DANGER: Arabian Quicksand : U.S. Economy On the Line: It All Comes Down to Oil

In a classic case of missing the point, economists are speculating avidly on whether Saddam Hussein’s takeover of Kuwait’s rich oil reserves will tilt the United States into a recession. It’s a bit like watching the swishing of a lumbering elephant’s tail. The swinging tail may be impressive in its own right, but it’s hardly the most important thing going on.

Kuwait’s 1.6 million-barrel daily production is about 2.5% of the world total. Iraq’s 3 million-odd barrels is another 5%. It doesn’t sound like much, but fears of supply disruptions have already driven spot oil prices as high as $28 a barrel--up from $18 just a week ago. If those price increases were to stick, which is highly uncertain, it could add as much as 2%-3% to the U.S. inflation rate. Economists plug those numbers into their mathematical models, and it’s clear that the United States would slip into a recession.

And that’s much of the problem with economists. For whatever the resolution of the crisis in the Middle East, the least likely of all outcomes is one that will be measured in incremental percentage points. The confrontation with Iraq will far more likely turn out to be a watershed event, offering both enormous risks and opportunities, and leaving its mark on the course of the industrialized economies, for good or for ill, for many years to come.

The risks are huge. A military free-for-all in the vicinity of the Saudi-Kuwait border would endanger 60% of the world’s oil reserves. Even if Hussein is bested in the field, as he almost certainly would be, vengeful missile or bombing strikes at the Saudi fields could create havoc with Western oil supplies that would take years to repair.

The Western economies, of course, would survive. But the transition to an oil-independent system would require a massive shift of investment throughout the entire decade of the ‘90s--to natural gas, nuclear power, electric cars. Much of the West’s capital stock would be obsolete overnight. For at least the next five years, and probably longer, the dislocation and chaos in the industrialized countries would be severe--of an order hardly captured by numbingly precise estimates like the “0.6% reduction in 1991 American GNP” that one forecasting firm has made. The word “recession” simply does not capture the reality of the stakes.

But the opportunities loom equally large. As of this writing, with U.S troops moving into Saudi Arabia, the spectacular potential benefits of a post-Cold War global economic regime are just beginning to come clear. Barring the real possibility of the sort of catastrophe outlined above, the confrontation with Iraq underlines the sharp realignment of the “fundamental forces” in the world, to use a phrase once much cherished by true Marxists.

For the past four decades, from Gamal Abdel Nasser through Ayatollah Ruhollah Khomeini to Hussein, the West’s access to Middle Eastern oil has been at the mercy of any demagogue or madman who cared to go to holy war against the infidel. The reason has not been that the West was unable to bring sufficient military power to bear in the Persian Gulf. The reason was to do so risked nuclear confrontation with the Soviet Union, with its entire diplomacy and military-assistance policies dedicated to sowing discord and economic disruption in the West.

At least at this stage of the crisis, the Soviet Union has emphatically declared that its interests now lie with the industrialized economies. It has cut off arms sales to Hussein, played an active role in generating condemnation of Iraq in the United Nations and, somewhat ambiguously, is even participating in the naval embargo in the gulf. Desert dictators who choose to stand up against the West hereafter stand alone.

The realignment among the Middle Eastern oil kingdoms is no less significant. The illusion of Muslim brotherhood among the Arab OPEC producers has long concealed the deep divisions between the haves and have-nots in the Middle East--the Saudi Arabias and Kuwaits on the one hand and the Iraqs and the Syrias on the other.

Politics, as always, follows the purse. Americans and Europeans complained about the high levels of Saudi foreign investment during OPEC’s salad days in the 1970s; but the consequence is that the Saudis have a $100-billion stake in the continued health of the Western economies, and little community of interest with ragtag Iraq. It is a lesson, not incidentally, that might be pondered by critics of the current pace of Japanese investment in the United States.

With the Saudis bringing their excess oil production capacity into the market, the confrontation with Iraq also demonstrates how much oil the world really has. Proved recoverable oil reserves almost doubled throughout the 1980s, the oceans are dotted with brimming tankers and the industrialized countries have more than 1 billion barrels in strategic reserves. The swing production available from the Saudis, the Venezuelans and one or two other countries can make up for a complete shutdown of Iraqi and Kuwaiti wells.

And finally, the entire exercise has so far been a pointed lesson on the importance of America’s role as the leader of the industrialized countries. Little has been heard from Helmut Kohl, the West German chancellor, or Toshiki Kaifu, the Japanese prime minister, except that, like all other significant heads of state, they are dutifully following the U.S. line. The confrontation with Hussein reinforces the fact that, even with the long standoff between communism and the West fading into history, global leadership requires more than efficient automobile factories.

A relatively rapid resolution of the crisis on more-or-less Western terms, therefore, would have profoundly positive effects--it would help assure the future dependability of oil supplies, reinforce America’s lead role in maintaining a stable international order and underscore the mutual interdependence of the industrial economies.

There are certain other lessons that will apply regardless of the outcome. The industrialized economies need to continue to diversify their energy supplies. Natural gas and nuclear power are both readily available and economical oil substitutes.

The Pentagon also needs to accelerate its shift of focus away from a Soviet-NATO tank confrontation in Central Europe. U.S. and other North Atlantic Treaty Organization forces can be converted to effective rapid-strike units even with substantial reductions in military budgets. Dealing with a Hussein, formidable though he may appear, is not nearly as demanding as defending the West against the aggressive, restlessly expanding, Soviet empire of a decade ago.

Make no mistake about it. The crisis in the Middle East marks a turning point. The result will either be a disaster for the West or help usher in a budding period of stability and prosperity. The outcome is not entirely within the control of any of the protagonists. The rest of us can only watch and hope.

For 40 years, the West’s access to Mideastern oil has been at the mercy of demagogues or madmen.