Oil Producing and Consuming Nations Need to Talk
THE war against Iraq was fought for many reasons: to punish naked aggression, to liberate a brutally subjugated Kuwait, to prevent a well-armed and power-hungry dictator from dominating a strategic expanse of the globe. But it was also fought to guarantee the free, affordable availability of Middle East oil on which the health of the United States and other industrial economies depends. Without the Organization of Petroleum Economic Countries, some analysts believe crude oil would eventually settle around $10 per barrel. Compared to the current OPEC target price of $21, that would represent annual savings to the US economy of almost $70 billion, a potentially powerful antidote to our lingering recession.
But the US national interest would be poorly served by an attack on oil prices or on the producers' cartel. A sharp drop in oil prices would not only hurt Texas, Alaska, and the rest of the oil-producing states, but would risk destabilizing at least the finances - and perhaps the politics - of Saudi Arabia and other countries that the US just fought to protect. Even the already fading possibility of Middle East peace would disappear as rivalries within the region became more pronounced. And other oil-pr oducing countries in whose security and prosperity the US has a substantial stake, such as Mexico and Venezuela, would suffer.
The best course for the US would be to use its hard-earned authority in the Middle East to launch a dialogue between oil producers and consumers to stabilize oil market conditions and, over the long run, prices.
Admittedly, no one is smart enough to know the ``right price'' for a barrel of oil, and it would be foolish to substitute government dictate for market forces. But recent developments are renewed testimony that oil is not a commodity which readily follows the normal rules of supply and demand. War was supposed to drive prices sharply higher and peace should have triggered a collapse. The prospect not only of plentiful, uninterrupted supplies, but renewed competition when Kuwait and Iraq are reintegrated into the market, should have produced a postwar dividend for oil consumers. Instead, OPEC has regrouped, announced a modest 5 percent production cut, and seemingly convinced markets that something like $20 per barrel is a sustainable price.
A disproportionate share of the world's oil reserves is located in countries of endemic instability. National, regional, and international politics have more to do with how much oil is produced - and how it is priced - than economics.
If nothing else, the war with Iraq demonstrated a need for something other than blind reliance on market forces when it comes to energy in general and oil in particular. The leaders of oil producing and consuming countries, led by the US and its coalition partners, should now develop a political framework that goes beyond OPEC or the International Energy Agency. (The IEA is a somewhat ineffective group of industrial countries, including the US, formed in the 1970s to develop a coordinated response to oi l market developments.) Their goal should be to prevent the kinds of disrupting price swings which have occurred since the early 1970s.
All participants would be expected to make contributions. Oil producers would stabilize their production policies. Governments would use their stockpiles to offset temporary market shortages or surpluses. Consumers would increase their energy efficiency. The US, as the world's largest consumer and second largest producer of oil, would have a special role: to reduce consumption and increase production, not only of oil but of other energy sources.
Such an initiative would be a worthy successor to the broad-based effort which defeated Saddam Hussein and could be an important building block of the post-cold-war world. Oil is too important to be left to armies to fight over.