Gathering clouds of the energy storm

By MARTIN SIEFF and HENRY ZEMEL   |   April 19, 2002 at 7:32 PM   |   Comments

WASHINGTON, April 19 (UPI) -- Publicly at least, the Bush administration remains confident the United States will not face any serious oil price or supply crisis in the event of a war with Iraq over the next year. Certainly, no worry over that ever crosses the minds of the administration's cheering section in the U.S. press. But the real picture is much more doubtful.

In the past 30 years, almost nothing has been done by either Republican or Democratic administrations to prepare the United States for another embargo or price-gouging rise by major global oil producers, especially of the Organization of Petroleum Exporting Countries, OPEC.

The confident assumption has been, ever since the days of the Reagan administration, that blessed free market economics as taught by Milton Friedman and his fellow gurus of the University of Chicago, have

made such things obsolete and impossible. They are wrong.

Energy analyst Daniel Yergin, in his classic 1991 Pultizer Prize-winning history, "The Prize: The Epic

Quest for Oil, Money & Power," recorded six global oil crises in the past half century. Through the first three -- the 1951 nationalization of British oil interests in Iran, the 1956 Suez Crisis and the 1967 Six Day War, the United States had spare pumping capacity and handled the disruption in oil supply effectively.

However, the three crises since then have each proven disastrous. They triggered stagflation and recessions in the industrialized world, and devastated fragile Third World economies. And there are overwhelming signs that another would be probably even more harmful.

In the fourth of the six crises so far, the 1973 attack by Egypt and Syria on Israel known as the Yom Kippur War led OPEC to unsheath the oil weapon and attack Western interests. The United States under President Richard Nixon and Secretary of State Henry Kissinger only mounted a feeble response.

Those were tough times in America. It was the era of the Vietnam debacle, Watergate, and Soviet expansionism. These crises, combined with the continuing high global oil price, overloaded the limited abilities of Presidents Gerald Ford and Jimmy Carter to deal with them.

Nelson Rockefeller, Ford's energetic, go-getting and big-government-fixated vice president, proposed a $100 billion synthetic fuel program, and billions were funneled into a Department of Energy, but the result was another big government spending black hole. No satisfactory program emerged.

The great American-based oil companies fared no better. Flush with petrodollars, they sunk many holes in the continental United States in efforts to revive domestic consumption, but all too often the new wells proved to be dry. (Current President George W. Bush learned that experience at first hand a few years later in his own unsuccessful attempts to make his fortune in the doemstic industry.) Oilmen decided America had run out of oil.

Before the United States and the rest of the world had fully recovered from the Fourth Oil Shock, the fifth one hit. And like all the previous ones it was triggered by political developments in the Middle East. Ayatollah Ruhollah Khomeini toppled the Shah of Iran, who ironically had been one of the key architects of the unsuccessful 1973-74 OPEC oil embargo and vast price rise. This crisis lasted from 1979 to 1981.

Although Khomeini in Iran triggered this Fifth Oil Shock, his regional rival Saudi Arabia was the main beneficiary. The crisis confirmed Saudi Arabia was now the dominant force in the oil cartel. As in

1973-74, it was able to flex the vast economic clout it had built up since the late-1960s when it replaced Texas as the key "swing" oil producer, or main, easily available strategic reserve, of the entire world, able to raise or lower global prices by unilaterally expanding or shrinking its own output.

The Fifth Oil Shock also confirmed another pattern of the fourth. Oil barons who used to sweet-talk petty rulers to extract decade-long concessions, now bowed and scraped before fabulously wealthy sovereigns just for a good price on a single tanker, or at times, the delivery of oil at any price.

The Sixth Oil Shock, as Yergin reported, was the loss of supply from Kuwait and Iraq on to the global market following the Iraqi conquest of the emirate in August 1990. Once again the price of oil spiked, helping trigger a short-term economic recession in the United States.

However, the impact was far less ruinous and milder than before as Saudi Arabia, which had been carefully courted by Presidents Ronald Reagan and George Herbert Walker Bush, the father of the current president, over the previous decade, this time through its "swing" producing power in favor of keeping global prices down rather than pushing them up.

The Saudis were alarmed that they would be Saddam's next target and this fear was shared by the first Bush administration. Operation Desert Shield, the vast military build up in the Arabian Desert that prepared the way for the liberation of Kuwait and the crushing of Iraqi military power in the 1991 Gulf War, was initially triggered and presented as a deployment to protect Saudi Arabia from this threat.

The current President Bush and those senior members of his administration who also served his father recall very well the -- relatively mild -- economic recession of 1991. For it proved decisive in eroding the older Bush's 90 percent approval ratings and leading him down the slippery slopes of defeat at the hands of Democrat Bill Clinton in the presidential election of 1992.

Not coincidentally, the current administration has linked recessions to hikes in the price of oil, but so far, the domestic U.S. media, especially press columnists, has refused to buy the idea. Yet the 350 percent rise in oil prices during the second Clinton administration (they finally fell somewhat) clearly contributed to the recent serious slowdown of the U.S. economy that it is still emerging from.

That slowdown finally ended the record-breaking boom of the Clinton years. And that oil price rise was the direct result of something free market energy analysts and pundits had confidentally predicted was impossible, a new production-limiting agreement between Saudi Arabia and Iran, the two largest oil exporters on earth, to boost basic global oil prices.

Today's Washington Conventional Wisdom is that because of the current excess global supply, the oil weapon will no longer work and that therefore no Seventh Oil Shock is possible. But this view was also

confidently held before the Fourth and Sixth Oil Shocks.

The United States currently faces two prospective Middle East crises that could trigger the Seventh Oil Shock, just as the six previous ones were set off by crises in that region. The spiralling out of control

of the Israel-Palestinian conflict could certainly do it, as happened in 1973. Or a U.S. military attack on Iraq could do it if Iran and Saudi Arabia act together in response to and protest against such an operation.

That kind of response by them is less likely if Iraq is militarily defeated rapidly. But the longer such a conflict lasts, the more the danger of an oil embargo will increase.

The dramatic failure of the attempt to topple President Hugo Chavez in Venezuela adds to the clout Saudi Arabia and Iran would enjoy if they attempted to unleash a new Oil Shock. Venezuela is the main oil

producer of the Western Hemisphere and of vast importance in meeting U.S. domestic energy needs. Chavez has often been violently anti-American in his rhetoric and openly courts China and Cuba's Fidel Castro. If he thought he could get away with joining such an attempt to price gouge the United States in particlar, he would certainly do it.

Only a concerted drive by both the U.S. government and American industry can really protect the United States from this or other oil shocks in the future. But current prospects are not encouraging.

The energy strategy advocated by Vice President Dick Cheney and his task force was long term and did not tackle issues of soaring domestic energy, especially oil use. Cheney addressed the issue of energy conservation, but not that of soaring oil use and he did not advocate automobile/SUV gas-mile legislation, which the Democrats promote.

A truly effective energy independence strategy would require elements from both the Republican and Democrat camps, as well as many things that either one or the other would abhor.

Yergin's justly-acclaimed book was published 11 years ago. Since then, under two Republican presidents and one two-term Democratic one, there has been no improvement in the outlook for American oil independence.

(Martin Sieff is a UPI senior news analyst.

Henry Zemel is a television documentary producer and managing director of the CAENO Foundation which fosters studies in history.)

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