ECONOMIC COMMENTARY:

The Oil Vice

One cannot ignore the feedback loop of the nexus of Big Oil and the defense establishment.

In all the grumbling about oil prices, I have heard nary a peep from the press or our government about the OPEC cartel. One would think that the cartel, headed by our old friend Saudi Arabia, would get some attention, given that the Saudis can drill, produce, and transport crude oil to portside for less that $1.50 a barrel. (If a free market prevailed in oil, the price of a barrel would be about $10 today). But, the Bush family of oil men have long since made a faustian bargain with the sheiks: sell oil to us at any price and we will protect you. It costs about $100 million a day to protect OPEC oil around the world, primarily with our naval power.

Including the War in Iraq, it was estimated by the National Defense Council Foundation that the subsidy from American taxpayers in 2005 alone amounted to $780 billion, or $4.50 per gallon of gas at the pump. If we spent that kind of money converting to renewable energy we would have a much cleaner earth, more good-paying domestic jobs, and the OPEC monkey off our back. Of course, Saudi Arabia happens to be our largest customer for military equipment—in the two years after Iraq's invasion of Kuwait, they bought $25 billion in military hardware from U.S. manufacturers. One cannot ignore the feedback loop of the nexus of Big Oil and the defense establishment.

Of course, the borrowing attendant to our out-of-control military budget and the cost of oil, as well as our trade imbalance, has led to historic deficits and a weak dollar. Thus, oil and other critical imports become more expensive. The OPEC cartel was not always as effective as it is today, and came close to collapse at times over the past several decades, as members secretly violated quotas and caps. George H. W. Bush, when he was Vice president, helped save the cartel from a price collapse in 1986, persuading the cartel to restrict output so as to cause prices to rise. which would help save the Texas oil patch.

America has had many opportunities to break OPEC, but has never moved to confront this prime example of organized thievery in a coherent way. Our American-based oil giants (many of them successors to the infamous "Seven Sisters" that controlled Mideast oil before OPEC) prefer high prices of oil for obvious reasons, and have no incentive to try to coerce OPEC countries to increase their supplies.

The last opportunity to rattle OPEC's cage came with our occupation of Iraq (certainly a war for oil), when we took control of the oil fields and Iraq's sovereignty. Instead of using this moment to free Iraq from the cartel, we quickly moved to confirm their status as the 12th member of OPEC. I have found little discussion of this aspect of our Iraq oil policy in the press. Ironically, Saddam's venture into Kuwait was over oil issues, and had we not intervened on behalf of Kuwait and Saudi Arabia, Saddam would have taken Iraq and Kuwait out of OPEC as a step towards breaking the cartel. But Saddam was not taking orders from us, and had to go, and we now suffer the consequences of an Iraq with no strong central figure to hold the warring factions together.

Why, one might ask, would Saudi Arabia want to risk a worldwide financial meltdown by setting a price for oil that is destined, it seems, to bring about a worldwide recession at the least, and a consequent drop in demand for oil, as well as reinvigorated efforts to find alternative energies? Well, some years earlier the Saudis discovered that the price of oil could be decoupled from economic growth. The western powers didn't want low oil prices as much as they wanted stable, predictable oil prices. Higher oil prices also made costlier investments in energy alternatives as well as making hard-to-get-at oil and gas feasible. But the bigger reason the Saudis would risk higher and higher prices is that they are the world's largest welfare state. Citizens of Saudi Arabia pay no taxes, and receive free education and health care. The regime needs a lot of profits from oil sales (they have few other sources of cash) to sustain the benefits they dole out to their population and, of course, the extravagance they dole out to the 3,000-odd family potentates. Should they have to cut these welfare payments, it is likely to create turmoil and ferment among the many internal forces that would like to overthrow this particular group of kleptocrats.

The third reason they continue to raise prices is that they can. Although they control less than 50% of world oil, they have formed alliances with other non-OPEC producers such as Russia and Mexico, who mostly go along with OPEC pricing whims.

Saudi Arabia has always been able to con its customers into thinking they are trying to be good global citizens and are doing the best they can to meet world demand while sitting on a depleting limited resource. This has always been a cruel joke. Nobody knows how much oil they have and, of course, it is a state secret. Even they may not know because new technologies are increasinigly able to "find" oil in existing well sites which could never be accurately assessed. What we do know is that they have always been able to produce more oil or find more oil when the need arises and it is convenient to do so. There is little truth in a cartel. Is there honor among thieves?

A book written last year by Raymond Learsy, Over a Barrel, is my primary source for much of the above. The author was a lifelong commodities trader with his own firm. He also served in the Reagan administration, and is currently a member of the Woodrow Wilson International Center for Scholars. He has been published in the New York Times and the Huffington Post and has appeared on MSNBC, so it is hard to find a political bias in his work, although he has not been fond of the oil policies of most administrations, including our present disastrous one. He states flatly that world oil reserves are probably at least 9 trillion barrels, which would give us a hundred year's supply, factoring in increased demand and likely efficiency improvements. Nevertheless, he is a big proponent of converting from fossil fuels to renewables in order to save the planet from climate catstrophe. The good news from this book is that we have time; the bad news is that we need to get far more serious in a hurry, and lose any complacency that may come with the good news. it will take enlightened government actions—market forces will not be enough.

There is another factor at play in the current escalation of prices ($120 a barrel as this is written), and that is speculation. Speculation in oil futures based on overblown concerns of possible or likely oil supply interruptions (the fear factor aided and abetted by the cartel), may account for as much as $40 to $50 dollars a barrel. The Nader campaign (widely ignored, although his campaign claims to have polls showing as much as a 10% voter preference for Nader in some states) has proposed a securities speculation tax. This is probably a recognition of the cause of the current financial meltdown in the banking sector as well as the historic recognition of the various bubbles, and the currency speculation that brought down the "Asian Tigers" a decade ago.

Of course, we all know some of the unforseen consequences of our faustian bargain. Fifteen of the eighteen conspirators that flew planes into the World Trade Center and Pentagon buildings on that fatefull day, 9/11/01, were Saudi nationals. It is also well known that Saudi Arabia is providing aid to the Sunni insurgency (resistance) in Iraq. The cartel would just as soon not have 3 or 4 million barrels a day of Iraqi oil flooding the market.

We are well into the presidential sweepstakes now, and it is to be hoped that we can end up with a President that will take the initiative to change our policies in how we deal with the players in the Middle East arena. If it can't be Nader, then Obama may rise to the occasion and help lead a break in the vicious cycle of oil dependency and wars for oil. We need an energy policy that makes sense and engages all sectors of society, rather than one hatched in secret in Dick Cheney's cave.