250. THE OIL WEAPON IS A BLUFF

Over the weekend, there was yet another oil weapon threat from Venezuela:

Venezuela could easily sell oil to markets other than the United States and is prepared to end exports to its No. 1 buyer if needed, the oil minister said in comments published Sunday.

[...]

"If our country, our process, our constitution are attacked by the Bush administration, we are not going to send any more oil," Oil Minister Rafael Ramirez told the Ultimas Noticias daily in an interview. "We'll see then which of the two governments is able to manage this type of a situation better."Source

This is really getting tedious. I'm not going to bother going back and making an actual count, but this is like the 9th time they've said that. Chavez and Iran are like a couple of Schnauzers out in the back yard yapping away. Here's my message to Hugo Chavez: Bring it on, dude. You know the U.S. hates your guts and they're out to get you, so stop yappin' and PULL THE TRIGGER.

Something is very fishy about this "oil weapon" business. If the oil weapon is so scary, how come people only talk about it, and never actually use it?

To answer this question, we can turn to a superb recent paper entitled Oil market power and United States national security by Roger Stern of John Hopkins University. The paper appears in the Proceedings of the National Academy of Sciences (PNAS), and is currently the most-read article on the PNAS website.

Roger's thesis boils down to this: The security threat to the U.S. is not states like Venezuela and Iran cutting off oil to the U.S. Rather, the actual threat is states like Venezuela and Iran NOT cutting off oil to the U.S. The reason for this is that the OPEC countries enjoy cartel power over much of the remaining oil, and thus can inflate the price by dragging their feet and stifling production. This causes the market price of oil to be far above the competitive price it would sink to if (for example) Venezuela was in Florida, and Saudi Arabia/Iraq/Iran were located in Texas, where the fields could be exploited in a competitive, free market environment. Roger calculates the differential between these two prices, and shows the massive scale of wealth transfer to OPEC which is achieved through this cartel power -- a flow which fuels and buttresses the enemies of the U.S., and makes them stronger.

Thus it's all a paradoxical game. In reality, the oil weapon has no teeth. Suppose, for example, that Venezuela pulls the trigger and stops exporting to the U.S. This will cause price in the U.S. to rise relative to the world market, which will create a huge temptation to make an easy profit by selling back into the U.S. market. Chavez will sell it to China, and China will sell it to the U.S. Ka-ching$$. This is the same reason why the apartheid embargoes on South Africa were very porous and ineffective. Of course, to solve this problem, Chavez or Iran could go for the jugular, and stop exporting oil entirely. But this would hurt them way more than it would hurt the U.S. The U.S. would have to deal with slightly higher gas prices. Venezuela or Iran would have to deal with massive trauma to their governmental revenues.

Want to see the oil weapon in action? Here you go:

Yet despite the stark repercussions expected, the U.S. defied demands that Israel be forced to return to its 1967 borders and further traduced supplier wishes by providing arms to Israel during the October 1973 war. The oil weapon was soon unsheathed in response.

Arab producers promised a 5% cut every month until Israel returned to its 1967 borders and a selective embargo against the U.S. and Holland (ref. 1, pp. 89–140). However, the problem of third-country sellers soon impressed itself on the suppliers. By November, there was no further 5% cut. By January, Saudi Arabia and Kuwait, the only large producers participating, were increasing production (14). An earlier 1967 embargo had been abandoned just as quickly (ref. 1, pp. 89–140).[p. 1651]

Roger concludes (I'm paraphrasing in my own style here) that if the U.S. really wants to kick its enemies in the nuts, reduce funding for terrorism and break the cartel, it should do what they really fear: take demand side measures in the U.S. like signing the Kyoto treaty or passing a steep fuel tax.

Don't take my word for it on all this. Please read the paper. Not only is it inspired; it is also full of interesting, behind-the-scenes details on U.S. geopolitical policy. The following part is absolutely astounding, and shows how far the U.S. government will stick its head up its ass to continue the policy of appeasement:

Sheikh Yamani warned OPEC that Kyoto implementation might reduce global demand by 20x10^6 bd (57). The cartel subsequently claimed that it should be compensated for revenue lost to Kyoto-based demand reduction (58). OPEC's legal theory is that its prospective losses are equivalent to those of low-lying island states seeking compensation to manage sea-level rise. The U.S. supports OPEC (59).

[...]

Although fear of the oil weapon has changed little since Akins, appeasement has had to change with the times. Longstanding passivity to economic predation is now complemented by toleration of Saudi support for terror propaganda. Recently, the U.S. began to support the cartel's Kyoto formula: that monopoly rents are an entitlement owed by the world to OPEC (59). Thus, the 1958 law asserting that imports will "impair the national security" should some adversary decline to sell is balanced by a proposal to compensate the adversary should we decline to buy. If adopted, such a policy might perpetuate security threats no matter how low Kyoto forced demand. [pp. 1654-1655]

-- by JD