The Politics of Cheap Oil
Oil prices may be falling, but hold off the cheering. Yes, cheaper oil leads to cheaper gasoline, and that’s good for America. At least, that’s the common wisdom, particularly among the neoconservatives. But there is plenty of downside to cheaper oil and those deleterious effects rarely get discussed.
First, a quick review. Oil prices recently fell below $50 per barrel, a drop of about 30 percent since crude hit $77 last July. And this price drop may persist. The Bahrain Tribune reported on January 22 that Iran and Kuwait are now planning their budgets based on $40 crude. Adding momentum to the price drop is the apparent inability of OPEC members to follow through on sustained production cuts. Cheating on production quotas has long been a problem in OPEC and that cheating, it appears, continues.
All this should be the best of news for the neoconservatives, who love to claim that the simplest way to undercut the growing power of petrocrats like Iran’s Mahmoud Ahmadinejad and Venezuela’s Hugo Chávez is to drastically reduce the price of oil. The reasoning goes like this: these rulers depend on oil revenues to fund their regimes. If that revenue declines, so, too, will their power. This concept has become the mantra of pro-Iraq war boosters like former CIA director James Woolsey, columnists like the New York Times’ Thomas Friedman, super-hawk Frank Gaffney, and groups like the Set America Free coalition, which insists that America must quit buying "foreign oil."
These pundits insist that foreign oil - including presumably, the crude that comes from such notoriously belligerent terrorist havens like Canada and Mexico, which are, respectively, the first- and second-largest suppliers of crude to the U.S. market poses a threat to American security. And therefore, the only solution is for the U.S. to be "energy independent." There is, alas, bipartisan idiocy on this front. Democratic presidential hopeful Hillary Clinton promoted energy independence in her speech announcing her bid for the White House. The new Speaker of the House, Nancy Pelosi, declared last week that she will deliver a slate of legislation by July 4, for "declaring energy independence." Barack Obama has made similar statements.
Let’s leave aside the fundamental, undeniable truth that America will never be energy independent. Instead, let’s focus on the many reasons why a sustained period of $30 or $40 oil will hurt America’s long-term interests.
Lower prices would further damage Iraq’s economy. Amid the torrent of bad news in Iraq, higher oil prices have been among the few positive news developments, allowing the country to amass sizable funds for the rebuilding effort. Iraq’s oil output has plummeted since Bush and the neocons rushed to invade the country in March 2003. But that falling output has been offset, at least partially, by higher prices. And given that Iraq will for good or ill be America’s colonial possession in the Persian Gulf for the foreseeable future, higher oil prices are far better than lower prices.
Cheaper oil will mean higher consumption in developing countries like China and India. The Chinese government has repeatedly increased the price of gasoline in an effort to slow that country’s insatiable thirst for oil. Cheaper crude would reduce China’s oil import bills and thereby allow greater consumption with little cost. If they Chinese decide to allow the yuan to float against the dollar, then their oil becomes even cheaper. And that would allow the Chinese economy to grow even faster growth that will further fuel China’s rise as a global power.
A long period of cheap petroleum could result in instability in key countries in the Middle East. This runs directly counter to the neocon gospel. If the U.S. could, magically, be energy independent, Friedman and his fellow travelers claim that global crude prices will collapse. That will mean, according to Friedman, that the rulers of repressive oil-rich countries would be forced to "open up their economies and their schools and liberate their women." He might be right. Or he could be disastrously wrong. And if that instability does occur, A.F. Alhajji, an energy economist and professor of economics at Ohio Northern University, says "the West cannot turn a blind eye to such conflicts." Indeed, the U.S. could not stay on the sidelines if a key ally like Saudi Arabia or Kuwait were to get embroiled in a nasty internal conflict due to an economic crisis caused by low prices.
Just to drive that point home, Gaffney and Woolsey and their ilk love to bash the Saudis. Would they be happier, if, thanks to their push for energy independence and cheap oil, Saudi Arabia’s king, Abdullah, who is a moderate and a staunch ally of the U.S., were to be deposed and replaced by a group of Wahhabi clerics who hate the U.S. as well as everything modern?
Cheap crude would short-circuit the push for greater automotive fuel efficiency. American motorists who’ve become accustomed to $3 per-gallon gasoline have, of late, been buying more fuel-efficient vehicles. If crude (and therefore, gasoline) prices continue to fall, they will happily return to their Hummers, big pickups, and SUVs. And that will, once again, set up a scenario that will allow foreign automakers like Toyota, Nissan and Honda to capture even larger shares of the auto industry when gasoline prices rise again, and they will.
Cheap crude will short-circuit the push for renewable energy. We’ve seen this before. The surge in oil prices that occurred after the 1973 oil embargo didn’t last. As prices softened, so, too, did the interest in solar power, wind power and other technologies. The best hope for the renewable energy sector is a sustained period of high prices for fossil fuels of all types, from coal to natural gas.
Low-cost oil would increase emissions of greenhouse gases. One can argue all day about what’s causing global warming. But if policymakers want to embrace Kyoto or other anti-warming initiatives, cheap oil is the last thing they should want.
A collapse in oil prices would mean a collapse in America’s domestic oil production. We’ve seen this movie before, too. In the early 1980s, Dallas and Houston were in a frenzy fueled by high-priced oil and a river of cheap money provided by crooked savings and loan operators. Everyone was convinced that high prices were here to stay. That illusion ended with the oil price crash of 1986 , which, by the way, was largely precipitated by unrestricted production from Saudi Arabia. The crash resulted in bankruptcies from Midland to Tulsa. Idle drilling rigs were cut up and sold for scrap. Skilled oilfield workers left the industry for good.
Cheap oil increases America’s reliance on foreign oil. Back in 1985, when America’s domestic oil production was on the upswing, OPEC countries supplied 41 percent of America’s imported oil. By 1990, with domestic production decimated, OPEC’s share had climbed to 60 percent. If a stint of low crude prices persists, the U.S. domestic oil industry will, once again, fall on hard times. That will mean foreign producers, who generally have lower production costs, will be able to gain market share at the expense of domestic producers.
Given these many facts, perhaps Clinton, Obama, Pelosi, Woolsey, Friedman, et al. can explain how cheap oil, and the potential collapse of the domestic oil and gas industry will help America be energy independent.
The punchline here is obvious: Be careful what you wish for. Cheap oil could hurt America just as much as expensive oil. In fact, it might hurt more.
ROBERT BRYCE lives in Austin, Texas and managing editor of Energy Tribune. He is the author of Cronies: Oil, the Bushes, and the Rise of Texas, America’s Superstate. His his third book, Petroleum Soldiers, will be published this fall. He can be reached at: firstname.lastname@example.org