Henri Reynard Speaks Out

OPEC, FRIEND, FOE OR DISASTER PENDING?

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I often read the Wall Street Journal when I am curious about what level of economic pain will hit us next. Every time I see the Journal's name I remember a fellow from my past. This gentleman claimed that the best news he read was written on the walls above the urinals in the bars he attended religiously. His name was Small, and thus his source of news became the Small Street Urinals. In any case the issue of OPEC once again made the first page of the slightly more conservative Journal. That happens regularly enough due to the impact that oil, the commodity that OPEC controls, has on our daily lives.

Broken systems of supply and distribution litter the past of the oil industry. Broken because of the fact that matching supply to demand accurately was never really possible without control over a large percentage of production. Thus was born Standard Oil, a monopoly that dominated the early days of the oil industry. Once the oil industry moved beyond the USA that changed. National interests elsewhere in the world dictated against one company based here controlling supply. Not until OPEC was supply again matched to demand.

Early in the last century, in the wild growth days of the industry, it was the dream of oil geologists to find the greatest source of oil on earth. They found it! Unfortunately it was under land owned by nomadic tribes without the ability to guarantee the security of the wells and pipelines. Then came WWI literally on the eve of parceling up those fields in Mesopotamia. Winston Churchill and his associates in the world of politics assembled new nations around those tribes at the end of the war. So were born Iraq and modern Iran. They were pulled out of the former Ottoman Empire and given a life of their own in an attempt to make the oil lying under those territories exploitable by France and Britain. Eventually the USA joined in this parceling up of the Middle East, based on its oil potential.

The Turks were the big losers in this international game. The Turks are not likely to forget that those territories were taken from them after WWI in a gross violation of what then passed for international law. Thus has it always been in the past of humanity, "to the victors go the spoils". The toothless League of Nations could not resolve conflicts without binding authority over the nations in its organization. Does that sound a little like the problem with the United Nations today? It is its lack of binding authority over the USA or France or Russia that has made it irrelevant in regard to the outcome in Iraq. That miscalculation could usher in a new age of adventurism culminating in a major war. No one in the world wants that but no one wanted WWII at the end of WWI, did they?

The oil industry is the greatest level of cooperation between multiple nations ever achieved peacefully. It is an utterly marvelous achievement of mutual interests overcoming mutual distrust. The nations using the oil have a through understanding about how the availability of oil or the lack thereof affects their nation. The nations producing the oil have the same level of understanding about how that oil impacts their nations. The current stability of this situation is based on a high level of mutual interests served by keeping the oil flowing. Iraq cannot feed itself without oil revenues. Saudi Arabia cannot provide either food or water for its population without the money derived from its oil. Iran would be hard-pressed to feed itself or provide water for its growing population without its oil revenues. There are serious issues of survival for whole nations, on both sides of this equation.

The USA would lose all of its economic growth potential if the roughly 120 billion dollars worth of oil that it imports every year were suddenly withdrawn from its economy. In fact that loss of oil would force the USA into what could become its most major economic depression ever. Likewise for all of the other oil importing nations on earth. Oil is the lifeblood of every industrial economy on earth. Natural gas is the air that those industries breathe in their boilers and their electrical generators. Coal is the food that powers the huge generating plants that light our cities. We need them all for our very economic life.

Oil is the only cheaply transportable commodity that is easily transformed into gasoline and diesel fuel. The international infrastructure of transportation is based on those fuels to a very great extent. The loss of one quarter of the current daily flow of oil around the world would paralyze the transportation industries of the world within months. Roughly 75 million barrels of oil per day flow through the transportation systems of the various nations connected to this system. The value of that oil at $30 per barrel is nearly $2,250,000,000! That is a daily flow of money equal to the annual budgets of several of the poorer nations of the world.

When you look at a year's revenues, for all of the oil produced worldwide, it turns out to be over eight tenths of a trillion dollars. That is Trillion with a T! That is enough money to have a serious impact on the world economy. When you look at the goods and services that depend on that oil for their very existence you will find its impact on the world economy is multiplied by at least a factor of ten. Certainly the impact of oil disappearing suddenly from the world's economy is incalculable. If oil suddenly disappeared it would destroy the world economy and probably our civilization along with it. OPEC is tolerated by rich nations because oil is vital. OPEC exists because no one has come up with another answer that would provide stability to the market for this vital commodity. Stable markets are more important than free markets when an economic community depends on a commodity for its very life.

If you are an importing nation the pragmatic approach to life would seem to be to hedge your bets and replace your oil imports over time. This would clearly make your economy more secure. Replacing oil would only be possible if the OPEC nations were greedy enough in the short term to price oil above the cost of competitive technologies. They are neither that greedy in the short term nor that stupid. They were trained to milk their markets without ruining the cash cow on which they depend. Henry Kissinger and others in the business of providing sound advice to the highest bidder provided this system to the oil exporting nations. The creation of OPEC turned out to be a stroke of fortune for the international oil companies, who decried its existence at first. It created a far more stable environment in which to operate. In a world based on predictable values for their products due to predictable costs being levied against their raw materials they have prospered.

The problem with OPEC is that it does not have any real level of control over its members, other than related to how much oil they sell. When a bad actor like Saddam appears on the scene, they have to ignore his depredations unless he attacks them directly. Nor has OPEC invested large portions of its revenue in armaments except when they are fighting one another. The consequence is that the oil consuming nations must police behavior in that area of the world. Thus we arrive at conundrums like the original gulf war, fought to keep Kuwait and Saudi Arabia from falling under the control of Saddam.

Unfortunately the present war is ushering in a new era of geopolitics not unlike the one that prevailed at the end of WWI. The powerful nations of Europe plus the United States then dominated the politics of the region. They manipulated governments and redrew boundaries between nations in order to keep control of the oil. Germany was shut out and needed oil to expand its industry and economic base. A kind of consensus international lawlessness prevailed between WWI and WWII; which allowed players like Hitler to believe that they could gain control of oil by conquest. Thus the destruction of international law right after WWI contributed to the development of the circumstances that led up to WWII.

Our President has determined that the conservative measure of developing international law, in order to reduce the likelihood of war, is not desirable. Since his appointment by the conservative dominated Supreme Court he has cast about demolishing international treaties one after another. This is a decidedly un-conservative way to behave. International treaties are much harder to build than they are to break. This reckless behavior has culminated in his effort to make the United Nations irrelevant in regard to our invasion of Iraq. In doing so our President has shown a fine lack of appreciation for the value of international consensus and its relationship to our security.

It is somehow appropriate that our generation would give rise to a scofflaw President. We are the generation that discovered the law can often easily be broken without severe and immediate consequences to the lawbreaker. We are only now learning that those consequences are then visited on the institutions of the law itself and the ordered society that law creates. Of course we are the nation that stole the whole continent on which we reside from its prior inhabitants. Lawlessness runs deep in our culture and conquest seems to be in our genes. Is conquest for the purpose of democratizing a nation any less conquest?

Of course this war is about oil, regardless of whatever else it is also about. If you read the sometimes interesting but mostly dull histories of the oil industry you will have no doubt of that. It is also about providing Iraq with a new government. That such a government will be democratic is hard to believe, but it may be so. Oil is still the stuff of modern empires, and the source of all military power in mechanized wars. It is also continuing to grow harder to find and develop new deposits. Most substantial available sources are already in production or at least identified. In the future is a time when oil will become scarce. We need to plan for that time. That fact does not seem to be in the minds of our current leaders at all.

We are not capable of overcoming our addiction to oil unless we can see beyond the next ten years and plan for the changes that will inevitably come. Oil will be our fuel of choice for transportation as long as it is easily available. OPEC has a tremendous stake in seeing to it that oil remains available for as long as they can produce it in the quantities needed. Too much infrastructure has been built around the use of oil for transportation for it to be easily replaced. Gradual replacement will serve all of us, both oil producing nations and oil consuming nations far better than suddenly reaching the point where demand is growing and supply cannot rise to meet it. That will cause economic problems that cannot be solved by the use of cartel power alone. In order to reach that kind of an agreement we need international treaties that support that effort. This Administration is unlikely to pursue such agreements; that should be cause enough to throw these bums out at the end of this term or sooner. Unfortunately politics is seldom that rational an art form.

We do need to plan for the longer term, but the term of office enjoyed by the most powerful scofflaw on earth is only four years. Even if he gets reelected he will not be in office when a lot of the time bombs being set by his behavior start to go off. This seems to me to be an ongoing problem for our nation. Scofflaw Presidents whose terms expire long before the disasters they create have played out. It was nearly twenty years between the end of WWI and the beginning of WWII. Without international law accepted by everyone in the international community WWIII is inevitable. How long will it be between the conquest of Iraq and the beginning of WWIII? However long it may be, it will not be long enough for us and our children and grandchildren! Forever would barely be long enough.