Enriching the enemy

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Oil prices have been levitating since President Bush used the words “Iran” and “World War III” in the same sentence. But geopolitical jitters aren’t the only reason oil has risen by more than $30 a barrel in the last year -- and $10 in the last month alone. Prices had been approaching $90 even before Bush’s bluster, Turkey’s massing of troops on the Iraq border and the announcement of new U.S. sanctions on Iran’s Revolutionary Guard. Demand for oil is robust; supplies are not. So economists cannot calculate exactly how much of the price run-up can be blamed on the “geopolitical premium” that oil traders add to every barrel when they fear war or other instability that would disrupt supplies.

What we do know is who benefits: Saudi Arabia, Russia, Norway, Iran, the United Arab Emirates and Venezuela, the world’s largest net oil exporters, in that order. Given that two of these countries are overtly hostile to U.S. interests and two more have a troubled relationship with Washington, it’s reasonable to worry that each time the United States buys a barrel of oil, we’re enriching our adversaries.

And the problem is getting worse. In 1970, before the OPEC oil embargo, the biggest oil exporters to the United States were Venezuela and Canada. Saudi Arabia accounted for less than 1% of our imports. As easy-to-exploit reserves were exhausted, oil production shifted to the Middle East and then to even less-stable countries, including Nigeria, Algeria and Sudan.


Today, the U.S. economy is far less oil dependent than in the past, as improvements in efficiency have allowed us to slash the share of gross domestic product used to pay for oil, even while the economy has grown. Oil imports cost roughly half as much per dollar of GDP as they did in 1972. The U.S. economy has shrugged off this year’s higher oil prices without much damage.

However, oil profits have dramatically changed the political and economic fortunes of Russia, Venezuela, Iran and Sudan, in ways that don’t benefit U.S. national security. The Iranian national budget this year was based on an assumption of an average oil price of $60 a barrel, according to the Washington Post. Tehran is now enjoying a windfall budget surplus and sitting atop a cushion of foreign-exchange reserves, cash that helps it buy the support of its restless citizens and makes it far less susceptible to U.S. economic sanctions.

And the dynamics of the oil markets favor Tehran, not Washington. Attempts to pressure Iran into abandoning its nuclear aspirations -- and certainly threats of U.S. military action -- only spook the oil markets more, punishing American business and strengthening the very regime in Tehran that Washington seeks to contain or change.

Of course, most Americans would agree that keeping Iran from getting a nuclear bomb is worth almost any economic price. Conservatives will argue that any short-term financial gains for Iran caused by U.S. pressure are unimportant in the larger geopolitical context, not least because a nuclear Iran would terrify the Middle East and send oil prices soaring. Then again, if diplomatic pressure succeeds in persuading Iran to abandon uranium enrichment and buy its civilian nuclear fuel from Russia, war fears will ease, the geopolitical premium will lessen and oil prices could fall.

Liberals will argue that the oil bonanza for unsavory governments is yet another reason to invest in alternative energy. But globalization means that even if the United States were able to reduce its oil imports, the world’s newest oil guzzlers, China and India, would probably just buy more, driving the price back up. All of which means the next U.S. president will need a global energy strategy -- and one that transcends ideology -- to cope with an unfriendly world that could soon see $100-a-barrel oil.