SO NOW WE KNOW. If demand for oil rises suddenly and the supply is constrained, the price will rise. Add myriad threats of supply disruption, and a producer cartel, and you get price increases that are sharp and enduring. Anyone who missed that lesson in his elementary economics course will certainly have learnt it from the business press in recent months.
Unfortunately, concentration on daily price movements diverts attention from the more threatening changes that are taking place in oil markets.
Most important, the consuming countries have realised that the political dynamics of their suppliers trump the needs of customers every time. Consider three of the largest producers, sitting on some 40% of the world’s reserves: Russia, Saudi Arabia and Venezuela.
Vladimir Putin is unconcerned about how the oil price is affected by his assault on Yukos, Russia’s largest and most efficient producer. He feels it imperative to eliminate Yukos’s principal shareholder, Mikhail Khodorkovsky, as a political rival, and to transfer Yukos’s main production properties to a company controlled by his former KGB buddies. If that means oil prices rise and abort America’s recovery, too bad for President George Bush.
Not even calls from national security adviser Condoleezza Rice to Dmitry Medvedev, Putin’s chief of staff, could persuade the Russian leader to abandon his assault on Yukos and help to bring down the price of crude.
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Nor could pressure from his Chinese friends move Russia’s president, who must enjoy being in a position to ignore the pleas of the world’s greatest superpower and its potential challenger for that crown. Putin may no longer be able to send tanks rolling across Europe, but he can certainly make it very expensive for the world’s motorists to roll across their nations’ highways.
The important thing to note is that the world’s largest oil consumer (America) and the world’s fastest-growing importer of oil (China), although competing for supplies, now realise that they have a shared stake in the stability of Middle East producers, and the secure movement of oil on the world’s sea lanes. Politics may make strange bedfellows, but a thirst for black gold makes even stranger ones.
Then there is Saudi Arabia, which is no longer capable of controlling oil prices merely by issuing a press release about its production intentions. One expert on that country’s politics and industry tells me that Saudi promises to step up output are worthless because a significant portion of that country’s “reserves” are “political barrels”, reported to enhance Saudi prestige but not quickly extractable.
American defence and intelligence officials until recently assigned a 50:50 probability that the Saudi regime would survive for the next 10 years. They are now quietly speaking in terms of a mere five years. This means that there is an even chance that the kingdom’s royal family soon will be calling for help to prevent a takeover by Islamic extremists. China and America will find themselves with no choice but to join forces to protect the Saudi fields from a takeover that could halt production. So don’t look for China to oppose any steps America might feel necessary to keep Saudi oil flowing onto world markets while Russia, untroubled by the disappearance of a big rival supplier, would be likely to oppose Sino-American intervention.
Then there is the effect tight oil supplies are having in America’s backyard, South America. In this region, Venezuela is the key player. That nation’s pro-Castro, anti-American president, Hugo Chávez, is now firmly in charge of the western hemisphere’s largest supply of oil — a supply that is only six days away from America by tanker (Saudi oil is six weeks away). Buoyed by his recent referendum victory, Chávez plans to divert supplies from America to the South American countries he is wooing.
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As in Russia and Saudi Arabia, the internal political goals of Venezuela’s leader override any desire to make life easier for America’s oil-fuelled economy. Putin wants to stifle political opposition, the Saudi royal family fears it will be overthrown if it invites American capital into the country, and Chávez wants to foment an anti-American movement in South America.
Meanwhile, as these ominous signs accumulate, politicians fret, strut, and do nothing. Bush has a multi-billion-dollar energy bill before Congress that at most would squeeze a relatively few extra drops of oil from the Arctic, perhaps a decade from now, and gives short shrift to any effort to increase the efficiency with which energy is used in America. Fortunately, Congress has so far refused to pass it, not out of any sudden spurt of parsimony, but because it wants still more goodies placed under this Christmas-tree of a bill.
Democrat John Kerry is proposing to denude American dinner tables of corn by converting the nation’s crop to expensive methanol, somehow force consumers to pay for expensive solar power, and in effect foreclose the nuclear option by opposing a bill he once supported that would create a storage site for nuclear waste at Yucca Mountain in Nevada, a state with five up-for-grabs electoral votes. How this will help Kerry to achieve his stated goal of “energy independence” remains a mystery to all serious observers of the energy scene.
Meanwhile, with America’s refineries operating at a stretched 96% of capacity, environmentalists continue to oppose any significant expansion of the nation’s creaking energy infrastructure, local groups continue to fight to prevent the construction of port facilities that would allow the needed increases in imports of liquefied natural gas, and voters remain unenthusiastic about a tax that might encourage them to use less petrol.
In sum, current high prices are the least of America’s energy problems.
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Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute