The Axis of Oil
Lead Editorial
The New York Times
January 21, 2003
With all due respect to President Bush and Congressional Democrats, this month's most notable stimulus plan for the American economy did not emanate from Washington but from Vienna. The recent decision by the Organization of the Petroleum Exporting Countries to provide an additional 1.5 million barrels a day to world markets should help make up for the shutdown of Venezuela's oil industry, the source of 13 percent of America's imports. The move also signals Saudi Arabia's willingness to ensure the flow of affordable crude in the event of war with Iraq.
Beyond its immediate benefits, the Saudi decision is a further reminder of how closely our fortunes are tied to the good offices of the big producers three decades after the oil shocks of the 1970's. That the Saudis and other Middle East producers have had to come to America's rescue in the wake of Venezuela's political crisis is rich in irony. Venezuela was counted on as a buffer against disruptions in deliveries from the Persian Gulf.
America's current predicament — it confronts the possibility of losing both Venezuelan and Iraqi oil at the same time — is thus instructive on two counts. It provides another powerful incentive, if any more were needed, to tighten fuel efficiency standards and to push more aggressively for the long-term development of alternative fuels. Since the United States has less than 3 percent of the world's proven oil reserves, the only sure road to greater self-sufficiency is through reduced consumption and new technology.
The other lesson is that the importance to the global economy of the big Persian Gulf suppliers, especially the Saudis, has not been diminished, however much we like to regard ourselves as "buffered" by Mexico, Venezuela or even Russia and the other former Soviet republics. Like it or not, the Saudis retain as much leverage as they ever have over global energy markets. Their share of current output may have declined, but the Persian Gulf area still claims two-thirds of the world's known reserves. And because it commands the bulk of the world's spare capacity in the near term, Saudi Arabia acts as a central banker when it comes to oil, determining the market's liquidity.
For now, at least, OPEC is helpfully trying to keep prices between $22 and $28 a barrel. It knows that allowing prices to hover above the $30 mark hampers global economic growth. But given America's thirst, even the cartel cannot fully ensure our economic recovery in light of the great uncertainty Venezuela and the Iraqi crisis create for energy markets. Fuel costs affect vast swaths of the economy, so at a time when it's anyone's guess whether oil will cost $20 or $60 a barrel six months from now, too many businesses are simply putting off any spending decisions.
If war is averted, oil prices are sure to decline, perhaps dramatically once Venezuela's crisis is resolved. A quick war that knocks Iraq's two million daily barrels off the market for a time could result in a short-term spike in prices, followed by a steep decline as Iraq, home to the world's second-largest reserves, increases production afterward. A protracted conflict in which Iraq attacks its neighbors' oilfields would be likely to trigger another economic recession, with oil prices exceeding $50 a barrel.
This isn't solely of concern to the West. China, with its mounting need for Middle East oil to fuel its economic growth, stands to lose as much as anyone. The fact that this once self-sufficient energy consumer will soon become the world's second-largest oil importer is creating an affinity of interests between Washington and Beijing, much as it does between Moscow and Beijing.
One positive aspect of the current uncertainty is that it reinforces the need for Washington and its cold-war adversaries — Russia and China — to work closely together on energy policy. At home, it should also prod the Bush administration to address sensible measures to encourage efficiency.
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