More talk of an OPEC oil embargo? Pshaw! Let them eat oil.
What we should really fear is the opposite – oil overproduction.
With Iraq holding back its oil, and people close to the Saudi royal family hinting last week that their “oil card” may come out once again, it’s a good time to assess the threat from OPEC.
In the end, I say that much good could come from an OPEC oil embargo, for the West at least. If the House of Saud, for example, should ever decide to lead OPEC into a dramatic oil-production reduction – one in which the price approached $70 (2002 dollars) US per barrel as it did in the 1970s – for a sustained period, the consequences could easily make Canada’s ratifying of the Kyoto Protocol unnecessary and redundant.
With a long-term embargo, Saudi Arabia and its oil-producing “friends” would force the West, which would be struggling with stagflation, into taking dramatic energy-conservation measures. It’s easy to imagine high energy prices eventually leading to large carbon dioxide reductions. These may be large enough for us to meet Kyoto reductions without the Kyoto incentives.
Of course, before that drastic a reduction would happen, the world economy would probably have to go through a difficult re-adjustment phase. Such is the power of OPEC, which some analysts predict will control about 45 per cent of world energy supply (it is now about 30 per cent) by 2010.
If there were a serious energy shortage, however, new technologies such as hybrid cars and Segways (the much-publicized personal transportation device), both of which already exist, would almost certainly help by easing demand for oil and other energy products. Public transit would increase, both in efficiency and service.
Innovation, as history has taught us, often follows high prices. Entrepreneurs with foresight and brains would turn an energy crisis into an opportunity. A meritocracy such as ours is perfect at taking such action.
On the demand side, I can imagine teleconferencing, high-speed electric trains and high-tech insulation materials soaring in popularity throughout North America. On the supply side, producers would exploit every reserve better, cheaper and faster than ever.
But all this expensive technological investment would likely develop only with the incentive of high, long-term energy prices, not the artificially induced, temporary kind brought about by a relatively brief embargo. The U.S. and International Energy Agency oil reserves, which are designed to mitigate relatively short-term (three to four month) shortages, would surely experience a temporary crisis. That’s why a long-term embargo would be the only formidable one.
Thus leads to the rather stark downside of any potential oil embargo.
Middle Eastern oil producers, weakened by a drastic cut in their revenue, yet still burdened by their high debt levels (Saudi Arabia has a debt-to-GDP ratio of 100 per cent!), would suffer the most. Countries such as Saudi Arabia rely almost entirely on oil exports for revenue.
It’s almost inevitable, considering this, that OPEC countries would face economic misery by cutting production. From there, it is not hard to imagine increasing Middle Eastern destabilization.
Of course, the opposite may be true too. Economic misery has been known to consolidate power for regimes (look at Iraq), if they are willing to oppress their people enough.
But no matter how you slice it, the countries that would be hurt most if OPEC ever really reduced production would be OPEC’s.
A Kuwaiti delegate at a meeting of Islamic nations on April 3 said: “We have to be realistic when talking about the oil weapon. This is a double-edged sword that will do more harm to us than to the United States.”
He is right, of course.
I almost relish the idea of an OPEC oil embargo. It would be a bonus for Alberta’s already healthy oil sector – if our meddlesome federal government does not stick its noodle in the pie.
But even more, I would love to see how creative and innovative we in the West would become. I have great confidence that we would rise to the challenge and show the OPEC nations just how self-reliant we can be.
That’s why we don’t have to fear any Saudi Arabian “oil card” threat.
Ultimately, it would be a meaningless posture from a desperate regime.
What we really need to fear is a serious oversupply of oil and long-term reduced prices, which might boost the economy, but could lead to deflation and OPEC dependency.
If OPEC were seriously intent on using oil as a weapon, it would first flood the market, choking off non-OPEC producers and seriously weakening the world’s ability to explore for new supply or develop the expensive resources it has (such as Alberta’s oilsands).
The Kyoto Protocol would then play into OPEC’s hands. With low prices encouraging wide energy use, the Kyoto restrictions and penalties would drive a few more nails in the coffin of Alberta’s oilpatch, not to mention Canada’s manufacturing sector, which would shift towards developing countries, where carbon dioxide restrictions don’t exist, but fuel prices would be low.
Once oil dumping creates its dependency, say 10 or so years after it starts, OPEC could cut supply at will, potentially crippling the West, which would have become less responsive to price shocks through its disintegrated oil and gas sectors. This would be the worst-case scenario. Fortunately, it’s unlikely.
It’s somewhat comforting how inefficient and indebted OPEC countries generally are. It might cost Saudi Arabia less than $4 per barrel to take the oil out of the ground, but it costs them $20 per barrel to live at the level to which they have grown accustomed. Long live Saudi opulence. They can’t afford to drive us out of business.
But this dumping scenario should give us pause. Fuel efficiency and self-reliance make sound long-term sense, with or without Kyoto, and whether anyone in the Middle East really has a beef with the West.
Believe me, I do not want to see legislation forcing conservation. I’d rather that we take this bull by the horns. Nothing less than our entire economy depends on it.
