Guzzling foreign policy
Glug, glug, glug.
You know that sound? Of course you do. It’s the sound of gasoline gushing into your car’s gas tank. It’s the sound of money gushing out of your wallet. And it’s now the surround-sound of the deepening global economic crisis, as skyrocketing oil prices push up commodity prices and spark a worldwide food shortage.
So it’s no surprise that presidential contenders Barack Obama and John McCain are vying to promise relief from high oil prices. Obama promises to tax oil company windfall profits, double fuel-efficiency standards for the auto industry and increase government-funded research into alternative energy sources. McCain swears he’ll suspend the federal gas tax, rely on market innovation to spur conservation and open up currently off-limits coastal areas for oil drilling.
But what neither mentions -- and the media rarely point out -- is that U.S. foreign policy also has a dramatic impact on the price of oil. So if you don’t like gas at more than $4 a gallon, you should look at the candidates’ foreign policy platforms too.
It’s fairly straightforward. For the most part, oil prices are driven by plain old supply and demand. In recent years, global demand for oil has gone up substantially -- driven partly by suburban sprawl and U.S. consumer thirst for ever-less-efficient SUVs but mostly by skyrocketing demand from rapidly developing countries, particularly China and India. Meanwhile, global oil production has struggled to keep pace with rising demand, and spare production capacity -- the ability to produce “extra” oil quickly -- is limited.
That makes oil markets acutely sensitive to relatively small disruptions in supply. If production drops in one corner of the world, the price of oil goes up, and you pay more at the pump. And as with all markets, oil prices also depend on expectations about the future. When investors fear there may be future developments -- crises, corruption, coups, wars -- that will cause disruptions in global supply, oil prices also go up.
On the supply side, U.S. foreign policy can have a major impact on global oil prices. Obvious example: Iraq has the world’s fourth-largest oil reserves, but the U.S. war in Iraq caused oil production there to plummet, from a prewar level of 2.6 million barrels a day to below 1.5 million a day in 2004. This contributed to rising oil prices over the last few years. In May, Iraqi oil production finally returned to prewar levels, but the Iraqi oil industry remains vulnerable to continuing insecurity.
In other parts of the globe as well, U.S. foreign policy decisions have helped spur increases in the price of oil. In Nigeria, continued tensions about the share of oil profits that should go to local development have fueled ongoing militant attacks on oil production facilities, repeatedly disrupting the flow. On May 4, for instance, attacks on Royal Dutch Shell installations disrupted production; the next day, global oil prices were up by $3.65 a barrel. But the Bush administration has shown little interest in pushing the Nigerian government to adopt the political and economic reforms necessary to defuse the crisis.
In Venezuela (the world’s fifth-largest oil supplier), the Bush administration backed a failed 2002 coup against President Hugo Chavez, effectively eliminating our diplomatic leverage with the Venezuelan government. Since then, Chavez has nationalized all oil production sites in Venezuela formerly under the control of foreign companies, a move that has further raised global oil prices. In Russia, too, ham-handed U.S. policies alienated Moscow, which has nationalized oil and gas companies and shown a distinct willingness to manipulate energy supplies for political purposes. Partly because of Russian government policies, Russian oil production has recently declined.
And global anxiety about U.S. bellicosity toward Iran -- which has the world’s third-largest oil reserves -- continues to cause intermittent spikes in oil prices, as investors brace for the production disruptions a conflict with Iran would cause. (Last week, for instance, when an Israeli Cabinet minister said that an Israeli military strike against Iran -- backed, he appeared to imply, by Washington -- might be “unavoidable,” global oil prices made their biggest-ever one-day jump.)
So which candidate offers an approach to foreign policy that’s more likely to help stabilize global oil production?
Not sure? Here’s a thought experiment. Remember McCain’s little “joke” in April 2007 -- back when he was just one of several Republican primary candidates -- singing “Bomb, bomb, bomb, bomb, bomb Iran” to the tune of the Beach Boys’ “Barbara Ann”? Well, imagine newly elected President McCain making the same joke in January 2009.
What do you think would happen to global oil prices?