Crude oil and gasoline prices have soared to a high not seen since
the Persian Gulf War in 1990-1991. Oil futures have passed $30 a barrel,
whereas they were as low as $9.50 about a year ago. This dramatic rise
has been brought about by the success of the Organization of Petroleum
Exporting Countries in lowering its oil production by more than 4 million
barrels per day since last March.
The simplistic view of a layman in the West is that as much oil as
possible must be produced, and it must be sold as cheaply as possible.
However, the critical question is whether "expensive" oil is bad for the
industrial world. Experts predict a gloomy future if oil becomes too
expensive, a world characterized by recessionary economies and social
turbulence. I contend that in the long run, expensive oil is good for the
world. In fact, cheap oil has deep and troubling political, economic and
Since most of the world's oil reserves are in the developing
countries, many factors influence their development and marketing. Oil is
the nonrenewable national wealth of the oil producers. One should not
expect the oil-exporting countries to deplete this resource without
getting any lasting benefits in return.
At the same time, the world is witnessing a population explosion--not
in Japan, Europe or the U.S. but in many of the oil-producing countries.
The annual rate of population growth in Saudi Arabia and Iran, OPEC's two
largest producers, is more than 3%. Since the 1979 revolution, Iran's
population has more than doubled. This explosion profoundly affects the
social fabric of the oil-producing countries. Except for Norway, every
major oil exporter relies heavily on its revenue from oil sales. If the
price of oil stays too low for too long, there will be social instability
and even revolution in these countries and mass migration of their
populations to the West. The cost of such instability to the U.S., Europe
and Japan will far exceed whatever they now are paying for oil.
At the same time, technology and capital reside with the nations that
import much of their oil, whereas the oil reserves, population growth and
social and political turbulence are in the other half of the planet. What
will happen after all the recoverable oil of these countries is gone? If
these countries do not receive a fair price for their resource to develop
a reasonable political and economical infrastructure, they will need
massive aid to survive.
What about the economic implication of cheap oil? Cheap oil bankrupts
the small oil producers and oil equipment companies, especially those in
the U.S. These companies can make a profit only if the oil price is at
least $16 to $18 a barrel. Cheap oil has increased the dependence of the
West, and in particular the U.S., on foreign oil imports, resulting in
larger trade deficits. More important, it has resulted in the
loss--perhaps permanently--of more than 500,000 jobs in the oil and
related industries of the U.S. Finally, it is a myth that expensive oil
is bad for the economies of the U.S., Europe and Japan. Several studies
have indicated that there is a negative correlation between the
fluctuations in the oil price and the gross national product of Western
countries. From 1982 to 1986, when oil prices were high, the economies of
the U.S., Japan and Western Europe were expanding, whereas the second
half of '80s, when prices collapsed, was marked by recession.
This, however, is only one side of the economic effect of cheap oil.
Development of oil reserves is tied to the global economy. Oil-producing
countries must maintain a high level of revenue from oil sales if they
are to continue developing their infrastructures and industrial basis,
and at the same time invest in their oil industries to maintain and
develop their resources to meet worldwide demand. All of this means more
jobs in the West, since the oil producers rely on the West for the
necessary technology. What would happen to the huge chemical industry in
the West that uses oil-derived materials if the oil reserves of the
developing countries were depleted too fast? Chemical and related
industries contribute one-third of the United States' GNP.
Finally, consider the environmental effects of cheap oil. The main
culprit of air pollution is fossil fuels, mainly oil, which in the U.S.
accounts for 85% of fuel use. There are hidden costs of cheap oil, which
we pay for through air and water pollution, global warming and acid rain.
Cheap oil induces people to overuse it and thus discourages
development of alternative sources of energy that are environmentally
friendly. It affects the economy negatively. It costs us huge sums in
health care. It causes social and political instability abroad. Is this
the world that we envision for ourselves and our children?