I have a great deal of respect for MEMRI (as you can see on the sidebar we recommend it as a resource) however the recent MEMRI brief on Middle East oil by Dr. Nimrod Raphaeli leaves a great deal to be desired.
Raphaeli’s argument rests on several faulty premises.
He argues that the problem of U.S. oil dependence is overstated since the U.S. imports under a quarter of its supply from the Middle East.
Firstly, oil is a fungible commodity. Think of the oil market as a swimming pool – producers pour oil in, consumers take oil out. Thus the provenance of the oil the U.S. or any other nation purchases is not particularly important. For example, the US does not purchase oil from Iran, but anything that impacts supply from Iran affects the entire market, not just those that buy directly from Iran. In a global market, it does not matter from whom oil is purchased. What is important is who controls the bulk of global oil reserves. Unlike the oil cartel OPEC and within OPEC primarily Saudi Arabia, non-OPEC producers do not have the ability to move the market. They do not have swing capacity, the ability to expand production and exports on a dime.
OPEC, comprised primarily of Middle Eastern producers, sits on 78% of world conventional oil reserves yet accounts for but 40% of global production. Thirty five years ago OPEC produced 30 million barrels a day (mbd) of oil, and, despite the doubling of global oil demand and non-OPEC production in the interim, at the height of oil prices this past summer OPEC’s production was just 32 mbd (today it is some 27 mbd.) No better illustration can be had for OPEC’s deliberate policy of constraining supply, a policy which directly contributed to the run up in oil prices, precipitating a massive transfer of wealth from oil consumers to exporters, reducing disposable income, and adding a straw to the camel’s back of our economy helping lead to the current downturn. As is clearly seen today, OPEC responds to reduction in global oil demand the same way it responds to increased non-OPEC production: by throttling down its own production in an effort to drive prices back up. When non-OPEC countries drill more, OPEC drills less. When we use less, OPEC drills less.
The second missed concept in Raphaeli’s article is the fact that oil’s uniqueness in terms of its power to impact international relations and world affairs, the reason oil dependence is such an important issue, stems from its status as a strategic commodity. This status derives from the fact that oil has a virtual monopoly over transportation fuels, and transportation, of course, underlies the global economy. Looking back to history, oil is most comparable to salt. Salt also once determined the course of world affairs and the status of nations on the world stage because it was the sole means of preserving food. Canning, electricity, and refrigeration stripped salt of its strategic status and turned it into just another commodity –one that is used and traded but no longer influences global affairs to any perceptible degree. Stripping oil of its strategic status will require breaking its monopoly in the transportation sector via fuel competition. That is why an Open Fuel Standard, which will ensure that new cars are platforms on which liquid fuels from a variety of feedstock can compete, a feature that costs but $100 per car, is so critical. That is why speeding up deployment of plug in hybrid vehicles, vehicles in which electricity and liquid fuels can compete, is so critical.
The bottom line is whether oil prices are high or low, and whether oil producers are richer or poorer at any given moment, should not distract us from the fundamental need to divorce oil from global affairs and insulate the the global economy from the ability of the oil cartel to effect mischief.