The End of Oil

The Last of the Big-Time Oil Dictators

The execution of Saddam Hussein brings to a close one of the stranger chapters in oil history. Saddam was a ruthless and cunning boss, but his real power, like that of his rivals in Saudi Arabia, Iran and Kuwait, flowed mainly from the oceans of crude beneath his country. Oil not only financed Saddam's army and regime, bringing in billions of dollars to an otherwise pre-industrial backwater; oil gave Iraq geopolitical weight, allowing Saddam to bargain with Washington, Moscow, London, and Beijing, and play these superpowers off one another for Iraqi advantage.

But in Saddam's hands, oil power was always a doubled-edge sword. Iraq's eight-year war with Iran was driven in part by Iraqi lust for the oil-rich border province of Khuzestan. Oil also lay behind the 1990 invasion of Kuwait. Impoverished by his war with Iran, Saddam sought to refill his treasury by increasing Iraqi oil exports. But neighboring regimes, especially tiny Kuwait, saw little advantage in allowing Iraq to regain its strength, and quietly raised their own oil production so as to glut world oil markets, drive down oil prices, and starve Saddam of revenues. (Some reports also suggest that Kuwait was stealing oil from the Iraqi side of a massive oil field that straddled a shared border.) After an enraged Saddam threatened to retaliate, neighboring governments saw the danger. They cut their own production in the hopes of raising oil prices and mollifying Saddam--but it was too late. The Republican Guard was already massing on the Kuwaiti border.

Oil also defined the post-Gulf War period. Saddam defied UN sanctions and used oil revenues to rebuild his army and to finance his own, increasingly dysfunctional regime. He skillfully levered the promise of oil contracts to win political protection from Russia, China, and even France--alliances that effectively allowed Saddam to delay Washington's efforts, in the aftermath of 9/11, to build support for a second Gulf war.

In the end, of course, oil wasn't enough--either for Saddam, or Iraq. The dictator was toppled, and, in what may be the most hostile take-over in oil industry history, his precious oil operations were acquired by Allied forces. But hopes of using that oil to rebuild Iraq (or to break OPEC's stranglehold on oil prices, which many US strategists had hoped for) have failed. Despite hundreds of millions of dollars in investment, the new Iraqi government has been unable to raise oil production even to pre-war levels.

Even as one chapter in the story of Iraqi oil power closes, another begins. Oil now fuels much of the sectarian strife that threatens to topple Iraq. Oil also threatens the fragile balance of power in Middle East--most notably in Iran's relentless campaign to extend control over Iraq. With Iranian oil reserves reportedly in sharp decline, Tehran may regard the Iraqi reserves as key to its own political survival in one of the most ruthlessly competitive regions in the world.

The Year That Was

Among oil aficionados, 2006 will go down in history as one of the most frustrating on record. On the one hand, the price of oil (though still below the inflation adjusted levels of the 1970s), was still high enough to make markets anxious and policymakers open to “new thinking.” Even congenital oil optimists like President Bush publicly acknowledged that an oil-driven economy might not be the most secure foundation for national or global security.

          Yet for all the radical talk of a bold new energy order, the year saw little real change in the nation’s energy culture. Oil may now now be officially problematic, but our consumption of it continues unabated. Alternatives are gaining traction, but public interest in the subject of energy, which was quite sharp a few months ago, and without which energy policy is dead, is fading. Some of this no doubt comes from the recent easing of gasoline prices, which tend to take the edge off consumers' appetite for change. But it's also true that the few energy stories still making the front page seem to imply that the crisis was over.

This summer, for example, Chevron announced a 15-billion barrel discovery in the Gulf of Mexico—enough new oil to increase U.S. reserves by a whopping 50 percent. And if that weren't sufficiently uplifting, then came news that OPEC was considering a production cut of perhaps 1 million barrels a day—proof, surely, that global oil supplies were far more abundant than pessimists had suggested.

Before we all rush out and renew the leases on our Hummers, it's worth considering a few details. In the case of the Gulf oil discovery, the figure of 15 billion barrels was actually the upper end of an estimate for how much oil might be in the field. The lower end was 3 billion barrels and a more plausible mid-range figure is 8 billion barrels—enough to last the United States for roughly a year. Put another way, the only reason the discovery to could “increase US reserves by 50 percent” is that US reserves were so pathetically small to begin with.

As for OPEC, its announced plan to cut production isn’t quite so cut and dried. OPEC routinely threatens to lower (or raise) oil production, but often is simply signaling rivals, like Russia, not to challenge OPEC as supreme arbiter of world oil prices. True, the line between supply and demand isn't as tight as it was this summer: by some estimates, global spare production capacity, once as low as half a million barrels, is now at 2 million barrels, meaning the system does have more slack than it used to. But keep in mind that 2 million barrels is still a relatively small buffer, given that the loss of single exporter, like Venezuela or Nigeria to, say, political problems, would more than erase that surplus and then some. Keep in mind, too, that nearly all of that spare capacity is in the Middle East, under OPEC control—and thus, unlikely to be brought online by an outlier, Russia, seeking to increase its market share.

More to the point, the very fact that OPEC is even talking about cutting production when oil prices are still above $60 reflects a new and discouraging reality in the oil economy: $60 is the new benchmark. After a decades-long “understanding” between oil producers and oil consumers that $30 was a fair price, OPEC has effectively declared $60 to be the new “fair” price—high enough to keep its own coffers full (and its fundamentalists paid off), yet low enough to keep the global economy from falling into recession. Put another way, even if oil markets aren’t quite as tight as they’ve been, OPEC has no intention to letting prices return to their pre-2001 levels. And short of invading the Middle East and making them lower their prices, there is little that importers like the United States, Europe or China can do about it. Cheap oil is not coming back anytime soon.