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Published on Friday, June 20, 2008 by The Nation

Anatomy of a Price Surge

by Michael T. Klare

As the pain induced by higher oil prices spreads to an ever growing share of the American (and world) population, pundits and politicians have been quick to blame assorted villains -- greedy oil companies, heartless commodity speculators and OPEC. It's true that each of these parties has contributed to and benefited from the steep run-up. But the sharp growth in petroleum costs is due far more to a combination of soaring international demand and slackening supply -- compounded by the ruinous policies of the Bush Administration -- than to the behavior of those other actors.

Most, if not all, the damage was avoidable. Shortly after taking office, George W. Bush undertook a sweeping review of US energy policy aimed at expanding the nation's supply of vital fuels. The "reality is the nation has got a real problem when it comes to energy," he declared on March 14, 2001. "We need more sources of energy." At that time many of the problems evident today were already visible. Energy demand in mature industrial nations was continuing to grow as the rising economic dynamos of Asia, especially China, were beginning to make an impact. By 2002 the Energy Department was predicting that China would soon overtake Japan, becoming the world's second-largest petroleum consumer, and that developing Asia as a whole would account for about one-fourth of global consumption by 2020. Also evident was an unmistakable slowdown in the growth of world production, the telltale sign of an imminent "peaking" in global output [see Klare, "Beyond the Age of Petroleum," November 12, 2007].

With these trends in mind, many energy experts urged the White House to minimize future reliance on oil, emphasize conservation and rapidly develop climate-friendly alternatives, especially renewables like wind, solar, geothermal and biofuels. But Dick Cheney, who was overseeing the energy review, would have none of this. "Conservation may be a sign of personal virtue," the Vice President famously declared in April 2001, "but it is not a sufficient basis...for sound, comprehensive energy policy." After three months of huddling in secret with top executives of leading US energy companies, he released a plan on May 17 that, in effect, called for preserving the existing energy system, with its heavy reliance on oil, coal and natural gas.

Because continued reliance on oil would mean increased reliance on imported petroleum, especially from the Middle East, Bush sought to deflect public concern by calling for drilling in the Arctic National Wildlife Refuge and other protected areas. As a result, most public discourse on the Bush/Cheney plan focused on drilling in ANWR, and no attention was paid to the implications of increased dependence on imported oil -- even though oil from ANWR, in the most optimistic scenario, would reduce US need for imports (now about 60 percent) by just 4 percent.

But this produced another dilemma for Bush: increased reliance on imports meant increased vulnerability to disruptions in delivery due to wars and political upheavals. To address this danger, the Administration began planning for stepped-up military involvement in major overseas oil zones, especially the Persian Gulf. This was evident, for example, when then-Defense Secretary Donald Rumsfeld gave early priority to enhancement of American "power projection" to areas of instability in the developing world. Then came 9/11 and the "war on terror" -- giving the White House a perfect opportunity to accelerate the military expansion and to pursue other key objectives. High on the list was the elimination of Saddam Hussein, long considered the most potent challenger to US domination of the Gulf and its critical energy supplies.

But the invasion of Iraq -- intended to ensure US control of the Gulf and a stable environment for the expanded production and export of its oil -- has had exactly the opposite effect. Despite the many billions spent on oil infrastructure protection and the thousands of lives lost, production in Iraq is no higher today than it was before the invasion. Iraq has also become a rigorous training ground for extremists throughout the region, some of whom have now migrated to the oil kingdoms of the lower Gulf and begun attacking the facilities there -- generating some of the recent spikes in prices.

Then there is the dilemma posed by Iran. With Saddam out of the picture, the Islamic regime in Tehran is viewed in Washington as the greatest threat to US mastery of the Gulf. This threat rests largely on Iran's ability to attack oil shipping in the Gulf and ignite unrest among militant Shiite groups throughout the region, but its apparent pursuit of nuclear weapons has inflated the perceived menace significantly. To restrain Tehran's nuclear ambitions, Washington has imposed economic sanctions on Iran and forced key US allies to abandon plans for developing new oilfields there. As a result Iran, with the world's second-largest reserves after Saudi Arabia, is producing only about half the oil it could -- another reason for the global constriction of supply.

But the Administration's greatest contribution to the rising oil prices is its steady stream of threats to attack Iran if it does not back down on the nuclear issue. The Iranians have made it plain that they would retaliate by attempting to block the flow of Gulf oil and otherwise cause turmoil in the energy market. Most analysts assume, therefore, that an encounter will produce a global oil shortage and prices well over $200 per barrel. It is not surprising, then, that every threat by Bush/Cheney (or their counterparts in Israel) has triggered a sharp rise in prices. This is where speculators enter the picture. Believing that a US-Iranian clash is at least 50 percent likely, some investors are buying futures in oil at $140, $150 or more per barrel, thinking they'll make a killing if there's an attack and prices zoom over $200.

It follows, then, that while the hike in prices is due largely to ever increasing demand chasing insufficiently expanding supply, the Bush Administration's energy policies have greatly intensified the problem. By seeking to preserve our oil-based energy system at any cost, and by adding to the "fear factor" in international speculation through its bungled invasion of Iraq and bellicose statements on Iran, it has made a bad problem much worse.

What can be done to reverse this predicament? There is no realistic hope of substantially increasing the supply of oil -- drilling in offshore US waters, as favored by President Bush and Senator John McCain, will not reverse the long-term decline in US production -- so it is only by reducing demand that fundamental market forces can be addressed. This is best done through a comprehensive program of energy conservation, expanding public transit and accelerating development of energy alternatives. It will take time for some of these efforts to have an impact on prices; others, like reducing speed limits and adding bus routes, would have a more rapid effect. And if this Administration truly wanted to spare Americans further pain at the pump, there is one thing it could do that would have an immediate effect: declare that military force is not an acceptable option in the struggle with Iran. Such a declaration would take the wind out of the sails of speculators and set the course for a drop in prices.

Michael T. Klare, Nation defense correspondent, is professor of peace and world security studies at Hampshire College. His latest book is Rising Power, Shrinking Planet: The New Geopolitics of Energy.

© 2008 The Nation

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