The Dangers of Cheap Oil

An increasingly popular theory now making the rounds says that the way to undercut the growing power of petrocrats like Iran’s Mahmoud Ahmadinejad and Venezuela’s Hugo Ch’avez is to drastically reduce the price of oil.
The reasoning goes like this: these rulers depend on oil revenues to fund their regimes. If that revenue declines, so, too, will their power. This concept has become the mantra of neoconservatives, columnists like the New York Times’ Thomas Friedman, and groups like the Set America Free coalition. All insist that America must quit buying foreign oil in order to be more secure. Friedman claims that should crude prices collapse, the rulers of repressive oil-rich countries would be forced to “open up their economies and their schools and liberate their women.”
The case for lower oil prices gained momentum recently when Nawaf Obaid, a Saudi security adviser to the Saudi embassy in Washington, wrote an op-ed for the Washington Post. He said that Saudi Arabia’s King Abdullah could “strangle Iranian funding” for the militias in Iraq by boosting oil production, which would “cut the price of oil in half.” In his November 29 piece, Obaid claimed that even with lower prices, the kingdom could still finance its needs. “But it would be devastating to Iran, which is facing economic difficulties even with today’s high prices. The result would be to limit Tehran’s ability to continue funneling hundreds of millions each year to Shiite militias in Iraq and elsewhere.” (A week after Obaid’s piece appeared, the Saudi embassy fired him.)
On first glance, a sustained period of lower oil prices might be appealing. But $30 oil would be disastrous for America’s interests on a number of fronts. First and foremost, the lower prices would further damage Iraq’s economy. Amid a torrent of bad news in Iraq, higher oil prices have been among the few positive ones, allowing the country to amass funds for the rebuilding effort.
Lower prices could cause instability in Saudi Arabia, Kuwait, the U.A.E., and other countries in the region. America depends on those three monarchies for political and military support. Kuwait, in particular, is the linchpin for America’s military presence in the region. A sustained drop in oil prices could destabilize the delicate Sunni-Shia balance in Kuwait. That could be disastrous for the U.S., which is able to prosecute the war in Iraq only because of its massive military bases in Kuwait.
Cheaper oil would mean higher consumption in developing countries like China and India. The Chinese government has repeatedly increased the price of motor gasoline in an effort to slow that country’s insatiable thirst for oil. Cheaper crude would reduce China’s oil import bills and thereby allow greater consumption with little cost.
Cheap crude would short-circuit the push for greater automotive fuel efficiency. American motorists have, of late, been buying more fuel-efficient vehicles. If oil prices fall and stay at $1 or $1.50, they will happily return to their Hummers, big pickups, and SUVs. And that could, once again, set up a scenario that would allow foreign automakers to capture even larger segments of the auto industry when gasoline prices rise again.
Low-cost oil would increase emissions of greenhouse gases. One can argue all day about what’s causing global warming. But if policymakers want to embrace Kyoto or anti-warming initiatives, cheap oil is the last thing they should want.
A collapse in oil prices could also collapse America’s domestic oil production. In the early 1980s everyone was convinced that high prices were here to stay. That illusion ended with the oil price crash of 1986, which, by the way, was precipitated by unrestricted production from Saudi Arabia. The crash resulted in bankruptcies from Midland to Tulsa. Idle drilling rigs were cut up and sold for scrap. Skilled oilfield workers left the industry for good.
Cheap oil will increase America’s reliance on foreign oil. Back in 1985, when America’s domestic oil production was on the upswing, OPEC countries supplied 41 percent of America’s imported oil. By 1990, with domestic production decimated, OPEC’s share had climbed to 60 percent.
The punchline: cheap oil could hurt America just as much as expensive oil. In fact, it might even hurt more.

© 2013 Energy Tribune

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