PUBLICUSS

By Robert F. Seibert

Saudi Arabia Does Us A Favor

Although it might not seem so initially, in refusing President Bush’s request for an immediate increase in its oil production, Saudi Arabia may be doing us a great favor. The king’s refusal of George Bush’s request is appropriate given the state of the petroleum industry. Metaphorically, the king acted like a responsible corner drug dealer, not providing the user with more drugs than he or she can safely use, not selling them drugs for which they cannot pay. A wise vendor doesn’t destroy the market for the product.

The Bushes may be unhappy about this turn of events. After all, they have been holding hands (literally, I remind you) with the Saudi leadership for decades. It’s been something of a turbulent romance between the Saudis and the U.S. over the years. The nadir of the relationship occurred in 1973, during the Arab oil embargo against the U.S. Henry Kissinger actually stated publicly that if they wouldn’t sell us their oil we might just go and get it. And the public discourse after the World Trade Center attacks in 2001 put the Saudis at the center of U.S. fear and loathing. We were actually so angry at the Saudis that we attacked and destroyed Iraq. You can’t get much madder than that, I guess.

The Saudi refusal to dramatically increase oil production is predicated on a number of factors, none of them connected to a desire to humiliate the U.S. Let me review a few of them with you.

First, the Saudis understand the oil market in global terms. They are very aware of the leveling of the production curve for petroleum and the implications this holds for the global market. For our purposes, it means more expensive oil at the global market level because it is increasingly expensive to produce it. Most of the truly inexpensive sources of petroleum have been exploited and are now in relative decline. This is not likely to change, even if we change our behavior.

Second, the increased cost of petroleum is exaggerated here in the U.S. because of the terrible condition of our currency. A decade of irresponsible deficit spending has reduced the value of the dollar and disproportionally increased our costs for the product. The decline of the dollar and the rise of other currencies (Euro, Pound, Deutschmark, Yuan, etc) make our exports cheaper and our imports dearer. In so far as we have pursued a weakened dollar to jump-start our exports, we pay the price on the other end. A fair amount of the increased cost of petroleum can be attributed to the real decline of the dollar: and a substantial premium is paid because of speculators pushing the petroleum

futures to the extreme. Economists and other analysts differ on the specifics, but they all concede that rampant speculation is a contributor to the crisis.

And then, of course, there is rising global demand. As China and India (together a third of the world’s population) embrace an industrial life style, demands for the product will rise. Combine this increase in demand with the flattening of the production curve, and you have the formula for rapidly rising petroleum prices.

Third, the U.S. is lagging the world in its commitment to plain old-fashioned conservation. We could alleviate some of our immediate problem by the simple expedient of enforcing a national speed limit, say of 60 – 65 miles per hour. That in itself could substantially reduce short-term demand, but it’s a solution not being considered. I wonder why not? Another positive effect of a national speed limit would be a predictable decline in the number of traffic fatalities nationally. Who would be against that?

Fourth, the U.S. could expand its program of incentives for the purchase of hybrid high mpg vehicles. We have actually limited that program to a few tens of thousands per year. I can’t see any practical reason for not doing this, other than the fact that the manufacturers most ready for ramped up production of these models are not U.S. national champions: Toyota, Honda, Nissan, for example. The same is also probably true for an increase in the CAFÉ standards for our national fleets.

Fifth, we could seriously consider expanding the public transit systems in the United States, a system dramatically in need of repair and modernization. Don’t hold your breath on that one either.

The Saudis know all of this and for obvious reasons conclude that we are not ready to recognize the realities of petroleum production and use. They are in the industry for the long haul and hope to secure a prosperous future for their country by the responsible and conservative use of their natural resources. If they intentionally or inadvertently move us in the same direction, congratulations are in order.

Something is going to change our priorities. Six or seven dollar per gallon gasoline will surely do that. Regular shortages will do that. Prudent conservative measures can make the transition reasonable and manageable.

In the meantime, buy a bike.

Publicuss, May 23, 2008