If you think the Arabs and their colleagues in the OPEC oil cartel are going to cut you a break when they meet today in Vienna (Austria, not Virginia), fuggedaboutit, as we say in New York.
Nor will they take time off to observe a moment of silence on this anniversary of the attacks on the World Trade Center and the Pentagon. Instead, they will figure out how to keep crude oil prices high and gasoline prices in the neighborhood of $3 per gallon.
Every indication is that the oil producers will refuse the urgent request of the world’s consuming countries to turn on the spigots, at least a bit, so as to bring oil prices down. “You cannot convince any member to add more crude to the market because we have enough crude,” OPEC secretary-general Abdalla el-Badri told the media.
Venezuela can’t: Its production is sinking as Hugo Chávez replaces Petróleos de Venezuela’s highly regarded technocrats with political hacks. So he wants more for each barrel he produces, especially if high prices threaten U.S. prosperity.
Iran, also suffering from falling output as the U.S. embargo denies the country the know-how and equipment needed to update facilities, is also a price hawk.
The key player, Saudi Arabia, will talk the talk of moderation and friendship to the West, and then explain that, adjusted for inflation, prices are no higher than in the 1970s, that a slowing U.S. economy will reduce the demand for oil and that the weaker dollar means the kingdom is getting less real purchasing power for its oil. Unsaid is the fact that the Saudi royal family needs the money to fund the lives of thousands of indolent princes and the terrorist maddrassas that it continues to finance.
Best of all, OPEC now knows it can count on Russian President Vladimir Putin to help it in two ways, one intentional,the other unintentional. Putin will cooperate with OPEC because high oil prices make it easier for him to simultaneously supply Russians with butter and his military with guns.
He also inadvertently helps to maintain prices by allowing Russia’s oil output to fall as his former KGB and other cronies — the siloviki — take over the country’s oil companies, ship the former owners to Siberia and reduce their foreign partners to subsidiary, marginally profitable roles. As The Economist pointed out, KGB-trained thugs “know how to grab assets and jail foes, but not how to run real businesses.”
In short, there is little likelihood that any of the major producers will permit the foreign investment they need to step up production sufficiently to make a significant dent in the current price of oil.
The Saudi royal family doesn’t want to antagonize the bin-Ladenites by openly inviting American companies in, although it relies on the American military to keep it in power. Mexico won’t allow American capital in but wants to ship an unlimited number of its jobless workers to the U.S. The Bush administration acquiesces. Any downward pressure on oil prices will have to come from a reduction in the demand for traditional petroleum. A recession would accomplish such a cutback, but that is neither likely nor a goal of U.S. and European policy.
There is some indication that gasoline prices of around $3 per gallon are having a bit of a dampening effect on demand. But it will take decades for the current fleet of automobiles to be replaced by more fuel-efficient vehicles.
There is no sign that demand for aviation fuel is headed anywhere but up, or that nuclear power can do much, certainly not soon, to replace fossil fuels in mobile uses. Coal might develop into an oil substitute for some uses, but it is hardly the darling of the environmental set.
Canada’s tar sands are a promising source, but expensive and environmentally costly. And the economics of ethanol and similar fuels are at minimum questionable, while their overall environmental impact is far from benign.
So the most likely scenario is for high oil prices to remain in place, with an upward jiggle when a hurricane threatens off-shore facilities, and a downward move when inventories temporarily spike.
The good news is that, in the long run, high prices will discourage demand and encourage efficiency and alternative fuels. Meanwhile, the American economy remains dependent on its enemies for fuel, its politicians refuse to take meaningful steps to reduce that dependence, and America sleeps.
Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Policy. His column normally appears on Mondays.
