Here’s an email rebutting the TCS piece I linked to earlier today. Some great points, I think:
Arnold Kling’s “Oil Econ 101” article you linked to in Tech Central Station mocking the neocon goal of oil-independence begs for a response, because he gets exactly wrong the means and ends of the rationale for cutting US oil demand.
(Full Disclosure — I am a pro-McCain Eagle, supported the Iraq War, and I have covered oil and gas industry and commodity markets for six years for industry trade press, so have some familiarity with this).
Kling mocks efforts to cut our oil demand from the Saudis, noting “If we reduce oil consumption by 10 percent, then we will not cut 100 percent of our imports from Saudi Arabia. We cannot arrange to consume only American oil and no Saudi oil … If we reduce demand by 10 percent, we probably will reduce our demand for Saudi oil by 10 percent.” He then goes on to say this “indirect approach of reducing oil demand is meaningless. Only a worldwide boycott of Saudi oil would effectively cut off their oil revenues.” While Kling is correct that an intense conservation program would only marginally cut our reliance on the Saudis (they are the equivalent of the global Federal Reserve in crude production capacity, and nothing will change this unfortunate geological reality), what ultimately matters is the price they receive. It comes down to a question of oil revenues (price * volume) that matters most to their state budgets, and their capacity to buy off restless elements in their society.
The volume of oil that OPEC and the Saudis produce only changes marginally year to year, but the price can very tremendously. Crude prices — and all commodity prices — are set at the margin. The main reason crude is near $50/bbl now is that Chinese oil demand grew 15% last year (plus strong growth from India) and no one, not the Intl. Energy Association, not the Energy Information Administration and not even OPEC, saw it coming. Chinese demand growth is expected to be 8% in 2005, and that should be a very supportive factor going forward for oil prices. Yet the size of the Chinese market is still only about 1/5th to 1/6th our own. (Dealing with rapid Chinese demand growth in the future is another prickly matter…). The US consumes roughly 25 million b/d out of a global crude market of about 76 million b/d. If the US were to cut its oil use by 10% it would cause DRAMATIC downward pressure on the price of oil going forward, starving the budgets of the Middle East oil oligarchies. This is exactly what happened in 1997-1998, when global crude prices crashed to $10-$12/bbl becuase the Asian currency crisis sank Pacific crude demand, while a string of mild winters cut US heating oil needs. The amount of crude that Opec and the Saudis produced at the time declined somewhat, but only marginally, as Kling would have predicted. But their revenues plummeted due to weak crude prices well below forecasts.
I can tell you from our reporting at the time that the oilicrats in countries like Saudi Arabia, Egypyt and Iran were sweating it big time due to mounting budget deficits and a failure to meet state budget commitments. It was a very dire time for the oiligarchs and undermined their domestic hold on power. Thankfully for them US gasoline demand remained strong due to our affair with SUVs, and eventually pulled the oiligarchs through to their current revenue bonanza. What Klingle doesn’t understand is that it is not about just states “sponsoring terrorism”, but forcing these sclerotic Middle East economies to face the same forces of dynamism that the rest of the world deals with it, resulting in more liberal societies. Not all countries in the Middle East have lots of oil. In fact countries like Qatar, Bahrain and the UAE have very little of it, and not coincidentally they represent the most liberal societies in the region. There is a strong argument that the societal unrest building in Iran is due in large part to their exploding population outgrowing the Mullah’s oil revenue, crippling their ability to buy off interests within society. We could help push them over the edge with a concerted effort to cut our oil demand. Young boys in Saudi Arabia might spurn the Jihad if they had something to look forward other than working for Saudi Petroleum or becoming freeloaders living off oil-driven state subsidies. That will never happen as long as the House of Saud remains flush with crude revenues.
So let’s conserve, shall we? And let’s increase taxes on gas while we’re at it. Far more effective than another botched war.
The Dish 