US Pays the Price of Relying on Foes for Oil
From the September 9, 2007 Sunday Times
September 10, 2007
by Irwin Stelzer
Some of my best friends are economic forecasters, brave men and women who foretell various futures – hourly changes in share prices and interest rates, or what Federal Reserve Board chairman Ben Bernanke and his monetary policy committee colleagues will or won’t do on September 18, when they meet to survey the wreckage of the financial markets and the health of the economy.
The consensus seems to be that Bernanke will lower the Fed funds rate. Friday’s jobs report is seen as the final bit of evidence that the Fed needs to justify easing rates. Employment, which analysts expected to increase by about 100,000 jobs, actually declined by 4,000 in August. More significant, earlier estimates of job creation in June and July were lowered by 81,000 jobs. Bernanke can now lower rates without being accused of bailing out improvident lenders to sub-prime borrowers. No moral hazard, merely good anticyclical monetary policy.
Throw in speeches by Bernanke’s predecessor, Alan Greenspan, suggesting that he sees a recession around the corner, and the pressure for a rate cut mounts. But the life of a central banker is never that simple. After all, the American economy is not doing badly. Consumers continue to drive store sales up. Goldman Sachs reports “limited spill-overs from the market turmoil to the economy so far”. Last week’s so-called Beige Book, which summarises reports to the Fed from around the country, notes that “economic activity has continued to expand . . . [and] credit availability and credit quality remained good for most consumer and business borrowers”.
Set that against the contradictory negative reports coming from the housing and financial sectors, and Bernanke is left to rely heavily on anecdotal evidence gleaned from his financial and business contacts around the country.
He will benefit from one more bit of data by the time he convenes his colleagues. Opec, the cartel of most of the world’s oil producers, meets in Vienna on Tuesday. Every indication is that the producers will refuse the request of consuming countries to open the spigots so as to bring down oil prices. “You cannot convince any member to add more crude to the market,” Abdalla el-Badri, Opec secretary-general, told the press.
Venezuela can’t: its production is sinking as Hugo Chávez replaces Petróleos de Venezuela’s highly regarded technocrats with political hacks. He wants more for each barrel he produces, especially if high prices threaten American prosperity. Iran, suffering from falling output as the American embargo denies the country the know-how and equipment needed to update facilities, is also a price hawk.
The key player, Saudi Arabia, will talk the talk of moderation and friendship to the West, then whine that prices are already down from their summer peak, that a slowing American economy will reduce the demand for oil, and that the weaker dollar means the kingdom is getting less real purchasing power for its oil. Unsaid is the fact that the Saudis need the money to fund the lives of thousands of indolent princes, and the terrorist madrasas it continues to finance.
Best of all, Opec now knows that it can count on Vladimir Putin to help it in two ways – one intentional, the other unintentional. Putin will cooperate with Opec because high oil prices make it easier for him both to provide Russia’s people with butter and his military with guns. He is also inadvertently helping to maintain prices by allowing Russia’s oil output to fall as his former KGB and other cronies take over the country’s oil companies, and reduce foreigners to minor roles. As The Economist magazine pointed out, KGB-trained thugs “know how to grab assets and jail foes, but not how to run real businesses”.
In short, there is little likelihood that any of the major producers will permit the foreign investment they need to step up production sufficiently to make a significant dent in the current price of oil. The Saudi royal family doesn’t want to antagonise the bin-Ladenites by inviting American companies in, although it relies on the American military to keep it in power. Mexico won’t allow American capital in, but wants to ship unlimited numbers of its workers out to the United States. The Bush administration acquiesces.
Any downward pressure on prices will have to come from a reduction in the demand for traditional petroleum. A recession would accomplish such a cutback, but that is neither likely nor a goal of American and European policy.
There is some indication that what Americans consider to be the high price of petrol – about $3 a gallon (39p a litre) – is having a bit ofa dampening effect on demand. But it will take decades for the current fleet of cars to be replaced by more fuel-efficient vehicles.
There is no sign that demand for aviation fuel is headed anywhere but up, or that nuclear power can do much, certainly not soon, to replace fossil fuels used for transport. Coal might develop into an oil substitute in some uses, but it is hardly the darling of the environmental set. Canada’s tar sands are expensive and environmentally intrusive. And the economics of ethanol are at minimum questionable, while their overall environmental impact is far from benign.
So the most likely scenario is for oil prices to stay high, with an upward jiggle when a hurricane threatens offshore facilities, and a downward move when inventories temporarily rise. The good news is that in the long run this will discourage demand, and encourage efficiency and alternative fuels. Meanwhile, the American economy remains dependent on its enemies for its fuel, its politicians refuse to take meaningful steps to reduce that dependence, and America sleeps.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.