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Dance of Oil

By Curtis Lang & Jim Ridgeway on Dec 15, 2000

 

It looks as if oil politics could be the vehicle for George W. Bush to define his administration's geo-strategic principles, solidify support in Congress,  reward his supporters in the energy "bidness" and unify the country behind his foreign policy, just as it was for his father. That does not necessarily  mean a repeat of the Persian Gulf War, but oil provides an ideal vehicle for restating the imperial American policy abroad.

And interest in oil politics and the economics of oil is heating up as temperatures fall across the American heartland. Price hikes of upwards of 40% are  expected in what the weathermen are saying will be a very cold winter.

That could even mean some threat to continued robust economic growth. Last week Alan Greenspan spent a good part of a speech to America's community  bankers discussing the "worrisome" oil situation.

But for Bush there's an upside to Greenspan's concern. With an "energy tax" dampening corporate earnings and consumer spirits, high oil prices could be a   major component in a Bush-Greenspan accord that would allow for the tax cuts so dear to Bush's heart while accommodating Greenspan's concerns about an  overheated economy. In effect, Bush would be enabled to stimulate the economy without interest rate cuts.

Greenspan might agree to maintain a "neutral" monetary policy if Bush assures him that in W's administration there will not be a replay of the Brady-Darman  scenario. Greenspan mightily disliked Bush Sr.'s advisors' meddling in Fed policy matters, and would look kindly on Bush Jr. promises to keep hands off  Greenspan's turf.

Alternative scenarios

One logical scenario in the current oil crisis, unlikely to find favor with a Bush administration, is a crash program of intensified energy conservation and  renewable energy with an emphasis on gasohol and other non-petroleum "bio-fuels."

Germany and other European countries, Japan, Brazil, and India are already headed in such a sustainable direction.

The United States' reluctance to kick the oil (and coal) habit that was so evident during eight years of Clinton/Gore will only become more pronounced  under a Bush/Cheney takeover. As the rest of the world moves steadily toward the solar age in the mid-21st century, imperial Uncle Sam, by far the  world's largest oil consumer, stands to be left out in the cold as the ultimate energy dinosaur, along with a handful of Middle Eastern sheikdoms and despots.

The next oil crisis

In the wake of Iraq's decision to cut off crude oil exports, media attention has focused on a task force of energy experts from the Council on Foreign  Relations and the James Baker Institute at Rice University in Houston, who have been pulled together to advise Bush on what direction to take.

The task force, cosponsored by the Council and the Baker Institute at Rice University, will be headed by Edward L. Morse, executive adviser at Hess Energy Trading Company. The Baker Center's Amy Jaffee is the project director and the Council's Military Fellow Col. James E. Sikes, Jr.(USA) is the  project coordinator.  

"For the new administration, this whole event is going to raise the question of energy security and energy policy to the very top of the docket," Baker Institute's Amy Jaffe told The Financial Times this week.

Bob Manning of the Council, who has just written a book on the importance of the growing Asian drain on limited oil supplies, says the group is now just forming and a report won't be ready until sometime this spring.

For most of the last century the world was awash with oil, and big international companies formed the international petroleum cartel to protect   themselves from drowning in a glut. The rise of OPEC during the energy crisis of the early '70s somewhat changed the oil business, giving the   Middle Eastern oil producers a greater say in oil politics, but leaving the real clout with the big companies that continued to dominate transportation,  refining and distribution.

All during the century there was periodic speculation that the world would soon run out of oil -- in the 1920s and again in the '70s -- usually coinciding  with the industry's drive to raise prices. Now, talk of scarcity has reappeared, backed up by what industry experts believe is at last an adequate system  of mapping the world¹s resources.

The conclusion is bleak: The world is fast running out of oil. Peak production occurred in the 1970s and the flow will turn down sometime in the next  four or five years.

Energy expert and author C.J. Campbell told the British House of Commons what to expect on July 7, 1999. Surveying oil fields around the world,  Campbell explained, "All discovery curves are flattening. Looking at the world as a whole, we see this growing deficit. Discovery peaked in the 1960s   with a 60 Gb surplus. But that has given way to a deficit of almost 20 Gb. We now find one barrel for every four we consume."

Campbell forecast that OPEC countries' share of key production will grow so mighty by 2001 that the cartel will be able to raise prices with impunity.  One reason for this is that Norway, the second largest oil supplier and the largest non-OPEC producer, is set to halve its production by the year 2006,  according to an official report. Campbell set forth an oil supply scenario for the British Parliament that should be required reading for policy-makers  everywhere.

"I think that a price shock around 2001, if not before, from Middle East control is inevitable," Campbell predicted. "I think that demand does become  elastic above about $30/b, reacting to normal market forces, so higher prices may curb demand.

"Nevertheless, I think it will be a time of great political and economic tension as Europe, America and Japan vie for access to Middle East oil,"   Campbell said. "More missiles can be expected. The third world will be badly hit, being unable to afford imports. Agriculture is very dependent on oil.

"But I expect that somehow a plateau of production, however volatile, will unfold around $30 a barrel," Campbell forecast. "But the end of the   plateau will soon come into sight. It may have a fundamental impact on investment. Up till now, the investment community has believed in perpetual  growth on which cycles are superimposed. The bottom of each cycle has been higher than its predecessor, making capital appreciation the primary  goal of investment. But the tensions of the oil shock and related events, including the colossal financial transfers to the Middle East , may create a new  view.

"After the many years of growth we may then experience a new downward trend, however cyclic," Campbell predicted. "Share prices may sink to  more realistic levels, as the main focus will be on yield, not growth. Capital will be destroyed.

"The plateau has to come to an end by around 2008, when Swing Share will have passed 50% and the Swing countries in the Middle East will be  approaching their depletion midpoint too," Campbell explained. "Production will then start its inevitable long-term decline at about 3% a year.  Increasing shortages will develop, and agriculture and transport will be seriously affected. The global market will come to an end because of high  transport costs."

"That is a scenario," Campbell admitted. "There are of course many alternatives, but the range of possibility is limited, given the resource constraints.  These constraints are facts, not scenarios. If by some miracle we could add 500 Gb of reserves -- more than half as much as produced so far --  it would delay peak by only ten years. One indisputable fact stands out. Discovery peaked 30 years ago. It takes no feat of intellect to conclude  that we now face the corresponding peak of production." (For a complete version of Campbell's speech, see The Imminent Peak of World Oil Production .)

Dr. Richard Duncan amplified the message in a speech to the Geological Society of America in Reno, Nevada, on November 13. Duncan also  forecasts that world oil production will peak in 2006 and that by 2008, OPEC nations will produce more than 50% of the world's oil. Then over  the next 40 years world oil production will fall by 58.8%.

Data on oil reserves and potential production are notoriously unreliable and previous forecasts of impending shortfalls have often been wrong, but one  thing is certain. A combination of decreasing oil production and rising energy consumption is a prescription for both geopolitical and economic turmoil if  these trends are left unchecked.

OPEC's clout is rising, energy prices are soaring and Americans are consuming more energy per capita than they have in decades. Beginning back in   Jimmy Carter's administration the auto industry set in motion long-term plans to build large vehicles, climaxing in the gas-guzzling SUVs. At the same  time, third world, especially Asian, industrialization sucked up more and more of the surplus.

There still is a lot of oil to be produced -- in the far North, Alaska, across Canada, all around the Pole. Alaska's Wildlife Refuge is but a sliver in the great  northern play. There are reserves around the western edges of the Gulf of Mexico. But the only really big reservoirs left are in the Middle East.

Just as the British marched into Mesopotamia at the end of the 19th century to tie down oil to fuel their new battleships, so the United States finds itself  with a larger and larger stake in securing an oil supply in the Middle East. Never having spent any real money on alternative fuels, we have no choice but  to fight for what is a very real strategic interest.

This provides a clear focus not only for George W's foreign policy, but for his entire administration. Look at what oil means:

Crash programs to modernize rapid deployment within the Army and Navy. Already we have a police force of ships and planes in and around the Gulf to police post-Persian Gulf war limits on Saddam Hussein. They will only grow larger.

As part of that policing, pinpoint strikes against terrorists are good politics at home and can be viewed as part of that policing action. With Dick Cheney and  Colin Powell back in the saddle, massive, deadly force to back up American foreign policy is certain. Used ineffectively by Clinton , swift commando strikes  by Delta Force-type units -- backed up by carrier-based planes and missiles -- are a real prospect under Bush. In his first appearance as the would-be president  last week, George W. warned terrorists to look out.

In the Middle East, it means currying favor among Arab states that dominate the oil business. It could lead to an opening in Iran, where American oil companies  are short-listed in bidding for big new natural gas concessions. Israel fades. Saddam stays as a valuable throw weight against potential troublemakers like Iran.  All eyes will be on sucking oil deposits from Central Asia (Caspian Sea region) down through pipelines to the Gulf.

Two other geopolitical regions bear close watching:

Venezuela-Mexico. Critical U.S. importing of oil from these two Latin American countries is jeopardized by the election of two other new presidents. In the  former, Hugo Chavez, a Socialist friend of Castro's Cuba, is openly hostile to U.S. "imperial" interests. In Mexico, Vicente Fox has yet to reveal his hand in  response to George W.'s wistful efforts to woo the amigo south of the Texas border. He could easily turn off the spigot if the U.S. withholds financial assistance  or tightens up on emigration, as Bush is likely to do.

Iraq-India. These two countries are in the process of working out a commercial agreement for the exploitation of vast newly discovered petroleum and natural  gas deposits in Eastern Iraq. On November 28, India's ONGC Videsh Ltd (OVL) signed a contract with Iraq's Oil Exploration Co. to explore an 8,000 sq. kilometer  oilfield in Iraq's Western Desert. The strengthening of this little-known political alliance is seen in Washington as a threat both to U.S. ally Pakistan (situated  between the two new partners) and to the U.S. State Department/CIA, both of whom have traditionally mistrusted India because of its friendship with the Soviet Union during the cold war. We should also remember that the decision to keep Saddam Hussein in power at the end of the Gulf War was made under  the watch of George W's dad and likely future Secretary of State General Colin Powell. Another chicken comes home to roost!"

Invoking U.S. national security interests, Bush can employ oil as the vehicle for uniting fractious groupings in the Congress, pulling together oil state members  of Congress on both sides of the aisle in a common crusade with those having defense installations. Since the Berlin Wall came crashing down in 1989 and  Communism fell all across Europe, managers on the Republican right have been searching for something to replace it as a bonding force among quarreling  Republican groups. They've tried everything from God to drugs to rogue state terrorism. Now oil emerges as the answer to their prayers.

Such a coalition offers Bush the rare opportunity of stopping -- or at least postponing -- the environmental crusade, backlisting it in the name of national security  and allowing for more drilling in the Gulf and Alaska, not to mention continued postponement of fuel standards for motor vehicles and a halt to regulation of the  chemical industry. None of this spells much oil, but it does appease those in the industry who have poured hundreds of thousands of dollars into Bush's campaign  coffers.

A Bush-Greenspan accord?

Most important, oil politics opens the way to a Bush accommodation with the most important figure in American economic life -- Alan Greenspan. This week   Greenspan essentially invited Bush to open a dialogue with him on the subject of oil. In a ruminating speech before America's community bankers, in New  York, Greenspan sought to set energy into an overall economic perspective.

Here's what Greenspan said:

"In periods of transition from unsustainable to more modest rates of growth, an economy is obviously at increased risk of untoward events that would be  readily absorbed in a period of boom. The sharp rise in energy prices, if sustained, is worrisome in this regard. As we learned from previous episodes, rising  energy prices could engender risks to both inflation and economic activity.

"If accommodated by monetary policy, the jump in energy prices could spill over into general inflation and inflationary expectations, as was so evident in  the 1970s. At the same time, the hike in the price of imported energy has acted, in effect, as a tax equivalent of roughly one percent of national income.  Although there is as yet little evidence of the type of destabilizing inflationary pressures observed in the aftermath of previous oil price spikes or of exceptionally  large restraint on consumer spending, Middle East tensions have heightened such risks.  The most significant effect to date from higher energy prices appears to  be on profit margins, where corporate businesses, constrained by competitive market forces, have not been able to raise prices to fully offset energy cost   increases. We estimate that owing to the rise in oil, natural gas, and electric power prices, energy costs of nonfinancial, nonenergy corporations have increased  at a 40 percent annual rate since the spring of 1999. Apparently, most of the increase has eaten into the margins of domestic corporations outside the energy  sector."

The Greenspan-Bush dialogue can go any number of ways. With an economy slowing because of increased energy costs, and an equity market sagging from the  "energy tax," Greenspan might accept Bush's campaign pledge of tax cuts. That would be a plus for Bush, demonstrating that unlike his father, he can cut taxes  and deliver on his campaign promises. Greenspan could hold fast on his interest rates, thwart inflation and send the markets temporarily flying.

 

This article originally appeared at OnMoney.com, a division of the online broker Ameritrade.


Curtis Lang is Editor of OnMoney.com. He has written for the Village Voice, WORTH magazine, Ad Age, Request, The Nation, Mother Jones, and many more.


James Ridgeway is Washington correspondent for the Village Voice and the author of  16 books, including Blood in the Face , a history  of the far racist movement in the United States, and RedLight, an investigation of the sex industry. He also is a director (with Kevin Rafferty and Anne Bohlen) of  the film Blood in the Face, and director (with Kevin Rafferty) of Feed, a documentary on the 1992 New Hampshire primary.

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