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The
Politics of Cheap Oil
By Robert Bryce
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: robert@robertbryce.com.
Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by CounterPunch,
January 17, 2007. Petroleumworld reprint this article in the interest
of our readers.
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Petroleumworld
News 01/28/07
Copyright
© 2006 Robert Bryce.
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