the nuclear stand-off with Iran helped push oil prices to
near-record levels, President Bush once again declared,
"Dependency on oil creates an economic problem for us, and it
creates a national security problem for us."
But if Iran's behavior makes the case for
anything at all, it is that America should become more - not
less - "dependent" on foreign oil. In fact, the best way for
America to defuse the so-called Middle Eastern oil weapon is by
purchasing even more oil from the region.
The economic case for energy independence
has always been nonsensical. It is not possible to shield
American consumers from rising prices at the pump simply by
replacing foreign oil with domestic oil. Why? Because regardless
of where the oil is produced - Oman or Oklahoma - its prices are
set by the global market.
The global demand for oil and its ease of
transportation have synchronized oil prices everywhere.
Therefore, unless compelled by draconian government mandates, no
American company that can command $3 a gallon in Oman would sell
it for much less in Oklahoma. If war prevents Middle Eastern oil
from reaching its global customers, the incentive for American
companies to sell U.S. oil overseas would be even greater given
the higher prices that it would fetch. War or peace, no amount
of domestic production will give us "independence" from the law
of supply and demand.
But if domestic production won't ensure
access to cheap oil, some believe that it will at least shield
us from the kind of geo-political manipulation that Arab
countries attempted during the 1973 oil embargo. That, however,
is also a myth.
For starters, OPEC -- the Arab-dominated
cartel of oil producing nations - did not succeed in its
manipulation even then. It lifted the embargo in less than two
months, once it became clear that while its members were giving
up oil revenues, its oil was still reaching the United States
because of diverted shipments from Europe. There was some
diminution of oil supply in the United States, but not nearly
enough to do any serious damage to the American economy.
The long lines outside gas stations that
Americans associate with the embargo resulted more from panic
buying and domestic oil price controls rather than lost Arab
oil, notes M.A. Adelman, a professor of economics at the
Massachusetts Institute of Technology.
But if all OPEC countries together
couldn't pull off their political blackmail, a rogue regime
acting alone will surely not succeed.
Saudi Arabia's experience in 1980
demonstrates why. The country elected to play the role of OPEC's
"swing producer," unilaterally limiting its oil production in
order to boost world oil prices. It expected that higher oil
prices would compensate it for lower oil sales.
But Saudi Arabia was forced to abandon its
policy in a few years as other OPEC members bumped up their
production on the sly and pushed its exports to nearly zero.
Since then, Saudi Arabia has repeatedly said that it would never
again unilaterally cut output.
The lesson of Saudi Arabia's experience
oil sales that one producer foregoes will quickly be captured by
others is not lost even on regimes such as Iran, especially
now when there are more oil suppliers than ever before.
Given Iran's defiant mood and tension with
the U.S. and Europe over its nuclear program, one would have
thought that this would be a perfect moment for its hot-headed
president to further escalate if not act on his threat to
cut off Iran's oil exports to the West and shut down oil
shipments through the Straits of Hormuz.
But beneath all of Iran's saber-rattling
and its threat to retaliate against Israel in the event of a
U.S. attack, it realizes how suicidal such a move would be.
During a recent OPEC meeting, Karem Vaziri Hamaneh, Iran's oil
minister, went out of his way to reassure the world that Iran
had no intention of disrupting the oil market. "The need of the
world for energy is soaring and, if Iran is taken out of the
equation, prices will shoot up," he told the Wall Street
Journal. "But we don't want to cause hardship for any consumers
around the world."
Vaziri's concern is not so much for the
world's oil consumers, of course, as for the economic
consequences for his own country. The Iranian government depends
on oil exports for nearly half of its total revenues. If it cuts
these exports, buyers could go to other suppliers. But there is
not much else that Iran could sell to other countries to replace
its lost oil revenues.
Our dependence on Middle Eastern oil is
only the flip side of their dependence on our purchases. But
given the narrow base of Middle Eastern economies, the power in
the relationship is firmly on the side of the oil buyers. If
that relationship were to end because of "energy independence,"
we would give up crucial leverage to control the worst behavior
of some of the world's worst regimes. Of course, this leverage
is no magic wand that would protect us from a totally irrational
regime willing to absorb the economic cost of using the oil
weapon. But the more oil we get from such a regime, the higher
the price it would have to pay.
Thus whatever other arguments there might
be for boosting domestic oil production, national security is
not one of them. While this might seem counter-intuitive, it is
really part of the overall logic of trade: The mutual dependence
that trade breeds fosters peace because it gives hostile trading
partners an incentive to refrain from acting on their hostility.
Energy independence would weaken that incentive.
* * *
Dalmia is a senior analyst with Reason Foundation.
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©2005 Reason Foundation