Oil Dependence As Virtue

Oil Dependence As Virtue

Mini Teaser: In short, a world that doesn't need oil may also be a world that doesn't need the United States.

by Author(s): Daniel W. Drezner

In Iran, however, the clerics maintained their hold on power-and the effects of Iran's nuclear weapons were regional in scope. Saudi Arabia responded by quickly purchasing a deterrent. Riyadh's decision to go nuclear balanced Iran's arsenal, and the GCC turned into a military as well as an economic alliance. Iraq and Egypt decided to go nuclear, too. While the first instinct was to worry about a nuclear exchange in the Middle East, the end of oil also meant that the region was less vital to great-power interests-there were no external actors to precipitate a regional crisis. Thus, the existence of these nuclear deterrents has helped to keep the peace in the Middle East.

As a result of all this, many of the positive trends seen in the very poor and very rich oil-exporting countries have not occurred in the middle-income states. But the temporary instabilities in the autocracies eventually sorted themselves out. While no one in the West was thrilled with the increase in nuclear-weapons states, the realists were proven right: states with nuclear weapons do refrain from attacking each other. South America remained free of both nuclear weapons and autocratic governments.


THIS SPREAD of democracy, the persistence of peace and economic growth, and the demise of a top competitor (Russia) should have been beneficial to the United States. But in fact it helped the other great powers much more, for the end of the oil era brought about the end of the dollar era-and the definitive end of American hegemony.

For decades, presidential candidates pledged to end America's addiction to foreign oil. The presumption was that dependence on foreign energy was a constraint on U.S. action. Once it ended, it was thought, American power would again reign supreme. But instead it turned out that the United States was better positioned to maintain its power during the oil era than in the post-oil age.

In fact, the passing of the oil age eliminated a key capital inflow for the United States. Just a few years into this new era, the oil-exporting economies were sitting on close to $2 trillion in dollar-denominated assets, and the Gulf was one of the few capital-rich regions that relied on American security. A key pillar of support for the dollar was GCC resistance to the economic logic of diversifying their holdings away from dollar-denominated assets. The implicit quid pro quo of this arrangement was that in return for security guarantees, the Gulf regimes pledged to continue to preserve and defend the value of the dollar.

In the short term, the end of the oil era reinforced this guarantee. With their primary source of income evaporating before their eyes, the first instinct of all of the regimes in the region was to bind themselves even closer to the United States. Iran's decision to go nuclear only reinforced that trend.

But to everybody's surprise, America's security guarantees soon became less relevant, and the gravitational attraction of its economy diminished. When the GCC economies retrenched, they became unable-and unwilling-to invest large sums in American debt. The post-oil recovery of the Gulf economies gave these governments greater confidence in their ability to prosper. Without oil being an all-consuming commodity, the GCC states were able to trade much more extensively with Europe and the Pacific Rim than with the United States. Large Muslim minorities in those regions made them a more natural location for Arab foreign direct investment. This made it much harder for Washington to sustain its whopping fiscal deficit. Forced to choose between guns and butter, the American people opted to reduce their military obligations and maintain social services. The end of the dollar as the reserve currency was simply the coup de grâce.

And so it was not surprising that GCC central banks jointly announced that they would use a trade-weighted basket of the dollar, euro and the renminbi to determine their exchange rate. This announcement tipped other central bankers into selling dollars.

By 2025-a mere fifteen years after the beginning of the end of oil-only 20 percent of official reserves were held in dollars. The United States was forced to finance its current-account deficit-which for many years had been fueled by the insatiable American demand for energy-in euro-denominated bonds.

Meanwhile, the European Union was freed from its greatest strategic vulnerability-energy dependence on Russia and the Middle East. It took advantage of the switch in the Middle East's economic orientation and expanded its membership across the Mediterranean. A key bottleneck to China and India's long-term economic development was removed. Service exports surged to China and India-economies that, unconstrained by energy, were growing even faster after the end of oil than before. Furthermore, the way in which oil ended-replaced by new, low-carbon energy sources-prevented the most dire effects of global warming from coming true. This disproportionately benefited the developing world-and India and China in particular. America ended up weak, Europe became stronger and more unified, and India and China finally ascended.


THE YEAR 2008 was pivotal for the United States, but not in the way that most expected. Preoccupied with wars, an election and a financial crisis, no one anticipated what an impact oil-with its instability-generating, recession-fueling global reach-would actually have on the country's future trajectory. Looking back, though, it is clear that in the macro sense, the decline and fall of oil has brought significant benefits to the world. Long-standing civil wars ended peacefully. Freed from the resource curse, regions plagued by instability have joined the twenty-first-century economy. The predicted effects of global warming have been significantly curtailed. The new geopolitical and economic facts of life crystallized. The security situation in the Middle East is, to a surprising degree, stable. China and India continue their rise to middle-class economic status. The European Union's greatest security headache is no more.

Of course, not all the effects have been positive. The burst of diversionary wars and nuclear proliferation affected unstable areas of the globe. Countries like Iran and Russia have remained mostly shut off from the world because of the aftereffects of oil's collapse. But, oddly enough, the biggest loser among the great powers turned out to be the United States. The end of oil impacted the old cold-war superpowers the worst, although America came out slightly less bruised and battered. With their nuclear arsenals, neither country has become irrelevant. In the end, however, both countries have turned inward in response to the declines in their fortunes. Russia still matters on a regional scale, and the United States maintains its hemispheric influence. Washington, however, is no longer the world's superpower. It isn't even first among equals. Stripped of its enduring security allies, Washington remains an important voice in world affairs, but not as authoritative as Beijing.

At the beginning of the twenty-first century, America knew that it was addicted to oil. What it did not realize was that it was also addicted to the security benefits that came from an oil-based global economy. Washington did not plan for the transition to a post-hydrocarbon society, despite warnings from its own National Intelligence Council about a disconcerting future. The United States proved ill-prepared to cope with the rapid decline of its influence and resources.

This bout of American isolationism will likely be temporary. The effects of oil's demise on world politics are not.


Daniel W. Drezner is a professor of international politics at the Fletcher School at Tufts University and a senior editor at The National Interest. His most recent book is All Politics Is Global (Princeton University Press, September 2008).

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