Oil on Political Waters
The old politics of oil has resurfaced to add a nervous flutter to Election 2000 and also to revive an enduring question of modern industrial life--what is the right price for oil? The media's New Economy cheerleaders scolded Clinton/Gore for tampering with the answer, but those pundits are under an illusion that the market, not governments and international politics, determines the price of crude oil. Their rage at Clinton for unleashing a little extra crude from the government's strategic reserve is an amusing non sequitur. For the past thirty years, the world price of oil has been "managed" by governments, albeit with haphazard results. The price was maintained by the OPEC cartel of oil-producing nations, with discreet consultations from the United States and other industrial powers. Before OPEC, the world price of oil had been managed since the thirties by the fabled Seven Sisters, global oil corporations that still have an influential voice in the conversations. Oil-price diplomacy, for obvious reasons, is mostly done in deep privacy.
Indeed, Riyadh and Washington are at this moment attempting once again to get the price right, that is, to steer crude oil back down to a mutually acceptable zone, centered on $25 a barrel. That's what Saudi Arabia, the largest producer, says it wants--a target range between $22 and $28 a barrel--and what Bill Clinton has called "a reasonable range" acceptable to Washington. Oil at $25 a barrel would be a lot cheaper than the recent peak of $38, but also a lot higher than the $10 bottom that oil hit in 1998, when prices were severely depressed by collapsing demand triggered by the Asian financial crisis the year before. Splitting the difference is a better solution than continued crisis, especially for Europe, because stability helps sustain everyone's economic growth.
So is $25 the right price? Maybe not. Because $25 is still cheap oil--too cheap to allow the producer nations to recapture their massive revenue losses and possibly too cheap to force US consumers and companies to undertake serious, self-interested industrial conversions away from petroleum. Since oil is traded worldwide in dollars, its real price declines automatically from US inflation. Thus, measured in constant dollars, $25 oil is really only about $13 in historical terms--right where it was in the mid-seventies. This level would be modestly above the average real price of the past fifteen years but still far below what OPEC initially gained after its two dramatic spikes in the seventies. Because of the interaction of currency values, Europe is taking a much more severe hit this time. The euro is down and the dollar is strong, so the real price of imported oil is much higher for European economies.
Texas oil guy George W. Bush is making the same retrograde noises Republicans always make--Drill for more oil! Open up the Alaskan wilderness! Drill offshore! Whatever! Bush's nostalgic notion that the United States can drill its way out of its petroleum problem is out of touch by about twenty-five years. The world isn't running out of oil--the undiscovered reserves are probably good for another century--but the United States is running out of its own oil. The proposition that we should pump and burn our remaining reserves first is completely backward, both as energy policy and for long-term national security. Al Gore, in his best moments, understands all this and has long championed a fundamental shift to alternative fuels, but he has lacked the courage to force the issue. The Clinton Administration provided gorgeous subsidies to the Big Three auto companies to develop electric cars and then allowed the industry to backslide by not increasing the government's fuel-efficiency requirements. Maybe the price crisis will prompt Gore to reread Earth in the Balance.
Oil politics is many-layered and so paradoxical that public opinion is not only confused but frequently led in the wrong direction. "Bad news" may actually be good news; the "villains" are sometimes actually victims. In real terms, OPEC's oil revenues peaked two decades ago--$493 billion in 1980 (in 1990 dollars)--and have declined unevenly since then. OPEC's oil income hit bottom in 1998, at $80 billion in real terms. So they regard the recent price run-up as a justifiable attempt to get well, to recover some of their losses. It's hard to muster much sympathy for oil potentates, but their national budgets have been severely squeezed--especially Saudi Arabia's, which absorbs more than its share of the production cutbacks because that country is the biggest and least aggressive player.
OPEC, on the other hand, has been a clumsy, hapless manager of world oil prices. Twice, it wrong-footed emerging economic conditions by increasing production just as global demand was about to swoon--inadvertently feeding the severe price collapses in 1986 and 1997. This time, they overshot again but on the upside --cutting oil supply just as the world's economies were gaining momentum. With the rising demand, prices were driven higher than the Saudis, at least, intended. Among the present dangers, the tight supply still threatens to stall out economic growth, especially for Europe, and it also gives temporary leverage to Iraq. If Iraq were to halt its exports, prices might soar again, just as Saudi Arabia and the United States are pulling in the opposite direction.
But here's some good news. Extreme price gyrations in oil promote fundamental change in US industrial structure. The seventies stimulated major shifts toward energy conservation and persuaded some sectors, like electrical generation, to decouple entirely from the vulnerability of unpredictable price shocks. Electric companies converted to natural gas and other fuels so that a major US user of petroleum was permanently lost as a market for OPEC exporters. Some authorities think this new mini-crisis is likely to encourage similar movements, especially in transportation. The auto industry, for instance, has toyed for years with available technologies like fuel cells, which liberate cars from oil, but they never moved seriously. Now Japanese manufacturers are making electric hybrids with far greater fuel efficiency. In other words, if high oil prices linger awhile, the permanent market for oil might shrink. Detroit could once again lose market share to Japan, but Americans and the environment would benefit enormously.
Sheik Ahmed Zaki Yamani, Saudi Arabia's former oil minister and a founding architect of OPEC, already fears this--another round of innovations that drastically reduce gasoline and oil consumption. "Technology is a real enemy for OPEC," Yamani warned in a Reuters interview. "Technology will reduce consumption and increase production from areas outside OPEC. The real victims will be countries like Saudi Arabia with huge reserves which they can do nothing with--the oil will stay in the ground forever."
OPEC, the sheik predicted, "will pay a very heavy price for not acting in 1999 to control oil prices. Now it is too late. The Stone Age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil." His forecast may be a bit premature, but it's a lot more cheerful than the oil chatter in American politics.