seems to be a weak form of anti-terrorist policy. But there are quite a

number of cases in which former "terrorists" became mainstream politicians later in

life and several of them were even awarded the Nobel Peace Prize.

The anti-terrorism policy proposed here has some features in common with the

policy often put forward for fighting terrorism by alleviating the causes (see Kirk

1983 for extensive references to the literature). It is to be expected that the

confrontation with the liberal ideas existing in our universities will mellow their

terrorist inclinations. The very least that this would achieve is that the (potential)

terrorists gained access to new and radically different ideas, and no longer be

limited to a situation in which they live within a closed circle of terrorists and

ideas. According to Hardin's economic theory of knowledge, interaction between

groups is likely to reduce extremist views. Hardin starts with the premise that a

person's knowledge depends on the costs and benefits of acquiring and then

applying pieces of knowledge. Because of the high cost of attaining and verifying

every bit of knowledge, people typically rely on sources of authority and the

society in which they spend most of their lives. A person also has little incentive to

acquire knowledge and beliefs that are at odds with the beliefs of the society he or

she lives in. Extremist views are therefore more likely to flourish in isolated groups

of like-minded people. This is a generally recognized fact in research on religious

sects. Moreover, extreme views serve as norms of exclusion. Extremism, therefore,

reinforces segregation and vice versa. Wintrobe (2002) and Breton and

Dalmazzone (2002) stress the role of political entrepreneurs who exploit and

magnify the differences between the isolated groups. Similarly, Glaeser argues that

politicians supply hatred if it complements their policies or in Glaeser's words, if

"hatred makes a particular politician's policies more appealing". He further argues

that the demand for hatred falls when consumers start to interact with the targeted

group. He explains the lower demand for hatred due to social interactions by

referring to Becker (1957), who discusses the lowering effect of hatred on returns

in social interaction.

Terrorism, as well as deterrence, can be seen in this context as an attempt to

enhance segregation and thereby strengthen exclusiveness. Extending to terrorists

an invitation to foreign countries will not only raise opportunity costs of terrorism

but will also break the vicious circle of segregation and extremism. This may

therefore be a promising strategy to lower the inclination of terrorists to participate

in violent activities. Analytically speaking, this reflects a change in preferences and

could be depicted in the graphical model by a flatter indifference curve.

There is also abundant evidence from experimental research, which shows that

communication between players increases cooperation. On the basis of his meta-

analysis of social-dilemma experiments, Sally (1995) concludes that "the

experimental evidence shows quite clearly that discussion has an extremely

positive effect on subjects' willingness to cooperate". Sociological studies indicate

that (residential) segregation is often largely responsible for repeated ethnic

conflict.

As has become clear, increasing the opportunity costs to terrorists represents a

completely different approach than conventional anti-terrorist policy using

deterrence. A conscious effort is made to break the organisational and

psychological dependence of the members of terrorist organisations by offering

them more favourable alternatives. Deterrence policy does the opposite: the costs

of staying a terrorist are raised remain low.

A policy that opens up alternatives to terrorists is far from ideal. It has some

important disadvantages. It is useful to discuss two often-raised objections:

Firstly, the strategy of offering valued alternatives to actual and prospective

terrorists will not work. There can be various reasons for this. One is that the

incentives offered are insufficient to affect terrorists. This may be especially true

for highly intrinsically motivated or fanatical terrorists. In this case, the strategy, in

order to be effective, would require excessive incentives and would entail

considerable costs. The incentives are therefore likely to be ineffective in

persuading the hard core of a terrorist organisation to participate in more legitimate

activities. However, they may prove successful in restraining the Umfeld of the

terrorists from engaging in terrorist activities. Without the support of their Umfeld,

the hard core of a terrorist organisation will at least only be able to undertake low

scale terrorist activities.

Secondly, the "benevolence" strategy could create perverse incentives through

which some individuals will be induced to engage in terrorism in order to receive

future rewards for abandoning terrorist activities. This argument applies to positive

incentives in a wide range of policy areas, for example compensation payments in

environmental affairs or positive sanctions in the case of international cooperation.

However, these cases show, that often the implementation of positive incentives

more successfully promotes cooperation than deterrent threats do. For example,

when focusing on horizontal nuclear proliferation, demonstrate that positive

incentives have the potential to produce significant behavioural changes for the

short term and fostering more stable solutions to the problem in the long run.

There are important advantages to the strategy of offering alternatives to terrorists:

The whole interaction between terrorists and the government becomes

characterised by a positive sum game. Both sides will benefit. The effort of the

government is no longer directed towards destruction. Rather, the government

makes an effort to raise the utility of those terrorists who choose to enter the

programmes offered. In contrast, deterrence policy by necessity produces a worse

situation for both sides. The terrorists are punished (incarcerated, killed, etc), while

the government often has to raise large sums of money to finance its deterrence

strategy. Another major strength of the strategy is that it will undermine the

cohesiveness of the terrorist organisation. An incentive to leave poses a strong

threat to the organisation. The terrorist leaders will no longer know whom to trust

because, after all, most persons can succumb to temptation. Efforts to counteract

these temptations by prohibiting members from accepting the attractive offers (e.g.

to spend a period of time at a research institute) will lead to conflicts between

leaders and the rank and file. When good outside offers are available to members,

the leaders tend to lose their influence and authority. The terrorist organisation's

effectiveness is thereby reduced. When considering the usefulness of the strategy, it

is important to keep in mind that the deterrence strategy often does not work, and is

counterproductive. Many examples demonstrate that terrorist movements have

survived despite a strong deterrence policy.

In a comparative perspective, a strategy that offers alternatives can be regarded as

superior.

V. Application to Enterprises

Enterprises, as a rule, cannot use a deterrence strategy against terrorists, at least not

directly. They can try to convince the respective governments to embark on it or

they can try to finance private armed forces to fight terrorists. Both pursuits tend to

be futile. Even if they were successful, this does not mean that the terrorist threat

disappears as deterrence rarely works. Therefore, it is important for businesses to

seriously consider alternative ways of dealing with terrorism.

The strategy of decentralisation is immediately applicable to business. Many

enterprises are faced with immediate or at least potential terrorist threats. This

applies in particular to firms located in developing countries where local terrorism

exists (e.g. in South America, Africa, and Asia) but is also important for firms in

developed countries. If the principal part of an enterprise, most importantly

headquarters, is located in one prominent building, it offers an attractive target to

terrorists. If an attack is successful current business is strongly disrupted, valuable

documents and the content of computers are destroyed, and fear and uncertainty are

spread among the employees. The ensuing costs tend to be out of proportion

compared to the rather low cost of an actual attack or even of a threat of an attack.

In many cases headquarters of large firms are landmark buildings, sometimes even

"icons". This makes them even more attractive targets to terrorists, especially as

one of their major ambitions is to receive media attention.

If the headquarters and other important parts of an enterprise are decentralised, the

terrorists' destructive task is made much more difficult. They are no longer sure

where they should attack, and even if they do, the damage caused is much lower

than if the firm is centralised in one location. In several respects, firms already

pursue a decentralisation strategy. In particular, they disperse the safety backups of

the computer contents in a different location. In the case of the terrorist attack

against the firms in the New York World Trade Centre Towers this strategy proved

to be very beneficial.

The strategy of offering peaceful alternatives to actual and prospective terrorists is

more difficult to employ. Businesses require careful procedures in order not to

antagonise the other side. Thus, it would in most cases be a mistake to make direct

monetary offers to terrorists for giving up their attack plans. This would be seen by

terrorists as an attempt to "corrupt" them, and therefore make it impossible for

them to accept. Moreover, direct monetary compensations invite further demands

in the future. Nevertheless, it is not unheard of that firms have resorted to these

means, especially when dealing with the Mafia. In most cases, more subtile ways to

establish contact and to integrate terrorists and their "Umfeld" are more successful.

One option could be that relatives (parents, brothers and sisters, and cousins),

friends and acquaintances are hired by the threatened firm. This may well dissuade

terrorists from attacking as an attack may cost the job or even the life of their

relative. In any case, such a job offer creates tensions between the "Umfeld" and

terrorists if the terrorists forbid them to accept it. But how this strategy of offering

valued alternatives is applied must be decided case by case.

VI. Conclusions

This paper argues that deterrence is not the only possibility for a country to counter

terrorism. Two alternatives have been discussed; they are viable and do not have

the grave disadvantages of deterrence policy. The first alternative to deterrence is to

reduce terrorist attacks by decentralising political, economic and social activities

and to therewith make them less attractive to terrorists. The second strategy raises

the opportunity cost to terrorists by offering them peaceful alternatives. This

strategy has both weaknesses and strengths. But when the strategy is compared to

deterrence policy, its favourable features prevail.

Both strategies may also be applied to businesses faced by terrorist threats. The

strategy of decentralization is directly applicable: a firm dispersed over many

different locations is more immune to terrorist attacks than a firm whose

headquarters and other crucial parts of the enterprise are concentrated in one place.

The strategy of offering valued alternatives to terrorists and especially their

"Umfeld" may be more difficult to employ but could also be viable.

VII. Summary

The price of oil began rising in October 2003 and reached record levels in 2004

and again in the beginning of 2005. As a result of these price increases, consumers'

budgets have been under pressure, business costs have risen, and oil producers'

profits have increased. The 109th Congress is considering broad energy legislation,

that addresses conditions in the oil and petroleum products markets.

A long term explanatory factor for increasing oil prices could be the decline of

the world reserve base. The reserves to production ratio is the measure which

indicates the world's ability to maintain current production, based on proved

reserves. Over the past decade there has been little change in the reserve to

production ratio, suggesting that, at least for now, long term forces are not driving

up the price of oil.

A wide variety of cyclic and short term factors have converged in such a way

that the growth of demand has been unexpectedly high causing upward pressure on

oil prices. Those factors which have been identified as contributing to the high

price of oil include the resumption of relatively rapid growth rates of gross

domestic product in many countries around the world, a declining value of the U.S.

dollar, gasoline prices, the changing structure of the oil industry, OPEC policies,

and the persistently low levels of U.S. crude oil and gasoline inventories.

Expectations concerning future market conditions are quickly embodied in oil

prices formed in futures markets like the New York Mercantile Exchange. The fear

of terrorism and war, uncertainty concerning the relationship between the Russian

government and the oil company Yukos, and other political factors are quickly

reflected in price along with real political unrest like that experienced by oil

producing Venezuela and Nigeria. Speculative buying and selling might also affect

prices as financial traders adjust their investment portfolios to reflect expected

market conditions. Demand patterns for world oil and oil products show significant

diversity by country, region, and product groupings. As a result of this diversity it

is not possible to attach blame for the current level of price to any one nation,

region, or product segment. The view that the oil market is international in scope

and tightly interrelated is enhanced by the demand data.

As a result of the integrated nature of the world oil market it is unlikely that any

one nation acting on its own can implement policies that isolate its market from

broader price behavior. As new major oil importers, notably China, and potentially

India, expand their demand, the oil market likely will have to expand production

capacity. This promises to increase the world's dependence on the Persian Gulf

members of the Organization of Petroleum Exporting Countries, especially Saudi

Arabia, and maintain upward pressure on price.

VIII. Prices

The world oil market was characterized by strong demand growth that began in

2003 and continued through 2004 and into 2005. As a result of this growth, and the

resulting high prices, consumers' budgets were under pressure, the profits of energy

producers were up, and consuming nations again had to face the economic and

political costs of dependence on imported oil.

Appropriate policy responses to world oil market conditions may well depend

on whether the factors that pushed the market to its current level are likely to be

temporary or permanent. The lessons of past volatility in the oil market suggest that

even transitory forces and market adjustments can yield not only changing prices,

but changing patterns of consumption and production as well. Past performance

also suggests that the expectation, or actuality, of a period of high prices or reduced

availability of supply, can change economic incentives, as both consumers and

producers adjust to the new perceived conditions.

This dissertation analyzes the factors that have driven both demand and supply in

the world oil market in the period 2003 through the beginning of 2005. The

dissertation provides and analyzes basic information to inform debate on broad

energy legislation.

IX. Background

While the primary focus of this dissertation is on conditions in the U. S. market,

analyses should be carried out in the context of the larger world market. Few

actions by consuming, or producing nations, can be properly evaluated

independently of the world market. Oil is a fungible, international commodity

whose ownership and ultimate destination is determined by market forces once it

leaves the producing country. No country can effectively isolate itself from changes

elsewhere in the market, nor is it likely that any nation can take actions that do not

indirectly affect other nations. Oil prices are linked, like those of other

commodities, to the levels of economic activity in the industrial nations. Demand,

both from consumers and industrial users, tends to pick up when growth rates of

gross domestic product increase and slow down when those growth rates decline.

As a result, oil prices tend to be volatile, at least partly due to variations in the

business cycle. While oil markets may behave like other commodity markets much

of the time, the oil market does have unique features. First, few commodity markets

have an institution like the Organization of Petroleum Exporting Countries

(OPEC). Since its creation in 1960, OPEC has had a variable influence on the price

of oil through Spot market prices are for current delivery of physical oil, in this

case, WTI, at Cushing, Oklahoma and its member nation quota system. Second, oil

has been subject to supply disruption due to political instability as well as technical

factors. Third, psychological or expectations effects, tied to real or perceived

probabilities of market disruption, may lead to price volatility. Finally, world oil

transactions are settled in U.S. dollars, which affects the value of the dollar in

world currency markets, as well as the magnitude of international reserves held by

petroleum importing and exporting nations around the world.

X. Oil Prices

Spot market price data for West Texas Intermediate (WTI) at Cushing,

Oklahoma. During the time period the OPEC price band for crude oil was at $22 to

$28 per barrel. Accounting for quality and location differences between the OPEC

reference crude (Saudi Arabian Light) and WTI, prices in the U.S. spot market

during 2003 remained close to, or were above, the upper end of the OPEC price

band. However, prices moderated for several months after the beginning of the Iraq

War in March 2003.

U.S. Spot Price of Oil

2001-2003

Jan 00

May 00 Sep 00

Jan 01

May 01 Sep 01

Jan 02

May 02 Sep 02

Jan 03

lla

r B

Price increases began in the late fall of 2003, and continued into 2004, reaching

a yearly peak of over $53 per barrel in October 2004. Although prices fell by $10

per barrel by December 2004, they began to rise again in January 2005, and peaked

again at nearly $53 per barrel in April 2005. Some insight into future spot market

prices might be gained by examining NYMEX futures market prices. For example,

in the five days before it terminated trading on July 20, 2004, the August 2004

contract on WTI at Cushing, Oklahoma was trading at over $40 per barrel. As of

July 23, 2004 the September and October WTI futures contracts continued to trade

at over $41 per barrel on the NYMEX.4 On August 10, 2004 the NYMEX futures

price for crude oil traded above $45, a first in the history of the exchange. On the

same day, the spot market price for WTI was at $44.48.5 These data accurately

suggested that high crude oil prices were likely to continue for the remainder of

2004. By the end of Novemer 2004, futures prices for the January 2005 contract

were trading at nearly $50 per barrel and the March 2005 contract was trading at

$50.41 per barrel. These prices suggest that, while the crude oil price might remain

volatile, reacting to current market conditions, it is unlikely that prices will return

to pre-2003 price increase levels for the remainder of 2004.

Gasoline prices peaked in February and August of 2003. They then lagged oil

prices, not showing price increases in the fall of 2003. However, they did follow oil

price increases throughout the spring of 2004, also peaking in May of 2004.

Gasoline prices were volatile for the remainder of 2004. After the May peak, the

price remained approximately 12 cents per gallon lower for the next four months.

Although the price went above $1.37 per gallon in October 2004, it finished the

year at $1.07, about 24% off the May peak. Gasoline spot prices increased in 2004.

By February 2005, the price peaked at over $1.52 per gallon. On February 3, 2005

the NYMEX future prices for gasoline in July, August, and September were above

$1.50 per gallon. As in the oil market, these futures prices suggest that there is

likely to be only modest, if any, moderation in gasoline prices for the rest of the

year. Conclusions concerning projected spot prices based on the trading value of

current futures contracts may or may not be accurate. Futures prices process new

information and market conditions quickly and prices can change direction on a

daily basis. The futures price on the NYMEX and other markets is conditional on

information available today. As more information becomes available, futures prices

will adjust. However, futures markets are providing little indication that either oil

or gasoline prices might decline in the near term.

Crude Oil Stocks Excluding Strategic Petroleum Reserve

240

250

260

270

280

290

300

310

320

330

Jan 00

May 00 Sep 00

Jan 01

May 01 Sep 01

Jan 02

May 02 Sep 02

Jan 03

illio

f b

XI. Reserves and Production

The long term ability of the oil market to meet demand depends on the

magnitude of available reserves. An important category of reserves are proved

reserves. Proved reserves are those quantities that geological and engineering

analysis suggest can be recovered with high probability under existing

technological and economic conditions. Proved reserves can be augmented through

exploration and development of new discoveries, through technological

improvements, as well as through the existence of more favorable economic

conditions. In the past, all of these factors have contributed to augmenting the

proved reserve base. Whether the proved reserve base grows over time or not

depends in part on the level of production. As production proceeds, the level of

proved reserves declines. As new oil discoveries are made, recovery technologies

improve, or as the price of oil rises, the stock of proved reserves increases. A

standard measure of the potential availability of oil over time is the reserve to

production ratio (R/P). The R/P can be interpreted as the number of years that the

existing reserve base can sustain the current level of production. Since both proved

reserves and production can change year-to-year, the value of the R/P is more

descriptive as a measure of potential market viability when considered over time.

The reserve portion of the ratio shows that the world had access to more

reserves in 2003 than in 1993 or 1983. Reserves in 2003 totaled 1.147 trillion

barrels. Reserves in 1993 were 1.023 trillion barrels, and in 1983 were 723 billion

barrels. These data represent over a 12% increase in reserves for the decade since

Details

Seiten
Erscheinungsform: Originalausgabe
Erscheinungsjahr: 2005
ISBN (eBook): 9783836606851
Dateigröße: 379 KB
Sprache: Englisch
Institution / Hochschule: The University of Texas at El Paso – College of Business Administration
Erscheinungsdatum: 2014 (April)
Note: 1,0
Schlagworte: multinationales unternehmen internationaler terrorismus mineralölindustrie terrorism market opec money laundering deterrence
Produktsicherheit: Diplom.de

Autor

Özgür Göcer (Autor:in)

International Terrorism and its Key Market

Zusammenfassung

Leseprobe

Inhaltsverzeichnis

Details

Autor

Özgür Göcer (Autor:in)