Radical Reason

"Nil sine ratione."

Thursday, May 11, 2006

May 12, 2006

Oil once again dominates the headlines, as consumers feel the pain of high prices at the pump and oil tops $75/barrel. But the issue goes much deeper than these highly publicized news items. Oil exerts an incredible amount of influence over global geopolitics – the foreign policies of all advanced industrial nations are dependent to a large degree upon the whims of oil-producing nations. A steady oil supply is crucial to the stability of the global economy.

And yet, the 21st century thus far has been marked by continuing concerns about the oil supply. The majority of global reserves are controlled by the cartel of OPEC nations. The easiest oil to access at this point lies below the territory of some of the world’s most unstable and corrupt states. A number of books have recently been written detailing the unique geopolitics of oil and heralding and “end to oil” at some point in the future.

These doomsday Cassandras raise many interesting points about the challenges faced by the global economy in depending on a resource with such an unpredictable nature, but it is premature to ring oil’s death knell as the primary motivating factor of the global economy. First, there is a great deal of disagreement over the actual levels of oil left in the world. Some scientists have been proclaiming for the past twenty years that the ground would dry up the following day – so far, they’ve all been wrong. New technologies, like deep-sea drilling and innovative techniques to wrest the oil from tar sands and shale have allowed companies to produce hydrocarbons from previously unsalvageable fields. And despite today’s uncertainty, the most reasonable arguments attribute the spike in oil prices to such novel factors as supply and demand and nervousness associated with political unrest in oil-producing nations like Iran, Iraq, Venezuela, and Nigeria – four countries that rank in the top eight of oil production, and all members of OPEC.

It is this instability that poses the greatest threat to oil production and the global economy, not the typical twin scapegoats of over-consumption and the drying up of the wells. South America continues to be a scion of bad news for the global energy market and the principles of market economies as a whole. First, Hugo Chavez has continued his autocratic, demagogic rule of Venezuela, declaring himself as the populist leader of a new type of socialism while falling prey to the temptations of good old-fashioned socialism, enriching himself and his allies in a web of corruption while allowing his people to languish in poverty despite staggeringly high oil revenues. He has a disciple in Evo Morales, the new leader of Bolivia, who speaks the populist language of the new socialism as well.

Both leaders have used their newfound power to nationalize hydrocarbon production, revoking the contracts of foreign oil and gas firms and imposing new finance schemes that amount to taxes of 80% on the private firms that operate these facilities. To be fair, multinational firms do have a responsibility to compensate the people of oil- and gas-rich nations for the profit they derive from the sale of those resources, but this partnership flows both ways. Just as multinational energy companies need the consent of the people and the governments in which they operate, those Bolivians and Venezuelans need the expertise of foreign firms to effectively exploit the natural resources on which they sit. Nationalization not only aggravates relationships between countries as the assets of companies are forcibly appropriated, it ushers in an era of economic inefficiency whereby no one derives the full benefit of resource riches. And there’s always the chance, albeit a slim one, that those with the knowledge will refuse to “pay to play” in the Bolivias and Venezuelas of the world.

In a perverse way, high oil prices may be good for the United States economy in the long run because they create powerful incentives for our nation to come up with alternatives to the unstable hydrocarbon-producing nations in the Middle East and South America on which we’ve been so dependent for the past twenty years. Greens have been proclaiming the coming of alternative fuels for years, but these alternatives will not be viable until it become economically prudent and beneficial to produce and use them. High gas prices make alternative fuels look a lot more attractive. The high price environment also creates incentives to increase domestic production through the approval of new drilling projects, like in the Alaskan National Wildlife Refuge, and the construction of new refineries to process oil into gasoline. Ironically, the populist politicians who continuously decry high oil prices stand in strongest opposition to these most apt of solutions.

Oil truly does reach into every sector of American society – from the economy to foreign affairs. Look to the Iranian crisis. To be sure, nuclear proliferation is a serious threat to American national security, particularly when those weapons could be in the hands of avowed enemies or leaders of questionable sanity. But the fact that Iran is a leader in oil production adds a huge wrinkle to the global strategy of preventing nuclear weapons from being developed by the mullahs.

So next time you gas up, consider why that gas is $3/gallon. It’s not price-gouging, it’s not greedy corporations – it’s economics and geopolitics.

2 Comments:

  • At 12:11 PM, Blogger Son of Brasky said…

    It may also be worth noting that even at $3/gallon and $75/barrel, petroleum is still probably one of the world's cheaper commodities.

     
  • At 3:44 PM, Blogger Andy said…

    Agreed...
    Imagine if we didn't placate the oil regimes as much as we do -- we'd be at $200/barrel.

     

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