What Are Our Options?

Our ability to shape production policies by Saudi Arabia, Russia and-in time-even Iraq is hugely constrained. In fact, the jury is still out on whether the three countries may find ground for common production policy to sustain prices higher than optimal from the U.S. perspective. Saudi Arabia remains, at least in theory, in a position to drive prices sufficiently low to compel Russian long-term production restraint. Given the importance of oil to Saudi Arabia's economy and finances, Riyadh would not undertake such a policy lightly. But it has done so before-not just against the Soviet Union in the 1980s, but more recently, against Venezuela in the late 1990s. In fact, many Venezuelan opposition leaders believe it was the Saudi 1997-98 price war that undermined their industry and led to the advent of Hugo Chavez, leaving the South American continent and the American consumer equally concerned about the turmoil created and squarely dependent on Saudi largesse to get out of the problem. In a word, Riyadh flexed its oil muscle, showing wayward fellow oil producers and the U.S. government alike that it had everyone under its thumb.

A number of Russian observers believe that their oil industry can weather such a price war. This is easy to say with prices above $25 per barrel. Should prices fall precipitously say, to below $15 per barrel, Russia will be faced with both plummeting revenues and declining investment. Moscow will be sorely tempted to cooperate on production levels with Riyadh, as it did in 1999-2000, in order to raise prices. Whether this is the reason that Moscow and Riyadh recently signed an agreement to cooperative on oil price stability is an open question.

In time, even Iraq may find its interests diverging from the United States in terms of production and pricing policy. In the short run, those interests converge. The rapid recovery of the Iraqi oil sector is, rightly, a top priority for both Washington and Baghdad. But those interests can and will diverge should increased Iraqi production threaten an oil price war. In the case of both Russia and Iraq, the neoconservative alternative fails to take into consideration the fundamental fact that the interests of oil suppliers and consumers diverge. What is good for the United States may not be good for a post-Saddam regime in Baghdad.

Missing from this discussion are any serious measures to address the demand side of our reliance on Middle East oil. Current U.S. oil demand is about 20 million bpd, of which only 40 percent is produced domestically. Indeed, the consistent growth in U.S. oil imports is an overwhelming factor in global oil markets-one, which official Washington refuses to recognize despite criticism from allies in Europe and Japan. U.S. net imports rose from 6.79 million bpd in 1991 to 10.2 million bpd in 2000. Global oil trade, that is the amount of oil that is exported from one country to another, rose from 33.3 million bpd to 42.6 million bpd over that same period. This means that America's rising oil imports alone have represented over one third of the increase in oil traded worldwide over the past ten years-and over 50 percent of opec's output gains between the years 1991 to 2000 wound up in the United States.

Ironically, the United States is so busy managing the diplomacy of its relationships with oil suppliers that we have failed to give highest priority to the international relationships where common interest may be the strongest -other major oil consuming nations. Reliance on coordinated policy responses through the International Energy Agency (iea) in Paris need to be remolded to meet changing market conditions. When the iea was founded as an offshoot of oecd membership, its members were responsible for more than 75 percent of global oil trade. But with the emergence of China, India and other growing non-oecd markets, the iea's membership has become increasingly isolated from the real operation of the international market and new sources of oil demand growth. The ideas behind the iea remain valid; it is critical for oil importing countries to bind themselves collectively to meet pending disruptions. But the membership and scope of the organization has become too narrow and it is time to rethink ways to include critical emerging markets within the consuming countries' emergency response mechanism. One can imagine that a coordinated iea stock release in a time of great market disruption will be less effective if China responds by buying up oil in a panic and hoarding it than if China itself has strategic stocks to contribute into the market. The iea may also need to consider new steps to counter disruptions in other important fuels beyond oil such as natural gas which is taking a larger and larger share of energy markets in major consuming countries but will also be shipped from distant suppliers, making it increasingly susceptible to the same political and accidental disruptions as oil.

True, the Bush Administration has initiated dialogue with the eu on hydrogen fuel research and other alternative energy but joint research in energy technologies, like the purview of the iea, must extend as broadly as possible to include the largest future oil consumers. Still, before the United States can truly show leadership in forging links with fellow oil consumers, it must gain some credibility by demonstrating a willingness to curb its own unrestrained oil addiction. Then, by example, America might be in a position to initiate a truly global effort to encourage conservation policies, to conduct multi-lateral research and development programs, and to disseminate promising energy technologies.

On the domestic front, any politically plausible mix of conservation policy or increase in domestic production will leave the American oil-guzzling outlook largely unchanged. While the idea of "grand compromise"-which would include opening up not just the Arctic National Wildlife Refuge but vast tracks of politically sensitive U.S. coastal shelf to production and, at the same time, imposing stringent new automotive standards-may be theoretically appealing, it stands little chance of passage as Capital Hill's November failed effort so well demonstrated. A shift to fuel cell technology and hydrogen-based technology, proposed by the Bush Administration and concretely pursued, may eventually reduce U.S. petroleum imports, but the time-frame involved runs to the decades, not years. Moreover, this hydrogen economy is dependent on scientific breakthroughs that are in no way guaranteed and, it presumes plentiful local natural gas supplies that are iffy, at best. Indeed, the administration's decision to focus on the "hydrogen economy" is viewed by many as an effort to deflect a more politically painful, but immediately plausible policy to make a here and now effort to switch to hybrid automotive technologies that could immediately reduce consumption through increased efficiency. General Motor's commitment to produce 1 million hydrogen fuel cell cars a year by 2012 seems pretty small when put up against the expectation of 100 million vehicle growth rate in the traditional gas-guzzling American transportation fleet over the same time period. Clearly, a bigger, bolder policy with greater short to intermediate-term impact is needed. All U.S. government fleet vehicles should be highly efficient hybrid vehicles or electric power cars. Higher taxes could at least be placed on inefficient vehicles, and a larger gasoline tax should be targeted directly to truly bold (read, Manhattan project style) scientific research on nanoscience and energy, solar energy and electricity storage.

Still, realistically, no matter what happens on the demand side in the United States, there is no escaping the need for increased overall world output to keeping prices reasonable despite rising world (and U.S.) demand. But the United States will do itself a disservice by indulging in the fantasy that it can create this supply by diplomatic pressure or military action. Like it or not, the maintenance of Saudi Arabia as a supplier of last resort is a necessary hedge against short- to medium-terms disruptions for which there is no replacement on the horizon. Over the course of the last year, such disruptions have occurred in both Venezuela and Nigeria. There is every reason to believe that the kingdom will remain of feature of international oil markets for years to come. Far from replacing the U.S.-Saudi Arabian "special relationship" with an "Axis of Oil" between Moscow and Washington, the new approach can at best create an "oil triangle" with its points at Washington, Riyadh, and Moscow, perhaps eventually adding Iraq or Canada into the mix.

Still, lower oil prices should remain a U.S. goal, not only to wean unstable regimes from the ill-effects of undiversified economies, but to give most of the world, including the 1.6 billion people on the planet lacking energy services altogether, a chance to achieve prosperity. This goal can only be achieved by de-politicizing oil. The United States should turn back to multinational agencies and push more seriously for new ways to bring the rules of global oil trade and investment in harmony with the rules governing other trade in manufactures and services. Liberalization and open access to investment in all international energy resources would mean their timely development rather than today's worrisome delays. Rather than try to accomplish this on an American bilateral basis, the U.S. should lead the industrialized West to make a joint effort, possibly considering discriminating actively against products from countries that do not permit investment in their energy resources, much the way most favored trade status and the wto have been used to bring better practices in other industrial sectors. This is a tough policy, but ultimately, few of the top oil producing countries have used their oil wealth constructively to diversify their economies and improve the lot of their populations.