Don't Worry About Oil

Ame

ricans have learned through bitter experience to associate trouble in the Middle East and the Muslim world with pain at the gas pump--from the 1973 Arab-Israeli war and oil embargo to the 1979 oil shock after the Iranian revolution and the price jump that followed Iraq's 1990 invasion of Kuwait.

This time it's different.

Following a brief spike in the oil markets after Sept. 11, the benchmark price of Brent crude has slipped from around $29 per bbl. to between $21 and $23. Cambridge Energy Research Associates, a leading source of industry analysis, is forecasting a fourth-quarter average price of $23.75. The reason is simple. Even before Sept. 11, the global economy was entering a recession. That recession is now likely to be deeper, though not necessarily longer, as nervous consumers and business executives put off discretionary spending. The impact of a global downturn on the demand for energy "is the dominant factor by far" in its price today, outweighing speculative concerns about supply, according to Daniel Yergin, chairman of Cambridge Energy. "We may be looking at the worst global recession for 30 years."

Still, as the war against terrorism continues into the winter, you can count on reading plenty of commentary on the importance of oil security to the American economy. Granted, nobody is likely to justify military action by the need to preserve access to Middle East crude, a common refrain at the time of the Gulf War 10 years ago. There's a pile of rubble in New York City that provides more eloquent justification for armed force. But since Osama bin Laden has referred to the Saudi oilfields as "a large economic power essential for the soon-to-be-established Islamic state," it's worth assessing how vulnerable the U.S. is to supply interruptions and price hikes of the kind that have happened three times since the early 1970s.

Here's the case for being worried: we import far more of our oil than we used to do. In 1973 imports accounted for 35% of U.S. consumption. Today the figure is 50%, and analysts expect it to rise to more than 60% by 2020. About two-thirds of the world's proven reserves are in the Middle East. Iran and Iraq already have poor relations with the U.S. If Saudi Arabia and Kuwait fell under regimes hostile to Washington, would the lights go out on Broadway--and everywhere else?

No, they would not. If oil sits in the ground, it does nobody any good--least of all those in whose ground it sits. Not a single oil-producing nation in the Middle East has succeeded in significantly diversifying its economy. Black gold accounts for more than 90% of the value of the gulf region's exports. To meet the economic demands of their exploding populations, Middle Eastern countries have to sell their oil somewhere. And if those countries discriminated against a buyer like the U.S., arbitrageurs would create a gray market before you could gun your Mustang.

Most important, the U.S. economy today uses far less oil to produce each dollar of value in the economy than it did at the time of the last oil shocks. Says John Femly, chief economist at the American Petroleum Institute: "We've become much more efficient in our use of energy." In 1981, expenditure on oil amounted to 8% of GDP; by 2000, the figure had dropped to just 2.5%. Better-insulated homes and businesses, more efficient appliances and assembly lines and even automobiles--notwithstanding our enduring passion for SUVs--have reduced the economy's vulnerability to energy shocks.

Of course, no increase in the price of energy is painless. Gasoline and heating oil are important "psychological" commodities. Changes in their price have more of an impact on consumer behavior and expectations than price hikes for other goods, and politicians draw the predictable conclusions; you rarely see congressional investigations into the price of shampoo or lettuce. But as the long fight against terrorism continues, bear this in mind. There are many good reasons for going to war against those who committed the atrocities of Sept. 11. Oil isn't one of them.

E-mail Michael at melliot@aol.com