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The Economist [From The Economist print edition | 13/12/01]
Addicted to oil
America's energy policy was wrong before September 11th. Now it is even more so
IF SEPTEMBER 11th really did change the world then one thing it changed, you might suppose, is how the West, and in particular the United States, should think about energy. America's dependence on oil imports from the Middle East has led it to see the stability of the region as a vital security interest. In defending this interest over the years, its military and political entanglements have grown more costly and more complicated. In some ways, it is argued, these policies may have become self-defeating. America's military presence in Saudi Arabia, for instance, may make the region less stable, not more. All of which leads some to conclude that America and the West should henceforth minimise their involvement—economic, political and military.
Is this right? Put so baldly, no. The West's energy policies, and its political relationship with Middle Eastern oil producers, do need to be re-examined. But the issue is subtler than the debate between "engagers" and "disengagers" implies.
Varieties of dependence
The key fact is this: Saudi Arabia has enormous reserves of oil that can be extracted at very low cost. Regardless of western policies, its oil will flow on to the market and, in effect, set the world price. This makes “dependence” on Saudi Arabia an inescapable reality for years to come. Even if America were self-sufficient in oil production, the price of OPEC output, meaning mainly Saudi output, would still largely dictate the world price. With or without new fields in Alaska, or wherever, the only way to break that link would be a naval blockade to keep foreign oil out—not an easy policy to explain to voters.
Yet this economic dependence, you could argue, need not dictate political or military engagement in the region. Even though Saudi Arabia, as owner of the biggest and cheapest reserves, is the dominant producer, its oil is no use buried under the desert. The long-term trend in oil prices has been slowly down, a consequence of greater energy efficiency and better oil-extraction technologies. So oil in the ground has been a depreciating asset. Saudi Arabia can be relied on to keep pumping because it has a compelling interest in doing so. At the same time, its ability to gouge the West will be capped by fear of new energy-saving investment.
Until September 11th, the “benign dependence” theory was persuasiveOn this view, dependence on Middle Eastern oil may be a fact, but it is easy to live with. America has no need to commit blood or treasure to keeping "friendly" governments in power. That calculation should be made on other grounds. So far as economics goes, who controls the oil hardly matters. Saddam Hussein is as keen as anybody else to get his oil to market. This logic applies to all producers: oil will flow at affordable prices and, so long as energy markets in the West are free to adjust to fluctuations in demand and supply, all will be well.
Until September 11th, this “benign dependence” theory was persuasive. Certainly, it fit the facts. Looking forward, it admittedly played one thing down. A helpful influence on the oil market has been growth in non-OPEC supplies. Saudi Arabia remains the swing producer (the price-setter), but, as non-OPEC supplies increase, its freedom of action is curbed. The cartel's failure in recent weeks to agree on immediate production cuts was partly due to the refusal of Russia, a non-member, to join in. If there were ever to be an interruption in Saudi supplies, it would be far easier to cope with if the Saudi share of the market continued to fall.
The trouble is, it won't. Instead, Saudi Arabia's share is sure to rise in coming years. Easily extracted non-OPEC reserves will dwindle, even on optimistic assumptions about technological progress. Dependence on Saudi oil is not going to keep on fading—quite the opposite . This is a pity, to be sure, but it does not really change the earlier conclusion: that “dependence” is unavoidable, but it need not be a problem.
Something happened
Or so it seemed before September 11th. Now, there is a new fact—or rather an old fact, newly apparent. It may not matter, so far as the price of oil is concerned, whether the Saudi regime is friendly to the West, but it certainly matters whether it is rational. The previous arguments assume that Middle Eastern oil producers will know what is good for them. But if a Taliban-like regime were ever to gain control of the Saudi oilfields, could it be relied on to maximise profits in a sensibly self-interested fashion? It might decide to blow up the wells, in pursuit of devout poverty and to punish the West for its corruption. An indefinite cessation of production from what is now Saudi Arabia is not something the West could take in its stride, with or without flexible markets. And going to war for the oil might not be straightforward, especially if one postulates nuclear arms in the possession of such a state.
So what should the West do? It would be hard to exaggerate the costs of a spare-no-expense dash to reduce consumption of oil. Wasting hundreds of billions of dollars to little effect would be easy; the green favourite of investing in alternative energy would do nothing to reduce oil dependence in transport, where it is most critical. It is also a woeful error to think that anti-western sentiment in the Middle East would be assuaged by radical economic disengagement: plunging the region deeper into poverty might well achieve the opposite. But the prospect of increasing dependence on Middle Eastern oil, together with the risk that people as dangerous as the Taliban could come to power there, does add to the case for some measures to reduce western demand for oil.
One measure in particular. On environmental grounds, never mind energy security, America taxes gasoline too lightly. Better than a one-off increase, a politically more feasible idea and desirable in its own terms would be a long-term plan to shift taxes from incomes to emissions of carbon. This would spur development of new transport technologies—vital in curbing the demand for oil. It would also improve the chances that OPEC's reserves will fetch a better price tomorrow than in 2020: an insight that would curb the cartel's market power from day one. Gradualism is the key to doing this intelligently. The time to start is now.
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