Oil Wars Are Not Inevitable

The Economist magazine this month has two good articles (here and here) looking at world oil production in relation to Iraq. The following text is a condensed version.

"This week marks the 30th anniversary of the Arab oil embargo. Western countries are no less in thrall to Middle Eastern oil than they were then.

"... America's Congress is in the final stages of intense negotiation over a huge energy bill that is based on the administration's notion that there is a serious energy-supply crisis. The bill is expected to be passed by Congress any day now. “It's becoming very clear to the country”, George Bush has said, “that demand is outstripping supply.”

"... It is Saudi Arabia's willingness to be the swing producer that now insures the world's economy against oil shocks. As long as there is a stable government in Riyadh, the West can probably be confident that the enlightened self-interest of the Saudis will coincide with the interests of western gas guzzlers.

"Alas, the stability of the Saudi regime is far from guaranteed. The pro-American, ruling family is deeply unpopular with fundamentalists in the country, and there is no clear successor to the current de facto ruler, Crown Prince Abdullah. As even the Saudis now grudgingly concede, home-grown terrorists regularly carry out attacks in the country. And if a radical like the Saudi-born Osama bin Laden were ever to topple the royal family, the world could well be hit by another energy shock. (NB: this is GW's real definition of a "terrorist")

“THE Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” So says Sheikh Zaki Yamani, a Saudi Arabian who served as his country's oil minister three decades ago.

"... A generation after the (OPEC) embargo began, the facts seem plain: the world remains addicted to Middle Eastern oil (see article). So why is Sheikh Yamani predicting the end of the Oil Age? Because he believes that something fundamental has shifted since that first oil shock—and, sadly for countries like Saudi Arabia, he is quite right.

"Hydrogen fuel cells and other ways of storing and distributing energy are no longer a distant dream but a foreseeable reality. Switching to these new methods will not be easy, or all that cheap, especially in transport, but with the right policies it can be made both possible and economically advantageous. Unfortunately, many of the rich world's governments—and above all the government of America, the world's biggest oil consumer—are reluctant to adopt the measures that would speed the day when the Saudis' worst fears come true.

"... It all sounds very fine. What then is the best way to speed things up? Unfortunately, not through the approach currently advocated by President George Bush and America's Congress, which this week has been haggling over a new energy bill. America's leaders are still concerning themselves almost exclusively with increasing the supply of oil, rather than with curbing the demand for it while increasing the supply of alternatives.

"By introducing a small but steadily rising tax on petrol, America would do far more to encourage innovation and improve energy security than all the drilling in Alaska's wilderness. Crucially, this need not be, and should not be, a matter of raising taxes in the aggregate. The proceeds from a gasoline tax ought to be used to finance cuts in other taxes—this, surely, is the way to present them to a sceptical electorate.

"Judging by the debate going on in Washington, a policy of this kind is a distant prospect. That is a great shame. Still, the pace of innovation already under way means that Sheikh Yamani's erstwhile colleagues in the oil cartel might themselves be wise to invest some of their money in the alternatives. One day, these new energy technologies will toss the OPEC cartel in the dustbin of history. It cannot happen soon enough."

(copyright the Economist)