As the nuclear stand-off with Iran helped push oil prices to near-record levels, President Bush once again declared, “Dependency on oil creates an economic problem for us, and it creates a national security problem for us.”
But if Iran’s behavior makes the case for anything at all, it is that America should become more – not less – “dependent” on foreign oil. In fact, the best way for America to defuse the so-called Middle Eastern oil weapon is by purchasing even more oil from the region.
The economic case for energy independence has always been nonsensical. It is not possible to shield American consumers from rising prices at the pump simply by replacing foreign oil with domestic oil. Why? Because regardless of where the oil is produced – Oman or Oklahoma – its prices are set by the global market.
The global demand for oil and its ease of transportation have synchronized oil prices everywhere. Therefore, unless compelled by draconian government mandates, no American company that can command $3 a gallon in Oman would sell it for much less in Oklahoma. If war prevents Middle Eastern oil from reaching its global customers, the incentive for American companies to sell U.S. oil overseas would be even greater given the higher prices that it would fetch. War or peace, no amount of domestic production will give us “independence” from the law of supply and demand.
But if domestic production won’t ensure access to cheap oil, some believe that it will at least shield us from the kind of geo-political manipulation that Arab countries attempted during the 1973 oil embargo. That, however, is also a myth.
For starters, OPEC – the Arab-dominated cartel of oil producing nations – did not succeed in its manipulation even then. It lifted the embargo in less than two months, once it became clear that while its members were giving up oil revenues, its oil was still reaching the United States because of diverted shipments from Europe. There was some diminution of oil supply in the United States, but not nearly enough to do any serious damage to the American economy.
The long lines outside gas stations that Americans associate with the embargo resulted more from panic buying and domestic oil price controls rather than lost Arab oil, notes M.A. Adelman, a professor of economics at the Massachusetts Institute of Technology.
But if all OPEC countries together couldn’t pull off their political blackmail, a rogue regime acting alone will surely not succeed.
Saudi Arabia’s experience in 1980 demonstrates why. The country elected to play the role of OPEC’s “swing producer,” unilaterally limiting its oil production in order to boost world oil prices. It expected that higher oil prices would compensate it for lower oil sales.
But Saudi Arabia was forced to abandon its policy in a few years as other OPEC members bumped up their production on the sly and pushed its exports to nearly zero. Since then, Saudi Arabia has repeatedly said that it would never again unilaterally cut output.
The lesson of Saudi Arabia’s experience – oil sales that one producer foregoes will quickly be captured by others – is not lost even on regimes such as Iran, especially now when there are more oil suppliers than ever before.
Given Iran’s defiant mood and tension with the U.S. and Europe over its nuclear program, one would have thought that this would be a perfect moment for its hot-headed president to further escalate – if not act on – his threat to cut off Iran’s oil exports to the West and shut down oil shipments through the Straits of Hormuz.
But beneath all of Iran’s saber-rattling and its threat to retaliate against Israel in the event of a U.S. attack, it realizes how suicidal such a move would be. During a recent OPEC meeting, Karem Vaziri Hamaneh, Iran’s oil minister, went out of his way to reassure the world that Iran had no intention of disrupting the oil market. “The need of the world for energy is soaring and, if Iran is taken out of the equation, prices will shoot up,” he told the Wall Street Journal. “But we don’t want to cause hardship for any consumers around the world.”
Vaziri’s concern is not so much for the world’s oil consumers, of course, as for the economic consequences for his own country. The Iranian government depends on oil exports for nearly half of its total revenues. If it cuts these exports, buyers could go to other suppliers. But there is not much else that Iran could sell to other countries to replace its lost oil revenues.
Our dependence on Middle Eastern oil is only the flip side of their dependence on our purchases. But given the narrow base of Middle Eastern economies, the power in the relationship is firmly on the side of the oil buyers. If that relationship were to end because of “energy independence,” we would give up crucial leverage to control the worst behavior of some of the world’s worst regimes. Of course, this leverage is no magic wand that would protect us from a totally irrational regime willing to absorb the economic cost of using the oil weapon. But the more oil we get from such a regime, the higher the price it would have to pay.
Thus whatever other arguments there might be for boosting domestic oil production, national security is not one of them. While this might seem counter-intuitive, it is really part of the overall logic of trade: The mutual dependence that trade breeds fosters peace because it gives hostile trading partners an incentive to refrain from acting on their hostility. Energy independence would weaken that incentive.
Shikha Dalmia is a senior analyst with Reason Foundation.