⇱ Index page

The Internationalist Archive

Michael Hudson is an economist and author whose research has looked at the understanding of economic systems, debt, and financialization. One of his primary areas of expertise is the study of debt and its far-reaching implications, especially how debt dynamics influence economic stability, particularly in today's debt-driven global financial system. 

For issue #45 of The Internationalist, we draw from The Destiny of Civilization: Finance Capitalism, Industrial Capitalism or Socialism (2022). In this excerpt, Hudson examines the role of oil and gas in global geopolitics; U.S. oil companies' strategies to minimize costs and taxes while downplaying environmental issues; and U.S.'s efforts to control foreign oil resources and influence energy dependencies.

Throughout history labor productivity has largely reflected the rise in energy input per worker, from wind and water power to animal power, wood burning, coal, oil, nuclear, solar and geothermal power. Oil and gas remain critical to economic growth. Their control thus provides a chokepoint to control the world’s geopolitics. That explains the overwhelming role of oil companies in Anglo-American diplomacy. The fight to block Russia’s Nord Stream 2 gas pipeline by imposing sanctions on European companies aiding in its construction has been a focal point of today’s New Cold War politics.

Financializing oil rents

Until oil-exporting countries took control of their oil production after 1974, all U.S. oil imports were from foreign affiliates and branches of U.S. firms. That kept the balance-of-payments costs minimal, because the nominal price of oil imports was offset by charges that were not paid to foreign producers. These offsetting charges included the profits that head offices retained, managerial fees, shipping and port charges, payments to U.S. managers and U.S. labor working abroad, U.S. exports of drilling equipment and other capital goods used in the oil-extraction process, and interest charges on advances and loans to foreign branches and affiliates.

U.S. companies still organize their oil production abroad as foreign branches of their U.S. head offices. Their oil production operations are consolidated into the parent-company balance sheet. That enables them to qualify for a U.S. depletion allowance – a tax-deductible credit supposed to reflect the cost of how much an oil company would have to spend in obtaining an equal amount of the oil being depleted! (No restitution is made by this allowance to countries whose oil resources actually are being emptied out.)

When the U.S. income tax was enacted in 1913 by the Sixteenth Amendment (following a four-year fight after Congress had passed the tax in 1909), it was intended to capture economic rents. But by the 1920s, oil and mineral rent extractors had lobbied to free themselves from income taxation. The oil depletion allowance was an accounting fiction that made the oil sector effectively exempt from both U.S. and foreign income taxation.

The next challenge was to avoid foreign taxes on oil production, refining and marketing. Oil industry lawyers and accountants created “flags of convenience” in the form of shipping and trading affiliates incorporated in offshore tax-avoidance centers. Liberia and Panama have no income tax, and use the U.S. dollar as their own currency, making themselves de facto parts of the U.S. economy.

For many decades U.S. oil majors sold the oil that they produced in Saudi Arabia and other Near Eastern countries at artificially low prices to their Panamanian or Liberian shipping and trading affiliates. These intermediaries then turned around and sold the oil they had bought at low prices to downstream distributors in the United States or Europe, at a transfer price high enough to leave no room for refineries or gas stations in Europe or other oil-consuming nations to report a profit to their own tax authorities. Earnings on the oil industry’s foreign operations are reported as being made by the trading companies registered in countries where income is not taxed.

A basic criterion of a modern state is the ability to issue its own money, and to levy taxes to give value to it. “Flag-of-convenience” countries relinquish these inherent rights of states. Panama and Liberia are not “real” states, nor are the small Caribbean and Pacific tax-avoidance islands, and Monaco and Liechtenstein. They are the neoliberal ideal of what a post-industrial state should be: no taxes on rentier income, no social spending, but existing simply to enable fictitious accounting to conceal where profits and natural-resource rents “really” are made.

Shifting the social costs of pollution off the oil polluters

Much like agribusiness, the oil and mining sectors are global polluters of land, water and air – and seek to avoid liability for the environmental problems they cause. The 1989 Exxon Valdez 10-million-gallon oil spill in Alaska is the most notorious oil tanker accident. It was followed by years of legal protest by Exxon to delay and ultimately evade having to make restitution for its pollution. Equally notorious is British Petroleum’s 2010 Deepwater Horizon oil spill, resulting from the company avoiding the cost of having to properly seal its underwater well. BP’s many misdemeanors and its felony count for lying to Congress reflect the industry’s hardline opposition to environmental safety regulation.

On a smaller scale, thousands of oil leaks from abandoned wells and gas fracking operations in the United States have left massive local cleanup costs. Many of the operations (incorporated individually to avoid liability) are long gone, leaving local authorities no recourse for the costs of cleanup. Even on current operations, the vast amounts of water being consumed by gas fracking have led to widespread water pollution. Television news shows depict kitchen sinks whose flow of water can be lit with a match and turned into flame. Diversion of water causes lower water tables and small earthquakes and tremors, making the earth as unsafe as the local water supply.

These problems are capped by the oil sector’s long-time refusal to acknowledge its role in causing global warming, extreme weather and rising sea levels. Government policy also is often to blame. Development of Canada’s Athabasca tar sands in Alberta put the goal of U.S. energy independence ahead of environmental responsibility, at the cost of enormous pollution and oil spills through the pipelines laid to bring the province’s dirty oil to the United States. It takes four gallons of water to make a barrel of tar-sand oil. Back in 1976, when I was a consultant to the Energy Research and Development Agency (ERDA) for its study of gas liquefaction, my protest over the cost of water being counted as zero was excluded from the official report so as to make it seem that tar-sand hydrocarbons were economic to exploit instead of needing subsidies of free water.

Isolating oil-producing countries that break from U.S. diplomacy

After 1973-74, oil-exporting countries sought a more equitable share in the gains from trade by taking control of their oil reserves and quadrupling their oil-export prices. But even industrial nations that have kept control of their oil have suffered from the Oil Curse, “Dutch Disease.” Norway’s North Sea oil has forced its currency up to such high levels that its industry is priced out of world markets. It ultimately solved this problem (as did Saudi Arabia) by recycling oil-export earnings into U.S. and other foreign financial and arms markets, which became the ultimate recipients of the oil-rents.

Libya sought independence from the Dollar Bloc. Muammar Qaddafi took the lead in using its oil to develop a national social-welfare and educational system. He hoped to create a gold-based African currency area, and kept Libya’s foreign-exchange earnings in gold instead of dollars, ejected foreign military bases, and turned to China for construction instead of going to the World Bank. These actions led the United States, France and Britain to mount a NATO attack in 2011 that tortured and killed Qaddafi and destroyed Libya. Its gold reserves disappeared, and U.S. Secretary of State Hillary Clinton distributed its arms to ISIS fighters to attack Syria and Iraq to prevent these nations from using their oil for their own domestic growth.

On January 26, 2017, and again on February 26, 2018, President Trump insisted that the U.S. had a right to Iraqi and Syrian oil as reparations for the cost of attacking these countries!12 At a January 2020 campaign rally, Trump reiterated America’s right to seize the natural resources of any country that it attacked, as compensation for the costs of mounting the attack, with no reparations to devasted countries unlucky enough to have resources desired by U.S., British or French investors:

“People said to me, ‘Why are you staying in Syria,’” Trump said. “Because I kept the oil, which frankly we should have done in Iraq,” he added, to cheers and applause from the audience. The president has previously criticized his predecessors for not profiting off Iraqi oil wells. “So they say, ‘Trump’s in Syria,’…” the president continued. “We have the oil, really secure. We’ll see what happens with it.”

Also under attack for its oil is Venezuela. For many decades the United States sponsored client dictators there and in neighboring Latin America. To protect against the threat of nationalist rejection of U.S. proxies, the oil industry located its refineries for Venezuelan oil offshore in Trinidad. The aim was part of the industry’s strategy to prevent oil-producing countries from integrating their production with refining oil to produce gasoline and other fuels and marketing these products under their own control.

When U.S.-sponsored coups against Venezuela’s president Nicolo Maduro failed, the United States rounded up its allies to impose sanctions to disrupt its economy and starve it into submission. When Venezuela tried to use its gold to pay for vital food, medicine and other urgent imports, Britain simply seized the gold reserves held in the Bank of England, holding them for whomever U.S. officials might decide should be the official leader of that country. “It would be unlawful to allow Mr. Maduro access to the gold, a British High Court judge said, because Britain’s government recognizes his rival, Juan Guaidó, as Venezuela’s rightful leader.” Venezuelans did not support or accept the U.S. appointee.

The U.S. geopolitical strategy is to make the world dependent on U.S. oil suppliers and those in its diplomatic orbit. But a backlash has occurred as blatant U.S. use of its control of oil as a chokepoint to impose its economic and military diplomacy is prompting other nations to become energy-independent. The most recent showdown is the U.S. attempt to block Germany and other European countries from importing Russian gas. In December 2019, Congress imposed trade sanctions and financial penalties against companies helping construct Russia’s Nord Stream 2 pipeline. U.S. Secretary of State Pompeo travelled to Europe to insist that Germany delay its completion, warning that importing energy from Russia would make Europe “trade dependent” and therefore potentially hostage to Russian influence. U.S. sanctions were imposed against “a Swiss company that supplied the ships to lower the pipes into the water,” and in July 2020 “a bipartisan group of Senators moved to widen the sanctions in order to kill Nord Stream 2 altogether.”

On August 10, Russian foreign minister Sergei Lavrov held a joint news conference with his German counterpart Heiko Maas, and the two re-affirmed that Russia and Germany were determined to finish the Nord Stream 2 pipeline in the near future. Mr. Lavrov urged “that European states should determine their energy policy on their own.”

Germany tried to meet the Americans halfway by promising to invest about a billion dollars to build port facilities to import U.S. liquified natural gas (LNG) at much higher prices than those it was to pay for Russian oil, ostensibly to “diversify its supply.” But the conflict continued to escalate steadily. On January 19, 2021, the final full day of the Trump administration, “the Treasury Department sanctioned the Fortuna, the Russian-owned barge that is now laying the Nord Stream pipe on the Baltic Sea floor. A spokesman for Nord Stream 2 AG, the Swiss-registered, Russian-owned company building the pipeline, said, ‘U.S. sanctions actions against companies conducting legitimate business in the [European Union] on the Nord Stream 2 project are contrary to international law and a violation of Europe’s energy sovereignty.’” To U.S. policymakers, foreign energy sovereignty represented a threat to U.S. unipolar geo-economic sovereignty.


Excerpted from The Destiny of Civilization: Finance Capitalism, Industrial Capitalism or Socialism (2022) with permission of the author, Michael Hudson.

The Internationalist Archive