Should you panic about oil prices?
Not yet. Middle East turmoil may increase the danger of rising oil prices triggering a double-dip recession. But while a short-lived oil price spike is quite possible, a sustained spike causing serious economic damage isn't likely. Still, the US should consider two approaches for insurance.
Middle East turmoil is raising the danger that rising oil prices could eventually damage the American and global economy or even trigger a double-dip recession. Cash-strapped consumers who pay more at the pump will have less money to buy shoes, computers, cars, wireless gadgets – you name it. Higher oil prices will feed inflation, which already worries economists. And stock market investors could flee markets, fearing that others will do the same in the face of an oil shock.
But what is the likelihood of this scenario? A short-lived oil price spike is quite possible, but a sustained spike that can cause serious economic damage isn't likely. But regardless of the length or likelihood of a sharp rise in oil prices, now is the time for Americans to take steps to decrease their dependence on Middle East oil.
Nomura Holdings Inc., the Tokyo-based bank, has said that if Libya and Algeria were to halt oil production totally, oil prices could peak above $220 a barrel. But the world’s spare capacity or idle oil capacity is closer to historic highs than lows.
Saudi Arabia holds roughly 3 million barrels and OPEC is estimated to have approximately two more million barrels. That can probably make up for Libya’s and Algeria’s export production. Bloomberg estimates that Libya produced 1.59 million and Algeria produced 1.25 million barrels per day last month (though a total cut off in both countries is not likely). Saudi Aramco CEO Khalid al-Falih told reporters recently that his company was prepared to make up for any Libyan shortfall.
The International Energy Agency (IEA) – made up of mainly oil-importing nations – also requires its members to hold emergency oil reserves equal to at least 90 days of its net oil imports from the previous year. IEA members hold around 1.6 billion barrels of oil, including over 700 million in America.
Of course, all bets would be off if Saudi oil is seriously disrupted. The International Energy Agency and the United States would coordinate a release of oil reserves, but oil prices would still be likely to skyrocket.
Why Saudi oil production won't collapse
But what are the chances of a Saudi oil production collapse? Quite low.
Second, the Kingdom’s cradle-to-grave safety net quells dissent, unlike in Egypt.
Third, the Al Saud (ruling family) might well resort to using its heavily trained security forces to subdue protests that could disrupt oil production or threaten its power. In 1979, the regime was threatened. It faced a massive Iranian-inspired Shiite uprising in the oil-rich Eastern Province and the seizure by Islamic zealots of the Grand Mosque at Mecca. The Saudis suppressed the revolt and then appeased the Shiites with Riyal diplomacy, as they are doing now to preserve stability. (The Riyal is Saudi Arabia's currency.)
Fourth, the international community, dependent on oil and fearing a double-dip global recession or worse, would be far more likely to support the Al Saud than any other regional autocrats.
So what does all this turmoil mean for oil prices and the global economy? The near-term ride will be choppy but probably won’t last too long. Still, the United States and its allies should consider two approaches for insurance.
Insurance: Help Saudis avoid instability
First, they should take steps, even if modest and behind-the-scenes, to help Saudi Arabia avoid major instability. The fragile world economy, and especially the poor around the world who are hit disproportionately by oil price increases, cannot afford such a shock should the situation in Saudi Arabia escalate enough to disrupt its oil exports.
To that end, President Obama should create an interdisciplinary taskforce, consisting of members from multiple departments and agencies who consult with their counterparts in the Middle East and around the world. The taskforce should explore what Washington and its allies can do to help Saudi Arabia:
• Decrease youth unemployment – a potential time bomb.
• Liberalize by slowly allowing citizens greater democratic voice and by creating the beginnings of democratic institutions.
• Coordinate better with Western intelligence on Al Qaeda and its affiliates, which aim to overthrow the Saudi regime and would want to capitalize on unrest in the kingdom.
• Use public opinion polling to gauge potential popular grievances in Saudi Arabia better. Such information can make it easier for the ruling family to respond effectively to its people’s needs and demands.
Time to decrease oil dependence anyway
Second, even if we do not face a massive oil disruption, we must buy some insurance by decreasing oil dependence. Above all, we should encourage the mass production and adoption of hybrid and electric vehicles. This is because most of the world’s oil goes into gas tanks. A graduated gas tax is the best tool for incentivizing the use of fuel-efficient or electric vehicles. Knowing that they will pay much higher prices at the pump, consumers will be more likely to buy such vehicles, and producers will be more likely to build them in order to meet this expected demand.
And revenues from the gas tax could fund infrastructure development and other projects that support the production, purchase, and use of fuel-free transportation and/or pay down the national debt.
Decreasing oil dependence will also diminish carbon pollution that drives global warming, with its unpredictable economic and human consequences. Less dependence on foreign oil will also slowly diminish the chances that America will be drawn into oil-related conflicts in the Middle East. And weaning America off of oil will weaken Al Qaeda, as oil monies directly and indirectly support its terrorist infrastructure. America’s involvement in the region, while vital now for protecting the free flow of oil, also helps Al Qaeda win some recruits and sympathy.
It’s not likely that we will face an oil shock caused by a massive oil disruption, although that is not impossible. But a smarter energy policy, embraced by both Democrats and Republicans, will give America and the world a safer, more sustainable future.
Steve Yetiv is a professor of political science at Old Dominion University and is the author of “Crude Awakenings,” “The Absence of Grand Strategy,” and the recently released “Explaining Foreign Policy.”