Index

8  How the Oil Cartel Leads the Superpower by the Nose

William Krehm

The world oil situation and its relation to the SVU and to the Iraq Crisis, are a snake-pit where not one but a cluster of reptiles are intertwined. The slogan of many protesters "Iraq is about Oil" is not incorrect, but it doesn’t begin to cover the sinuous interlacing of distinct plots about oil and other crucial matters. It is not that the US hasn’t alternate sources of petroleum to the Arabian lands, if much more costly ones. It has. But the Saudis have long since perfected a means of keeping the superpower helplessly addicted to imported oil in ever swelling quantities. Equally important: with the American dollar, the reserve currency for most of the world in which oil is quoted on, the US is able to produce dollars to pay for all their oil imports at a nominal cost – that of printing currency, and running their bank computers. In our last issue we noted that the euro – the currency of a potential bloc of 500 million – has strengthened because of the collapse of the US stock market in a miasma of investigation. This has put question marks over the morality of the US economy and its very auditors. The euro in dollar terms has surged by some 35% in the last couple of years. The recrimination between the US and most of its hoped-for allies over the Iraq war, and the open bribery and threats that Washington is using to dragoon nations to the warring camp are not helping. A further deterioration of the record trade balance can result in a flight from the dollar, which would mean the collapse of the entire Globalization and Deregulation program.

The Wall Street Journal (18/03/03, "How OPEC Keeps America Hooked on Oil Imports") lays out some incredible details.

"All six presidents of the past 30 years have tried to wean the US off imported oil. All have failed. In 1973 when Nixon made the commitment to prevent oil imports from rising they amounted to 40% of the oil it consumed. Today it is 60%, and going higher. President Bush says hydrogen power will lead to hydrogen independence. Mr. Bush is certain to be wrong at least in the next couple of decades."

At the root of the trouble is that Saudi and its neighbours are managing their oil sales with the skill of great performers for one purpose: maintaining America’s dependence on their oil. The Persian Gulf states not only hold two-thirds of world reserves, but their average cost is as low as $2 a barrel. Around those stunning statistics they have perfected an act that keeps oil prices higher than they would be on a really free market, but low enough to make alternate fuels and technologies uncompetitive.

North Sea oil costs about $15 a barrel to produce, so there is a broad playing field for the Saudis. Only once have American oil imports shrunk substantially – between 1979 and 1983. These were years of the deepest depression since the 1930s. Others factors were the Iranian revolution of 1979, and the jump in fuel-efficiency of US automobiles as new fuel efficiency standards were brought in. The American public turned to smaller cars. President Reagan put an end to oil price controls and triggered a boom in domestic drilling increasing home production.

During that trying period oil prices hit $40 a barrel – $100 present equivalent allowing for the increase in the general price index. Prices were expected to double from there. President Carter advanced a plan for synthetic oil developed from coal and shale. The Saudis put on their thinking caps to head off such doomsday.

Virtues are Accidents; Vices are Planned

They dropped their prices to several dollars below the $34 figure of OPEC. Then as Alaskan and North Sea output shot up; Saudi and Kuwait decided that the time had come to pursue market share rather than higher prices. Sheik Yamani, the Saudi oil minister, minced no words. "Let’s see how the North Sea can produce at $5 a barrel." Prices fell to $12 a barrel, and Vice-President George H.W. Bush toured the Persian Gulf countries urging them to drop production and raise prices. The US had surrendered on the oil front. Eventually Mr. Bush convinced the Saudis to rein in production to attain $18 a barrel price. OPEC. OPEC has since set its sights on $22 to $28. What has since delivered the US to their mercies is the US gluttony for oil.

Today the US needs only half the oil that it did in 1973 to produce the same economic output. That was the most important lesson of the Saudi attempt to push their dearer production off the economic map. Electric utilities and other large consumers switched to natural gas, which, of course, is also cleaner. For which the Saudis earned some unintended brownie points. Natural gas was not only cheaper but more abundant in North America. The proportion of electricity produced from oil dropped from 13.5% in 1973 to around 3% today.

Such is the complicated world of today. Virtues happen by accident. Unwise policies are usually planned.

Accordingly, when oil prices declined after 1985, the pursuit of fuel efficiency relaxed. In the 1990s gasoline prices fell lower than they had been at any time since the oil embargo of 1973, after inflation had been taken into account. Its lesson learned, OPEC kept prices low enough to hold onto market share and chase those extra rigs to the scrap yard. And with the economy, courtesy of the stock market, booming again, consumers went mad buying SUVs, minivans and other big burners.

"To lessen dependence on oil, the US would have to raise the price of gasoline by an additional $1 a gallon tax on top of the average present tax of 41 cents to reduce consumption a quarter."

Britain has a $3.15 per gallon tax on gasoline, Japan $1.75, and that makes people choose smaller, fuel-efficient cars. Germany, France and Japan consume only one half the oil for the same amount of economic growth as the US. That is another of the vulnerabilities of the superpower. But Satan and his minions have a way of showing up wherever some virtue still holds out. On the troubled oil set, he takes the form of a strengthening euro, which not only cheapens US-denominated oil price, but seems about to snatch away some of that privileged status for the euro. That would not only keep oil prices low in euro terms, but move part of the privilege of producing cost-free euros for oil purchases to the member countries. That may prove the crimson path to oil-enslavement that is helping to undermine US supremacy. The transition will be easier because of the established presence of Daimler, GM and Ford in Europe.

This is one of several factors that must be subsumed in the answer to the question, "Is the Iraq war about oil?"

William Krehm

— from Economic Reform, May 2003

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