What You Should Think About Oil Prices

November 18, 2007

“Time destroys the speculation of men, but it confirms nature.”

–Cicero

When expressing hostility toward the Carter administration, critics often fault the former President for poor economic conditions, with particular emphasis on high oil prices, that he left behind after losing the 1980 election. Since most of this hostility comes from devout political partisans, it is hard to imagine how they will rationalize a strikingly parallel scenario unfolding as the second Bush administration comes to an end.

At least in Jimmy Carter’s case, the machinations of OPEC and a largely unjustified surge of anti-American sentiment in the Middle East could be blamed. Today, supply throttling by OPEC is virtually a non-issue, and there is the matter of tens of thousands of dead Iraqi civilians (among other things) to justify strong anti-American sentiment throughout much of the Middle East. Even so, this phenomenon clearly has its roots in something much bigger than inept American leadership transforming a long-standing culture clash into a seething pit of perpetual warfare.

Clearly there are many factors driving the price of oil to new heights. Perhaps foremost among them are concerns about the prospect of a war between the U.S. and Iran. It is no secret that the same folks who brought us the current Iraq policy are drooling at the prospect of violence against Iran. The problem is that, while the world community united in the 1990s to ban Iraqi development of weapons of mass destruction, Iran is a sovereign nation that has not violated the territory of any other nation since the Iran-Iraq war of the 1980s (itself a direct result of Saddam Hussein’s attempted invasion of Iran.)

The United Nations Security Council may be able to agree that Iranian nuclear weapons are a bad idea in principle, but in practice taking action against such a program involves setting a dangerous new precedent in which military aggression by powerful nations is permitted for no reason other than the crudest possible approach to preventing nuclear proliferation. The idea that the government of Iran would provide nuclear weapons to terrorist organizations is (as with much of the public rationale for war in Iraq) bogus on its face. Yet that misinformation is, in some circles, a more popular idea than the notion that military aggression to destroy foreign nuclear facilities would push future nuclear research so deeply into realms of secrecy that it would become much more vulnerable to abuse by madmen.

Yet the price of oil is as much influenced by Iranian leverage as American belligerence. Iran controls a great deal of coastline along the Persian Gulf. A hostile Iran has a range of options including rocket attacks on outbound oil tankers and rendering the Strait of Hormuz extremely perilous to navigate. Among other things, such an action would put a serious restriction on Iraq’s already troubled capacity to get oil to consumers abroad. Whether the U.S. backs off on pressures to let American corporations control Iraq’s most valuable natural resource or those pressures somehow wind up producing results, none of it will matter if the oil cannot be floated safely to markets abroad.

What all this means is that every time the President and his associates say something profoundly ignorant about World War III, they also say something that is certain to intensify the speculation driving up oil prices at present. This is certainly a key consideration — the current price of oil is as much a reflection of investors’ willingness to bet on even more extreme instability in the Middle East as it has anything to do with supply and demand. The more opportunists see a chance to make a fast buck by speculating on further increases in the price of oil, the more that price will continue to climb without regard for underlying realities.

Of course, the underlying realities are no cause to dance a jig. Decades of vigorous consumption have put an end to most of the “low hanging fruit” in petroleum economics. The world’s reserves are still enormous, but they are increasingly remote and increasingly difficult to process into useful fuel. These complications of supply are paired with increasing demand. The United States under President Bush has made a habit of forfeiting opportunities to engage with China and other rapidly growing economies in pursuit of global accords that might conserve resources or hasten the rise of alternative energy enterprises.

This means that there are real fundamentals driving oil prices higher. This also happens in the context of real fundamentals driving the value of the dollar lower. Years of poor economic stewardship and even poorer foreign policy have changed financial realities within the United states while radically transforming public perceptions abroad. Once unquestioned in its reliability, the greenback is no longer the Old Faithful of international currencies. Toothless government oversight of American capital markets (with mortgage debt resale being the tip of the proverbial iceberg) shakes confidence on one level while years of nonsensical proclamations and actions from the White House rattle a different set of analysts.

A view I find myself on the fence about is that the war in Iraq was really all about the petrodollar. Equal parts sensible analysis and kooky conspiracy theory, it holds that the real reason for all that violence was that Saddam Hussein was on the brink of orchestrating a Middle Eastern oil market that pegged prices to euros rather than dollars. There is much more evidence the Iraqi regime had such a plan in the works than there ever was evidence that they were developing weapons of mass destruction. On the other hand, wouldn’t launching a profoundly ill-advised war do at least as much damage to the world’s faith in American stability as any new commodities exchange ever could?

Fortunately, there are many factors that could bring the price of oil down, or at least seriously restrain its ascent. If saner heads prevail before a U.S. attack on Iran occurs, speculation based on the likelihood of that conflict will have been in error. Astute observers of world events are also suggesting that China may go green of its own volition — the waking dragon may simply skip a filthy phase of industrial development and strive for a leadership position in the realm of economic sustainability. Then there is also the prospect that, one way or another, chaos in Iraq will subside and Iraqi oil fields will produce a noteworthy surge in supply.

As with so many other geopolitical issues, the price of oil is clearly influenced by a range of complex factors. Yet for years now, conventional wisdom among speculative investors has held that “the smart money” is on increases. It is fair to question if the latest wave of increases would have happened at all if not for the scandalous losses and shameless deceptions major American financial institutions have sustained from abuse of an underregulated capital markets. If the Bush administration is able to go forward with aspirations of unilateral military aggression against Iran, then I believe the sky is the limit on the price of oil.

Yet in the absence of such a disaster, it seems increasingly likely that this conventional wisdom is a suckers’ bet. In spite of all the valid pressures pushing the price of oil upward, rampant speculation means that this price is overdue for a serious correction. Even if the coming winter is harsh in New England or OPEC should decide to play their strong hand with deliberate slowness, tremendous pessimism is already factored into the current price. The world would have to become screwed up in some additional, severe, and unexpected way for those soaring numbers to continue such a steep climb.


What You Should Think About the United Nations

November 17, 2007

“Negotiation in the classic diplomatic sense assumes parties more anxious to agree than to disagree.”

–Dean Acheson

There is a certain segment of the American public afflicted with strong negative feelings regarding the United Nations. Certainly it is not a perfect institution. Yet when one looks at its purpose and the context in which it operates, blanket hatred of the UN seems like a downright bizarre attitude to adopt. In fact, the general public of the United States sees the UN as a positive force bound by duty to do good in the world.

Yet there is a portion of the public as sure to feel their hearts race with hostility on hearing the phrase “United Nations” as Pavlov’s dogs would be to slobber at a particular light cue. In this case the conditioning is not a matter of being fed in conjunction with the cue. Rather the response in stimulated by the perverse satisfaction of embracing a bogus political orthodoxy. The organization had yet to spend a full decade in its present headquarters when a downright nutty group started rabble-rousing to promote American withdrawal from the strongest global organization dedicated to peaceful international relations.

A free society certainly can accommodate small numbers of survivalist storytellers dedicated to the hobbies of hoarding supplies and sitting around campfires swapping tales of big guvment’s evils. Alas, extremes of personal irresponsibility amongst media tycoons and people emulating journalists elevated the narratives of this fringe to a level where they influence the thinking of millions of American citizens. “Alas,” is an appropriate sentiment here, because a large number of those so misinformed are inclined to vote.

This is particularly problematic when the nation is divided over some sort of military misadventure. The domino theory was ridiculous on its face. If you see the United States as a society that honors traditions of personal liberty and will not yield to foreign oppression, then you have a solid basis for understanding that events in Viet Nam did not pose a real threat to American national security. Yet the sense of that threat motivated all manner of people to justify violence so extreme and remote. By word and deed they seemed unaware of just how much less fragile our nation actually is than such fears imply.

Today we also hear strains of, “we fight them over there so we don’t have to fight them here.” Come to think of it, we hear precisely that language today. To be fair, Al Qaeda has actually attacked Americans on American soil. On the other hand, Al Qaeda was a ragtag militia of unpopular extremists in 2000. By October of 2001, they had become one of the most despised organizations on Earth. Little by little, their reputation in certain parts of the world has risen. More precipitously, the reputation of the United States government has fallen in many of those same parts of the world.

There are many aspects to study in this phenomenon. One crucial facet involves understanding American thinking regarding the United Nations. When it came time to take action against Afghanistan, there was hardly an unsupportive voice in the room. Whatever delegation might have represented the outgoing regime in Afghanistan, the General Assembly did nothing to protest what the world saw as a legitimate action taken by the United States in the aftermath of a surprise attack. By December of 2001, the UN had already put together a plan and made significant contributions in multiple areas of promoting stability in occupied Afghanistan.

All seemed well with U.S.-UN relations up until the foundations were being laid for the attack on Iraq. It would not be long before the quest for international validation would give way to an effort to invalidate the voices of old allies, never mind the United Nations itself. It began with some foot-dragging on weapons inspections. Aside from a scrap of paper in some obscure German intelligence file and obvious misinformation provided by an Iraqi defector notorious for his eagerness to provide his handlers with sensational information, no reason existed to believe Saddam Hussein was on the verge of creating any mushroom clouds.

In fairness, there was a time when Saddam Hussein had pursued some exotic weapons programs. So long as he deployed them against Iranian targets, the United States was not shy about supporting the tyrant’s use of chemical weapons. It was a fact that he tried to build a ridiculously large artillery piece, and he had long been fascinated with powerful weapons. Yet it was also a fact that he had a narcissistic personality coupled with a significant amount of real political savvy. He may have valued firepower, but one thing he valued orders of magnitude more was his own neck.

The long and bloody process of slipping a noose around that neck faced derailment when military deployments by the U.S. convinced Hussein to give UN weapons inspectors unfettered access to the whole of Iraq. With trained professionals snooping in all the right places (not to mention U.S. satellites tracking every suspicious movement along with a large amount of ordinary traffic in Iraq) it was only a matter of time before the truth got out. As it happened, the truth was that Iraq was not wasting scarce resources on counterproductive efforts to break the UN-imposed ban on Iraqi weapons of mass destruction.

Some have argued that White House officials were so bereft of geopolitical acumen that they truly believed Saddam Hussein was supporting forbidden weapons programs. Doubt may be cast on this view by the speed and ferocity of the media campaign to discredit the United Nations. From the most predictable of cheap shots (“doesn’t Hans Blix look a lot like Mr. Magoo?”) to sweeping slander positioned neatly over kernels of truth (“doesn’t corruption in the Oil for Food Programme create a conflict of interest?”) these efforts were a veritable symphony of that dark art practiced by Messrs. Ailes and Rove.

French fries became “freedom fries” for a time, and eventually our nation would extend a much bigger middle finger to the international community by appointing John Bolton as U.S. Ambassador to the UN. In doing so our leaders (and their supporters) display a grasp of friendship just as warped as their grasp of prewar Iraq. Today some of these same Americans so hostile to the United Nations go so far as to say out loud, “if only someone was around to tell us this war was a bad idea before we got into it.” Adding a lousy grip on recent history to other tenuous grasps, they fail to recognize that traditional allies speaking out against The Coalition of the Willing were concerned friends willing to brave unmistakable pettiness from American political leaders in order to do what good friends do — offer words of warning to dissuade the pursuit of an obviously disastrous plan.

Yet pursue that plan is precisely what our nation did. Now that the United Nations is pulling climate change to the top of its own agenda, it is only natural that the same American voices assailing them in the past will do so in the near future. As it happens, the individuals and institutions at the heart of misinformation about the Iraqi threat to national security are also major providers of misinformation about the relationship between industrial emissions and global warming.

Given the choice between remaining devoted to pundits consistently (if not also hysterically) wrong about the great issues of our times or looking elsewhere for guidance, a substantial segment of the American population will stay the course, however wrong it may be. To be sure, the UN is not above all criticism. Yet can inadequate action in Darfur or corruption in prewar Baghdad really justify ignoring the facts about all the tremendous good accomplished by dozens of UN organizations gathering data, distributing humanitarian aid, and working to spread peace across the globe? If you have a passionate commitment to denying humanity’s role in ongoing climate change, ignoring the facts is just one of the side effects of the anger you are likely to feel on hearing or seeing the phrase “United Nations.”