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Whither The Price of Oil?

April 23, 2008

Whither the Price of Oil? And should it affect our foreign policy?

Charles Peña

According to Department of Energy statistics, the price of oil rose from about $20 per barrel to about $30 per barrel over the course of 2000 to 2001. And oil prices were actually falling in 2001 and declined sharply after the 9/11 terrorist attacks. But since early 2002 – after President Bush's "axis of evil" State of the Union Address, which can be thought of as the kickoff point of the run-up to the Iraq war – the price of oil has steadily gone up. As this is written, the price of oil is at a record high of nearly $114 per barrel. (It's worth noting that in terms of inflation-adjusted constant dollars, the peak price of oil was during the Iran-Iraq War in 1981.)

Three summers ago – when the price of oil was "only" $60 per barrel – I had a conversation with a former special assistant to President Bush for combating terrorism (no, not Richard Clarke) about the price of oil and national security. At the time, he was concerned about the price of oil going to $75 per barrel and what would happen if it hit triple figures. Like so many others, he was equating national security with the need for energy security which, in turn, means either cheap oil or alternative energy.

Unfortunately, this type of thinking is conventional wisdom and drives national security decision-making. Israel aside, the primary reason the Middle East is and has been a U.S. national security issue is oil. Even as the Bush administration makes democracy in Mesopotamia the raison d'être for its foreign policy and the Iraq War, the United States continues to have a cozy relationship with Saudi Arabia – the world's largest oil producer with the largest estimated oil reserves, yet anything but democratic – on the belief that such a relationship will somehow ensure at least access to oil, if not stable oil prices (that the price of oil has nearly tripled in the last three years should be enough to disprove the need for President Bush to hold hands with Saudi Crown Prince Abdullah). Oil is also a reason (not necessarily the reason, but certainly an important reason) Iran is demonized as not only a threat to the region, but to world peace. If the Iranians were not the fourth largest oil producing country in the world and sitting atop the world's third largest oil reserves, the United States would probably care a lot less that they (meaning the regime, not necessarily the Iranian people) are anti-American. Oil was a reason for the first Gulf War against Iraq. It probably would have mattered less had Iraq (fourth largest reserves in the world) invaded a country other than oil-rich Kuwait (remember then-Secretary of State James Baker's "jobs, jobs, jobs" rationale in 1991?). And certainly one reason Saddam Hussein became a target for the second Bush administration was that the neocons had already preordained that such a regime – one accused of developing dreaded WMD and having ties to terrorists in the aftermath of 9/11 – was a threat because of "longstanding American interests in the region" [.pdf] (a euphemism for oil). Finally, oil is a reason Venezuela's Hugo Chavez (Venezuela is the tenth largest oil producer in the world) has been portrayed as a threat to U.S. security.

But oil is not a national security issue. Oil is an economic issue. It's true enough that the United States (and the rest of the world, for that matter) is "dependent" on oil (although less than half of the oil imported to the United States is from the Persian Gulf). But it's also true that countries such as Saudi Arabia need to sell oil (particularly if a country's economy is primarily based on oil sales). So we don't need any special relationships to have access to oil. Supply and demand ultimately determines the flow of oil. To be sure, from time to time OPEC tries to control the supply of oil to influence prices to maximize profits, but OPEC does not represent the entire world oil market (non-OPEC countries account for 60 percent of the world's oil supply). As a result, OPEC cannot control either supply or price. If OPEC tries to limit supply, non-OPEC countries have an incentive to increase supply to increase their revenues. And OPEC members themselves have an incentive to cheat by increasing production over their quotas to increase revenues even as the organization is trying to constrain the supply of oil to maximize price.

So the price (and supply) of oil is dictated by the market. And there is no escaping this reality by trying to break our so-called dependence on foreign oil. Indeed, in the late 1970s the United Kingdom was essentially oil self-sufficient – virtually all of its oil consumption came from the North Sea. Yet when the price of oil spiked in 1979, the UK was hit just as hard as Japan – a country that was almost entirely dependent on imported oil. Why? Because oil is a commodity traded on the worldwide market and both its supply and price are indifferent as to where it comes from or where it's going.

Thus, the price of oil is the price of oil.

OK, but wouldn't we better off if we didn't need oil (or at least needed it less)? Environmental and pollution concerns aside, wouldn't we then not need to focus so much of our foreign policy on the Persian Gulf and Middle East? And wouldn't that make us less susceptible to radical Islamic terrorism? Ultimately, that was what my conversation with the former White House special assistant was about. Of course, we would be safer if we were not so involved in the Middle East – which does next to nothing in terms of assuring the supply of oil or stabilizing its price, but which is a significant factor in making us a target for terrorism. But if oil is the primary factor driving our Middle East policy yet the price of oil is the price of oil, the reality is that we don't need to be less dependent on oil to be less involved in the Middle East.

In other words, we don't need to achieve energy independence by weaning ourselves off of oil to be able to adopt a different – preferably less interventionist – Middle East foreign policy. And the paradox of trying to break free of oil is that the only way to do that is for the price of oil to go up. Even if it is expensive, as long as oil is still cheaper than other sources of energy there is no rational economic reason to pay more. Therefore, oil actually has to become more expensive than other forms of energy. But even at more than $100 per barrel, it's not… yet.

Three summers ago a certain special assistant was worried about the price of oil breaking the $100 per barrel barrier. Now it has (despite oil hitting a new record high on April 16, it's worth noting – although certainly not for cause and effect – that the Dow Jones Industrials closed up more than 250 points on the same day). We are neither more nor less secure as a result. We are only paying more at the pump. There are legitimate economic reasons to be concerned about the price of oil, but there are no national security reasons for the United States to take action or continue to build our Middle East and Persian Gulf foreign policy around oil. The only dependency we need to overcome is the myth that we are dependent on oil.

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I conservatively predict

I conservatively predict $200/barrel by year's end.

That's if the Fedgov can apply brakes to our inflationary recession and the dollar doesn't collapse precipitiously overnight.

SUPPORT OUR FOUNDERS' AMERICA
Support the Constitution of the United States

SUPPORT OUR FOUNDERS' AMERICA
Support the Constitution of the United States

You could be right Kevin...but for sake of argument...what if,

They munipulate the price back down again ? After all it is munipulated.
or...
Truly revolutionary new alternative energy systems are developed ?
or...
Present alternative energies are "tamed" and marketed economicly ?
or...
Folks finally give up their excessive lifestyles and learn to live "light" ?

Truckers strike...students park your cars and ride a bike...car-pool too.
Cut use...cut use...cut use...cut use...cut use...cut use...cut use...cut use
boycott...boycott...boycott...boycott...boycott...boycott..boycott...boycott.

Discover Costa Rica

Discover Costa Rica

I agree

I agree with you on that.

Bumped

please comment