Oil: Not much of a Strategic Weapon

Analysis/ commentary by
Wajih Halawa
Des Moines, Iowa
March 14, 2000

For many years now, Arabs have touted to themselves a "strategic" weapon that they have supposedly had at their disposal in the face of Western imperialism and Zionist vehemence. Long has it been maintained that Arab oil-producing countries could bring the rest of the world to its knees by simply waving the oil card in its face. This hypothesis was based on the impact of the oil embargo of the 1970’s, and the perception that the Arabs succeeded for once in getting their agenda on the table. The assumption became that they could repeat this feat in the future if Arab solidarity depended on it.

Today, with the prices of oil skyrocketing globally, some are actually wondering why this did not happen. Why haven’t the Arabs attempted some form of political pressure on the West, especially in light of Israel’s recent attacks on Lebanon?

Most obvious was the visit by US Energy Secretary Bill Richardson to select OPEC members to encourage them to increase output in a timely fashion, before the US economy’s joy-ride comes to an abrupt end. In some cases, he may have served some friendly reminders to countries like Kuwait and Saudi Arabia regarding a certain incident almost a decade ago. Maybe those countries no longer want protection from the US military machine, and the United States can withdraw its troops now. Nevertheless, Mr. Richardson insists that these visits "were not intended to be threatening, but we were very firm". Translation: Americans are now angry; they are demanding their cheap gasoline, and they want it now. In an interview with CNN, Daniel Yergin of Cambridge Energy Research asserted the importance of this US influence in driving prices down.

Meanwhile, American media outlets have moved the issue of oil shortages to the political platforms of the presidential candidates. We now have a George W. Bush who slams the Clinton administration for not reducing gas taxes (does he know that a gallon of gas costs more than $5 in Hong Kong?), and an Al Gore who vows to toughen up on OPEC. Republican have appeared on cable TV, citing the surrender of the Clinton government to "rich environmentalist extremists" who have made the United States dependent on "going around the world begging for foreign countries to increase output", according to Senator Gramm, and hence weakening small American oil producers. "We walk around like we own the oil of the world; well, we’re getting a shock", says Senator Dominici.

In all fairness, it seems that the joint Saudi-Iranian statement made recently serves as an acknowledgment of the miscalculated supply cuts made by OPEC and Mexico last year. Price volatility is not good for anybody, that is for sure, and the cause of this volatility is a direct result of supply cutbacks, with gasoline prices in the US rising as quickly as 12 cents per gallon in only two weeks, a record-breaker. Some Arab journalists and government officials have ventured to assume that this is but another conspiracy to implicate the Arabs and buy their oil at dirt-cheap prices – which, we remind them, has already been done – suggesting that the real cause of the price surge was deliberate "speculative activity by dealers".

The Wall Street Journal, on the other hand, prefers the analysis that takes into account the economic reform movement in Iran and the impact on private sector investment and the state-dominated banking system if adequately high oil prices are not sustained sufficiently. Saudi Arabia’s turmoil is also related to this situation, and this in turn allows us to understand the joint nature of Saudi and Iranian stances on oil policy, seeing how the two countries are increasingly nudging each other in their economic changes. Iran supports only slow, delayed, gradual supply increases, and would rather wait until September before making a decision on supply increases. Mexico, on the other hand, is bracing itself for a full-speed-ahead production increase as soon as the current supply regime ends on March 31st, seeing as it has little to gain as a non-OPEC country from being pro-rated on a smaller increase in production. American dealers are eager to see how much oil Mexico will bless them with after March 27th.

This leaves OPEC members in a bit of a quandary, with some countries pushing for increased production to stabilize prices – and quickly, in order to avoid another global recession, seeing how inflation closely mimics energy prices – while other oil producers will block such quota-raising initiatives for lack of spare capacity. Non-OPEC members like Russia will meanwhile take advantage of the price surge and gear all production towards export, crushing domestic consumption drastically in that already beleaguered country.

Do we reasonably expect the Arab world to reap anything out of a mess like this one? That is doubtful, but only time will tell.