US Congressman Jim Saxton, ranking
Republican member of the Joint Economic Committee
(JEC), released on last Thursday a study, "The
Strait of Hormuz and the Threat of an Oil Shock",
that analyzed Persian Gulf oil shipments,
scenarios of oil-supply disruptions, potential
market reactions, and their effects on the price
of oil and the impact on the US economy.
Contrary to the usual dire warnings one
usually sees about threats to Persian Gulf and
other regional oil supplies, which have
been
regularly issued since the Organization of
Petroleum Exporting Countries (OPEC) oil embargo
of 1973 and subsequently the Russian invasion of
Afghanistan in 1979, the study concluded that the
increased flexibility and resiliency of the US
economy have improved its ability to withstand a
temporary oil-supply disruption.
The
study, written by senior economist Thomas W Boll,
concluded with a prediction one rarely sees in a
government publication, that the specter of a
takeover of oilfields by some aggressor state is
extremely unlikely.
Two additional
observations are important. First, the likelihood
is not great that Persian Gulf oil will be denied
to the world. The incentives of most of the
parties in the region will lead them to continue
to produce and sell oil. OPEC abruptly shifted the
terms of the oil trade in its favor once and
cannot do it again; it can only improve the terms
incrementally as the demand for its oil increases.
The parties from whom threats to the oil
supply emanate are either disfranchised extremists
with no regard for the costs they might impose on
their compatriots or those who are engaging in
brinkmanship. The former presumably lack the power
to constrain the region's oil supply permanently.
The latter can use to their advantage only the
threat of cutting off the oil trade and not the
action, for the repercussions would be most severe
for all of the Persian Gulf. The collective oil
revenue of Gulf countries exceeded US$400 billion
last year.
Second, the US economy and the
world economy have become far more flexible and
adaptive. Economic liberalization throughout the
world has helped to keep inflation, interest
rates, and labor costs low and laid a foundation
for growth, despite the doubling of oil prices in
recent years.
Public-policy responses to
an oil-supply disruption are likely to be flexible
as a result and avoid the use of price controls.
This is not to say that an abrupt reduction in the
oil supply could not cause a recession or derail
economic advancement in the developing world, but
the chances of overcoming a disruption have
improved, provided it does not usher in an era of
deteriorating oil supply.
Surprisingly,
considering the Washington party line that Iran
represents a threat to the Gulf region, the press
release put out by Sexton noted, "Despite periodic
threats by Iranian officials to cut off Gulf oil
shipments, the credibility of these threats is
questionable. The Iranian economy would be
devastated by such oil-supply disruptions because
of its own high and growing reliance on imported
gasoline."
The study makes a point that
even those who flunked Economics 101 can
understand that economic interdependency
discourages embargos, boycotts and other
interference with trade. The Middle East is no
exception.
Even other, more traditionally
pessimistic assessments confirm the JEC study. A
draft of a July 18 study "Facing the Hard Truths
about Energy: A Comprehensive View to 2030 of
Global Oil and Natural Gas" done by the National
Petroleum Council noted:
While overt war between countries of
the Persian Gulf is unlikely, threats to and
harassment of production facilities, refineries,
terminals, and shipping remain a possibility.
Extreme "resistance" groups seek to overturn the
current order by means ranging from political
activism to subversion and terrorism. Militants
aim to remove many of the existing governments
in the region and to drive Western powers and
oil interests from the Middle East. While the
likelihood of extremist groups actually taking
over governments in the region is remote, there
is a much greater possibility that
non-governmental or para-governmental
organizations could either disrupt supplies
through the Strait of Hormuz or conduct a
successful attack on a land-based
facility.
While the JEC study is
notable by virtue of being a government study
expressing doubt about the threat to Persian Gulf
oil by an aggressor state, which is code for Iran,
it is hardly the first to do so.
A study
"Energy Alarmism: The Myths That Make Americans
Worry about Oil" released in April by the
libertarian Cato Institute in Washington, DC,
found that "concerns about political disruptions
are exaggerated. Furthermore, maintaining US
military forces in the Persian Gulf to reduce
political instability, a common proposal from
analysts concerned with 'energy security', is
unnecessary and would actually increase the danger
of political disruption to oil markets."
The study noted that in the five major
oil-supply shocks caused by political disruptions
in the past 30 years - the Iranian oil-industry
strikes in 1978, the collapse of the Iranian oil
industry in 1979, the start of the Iran-Iraq War,
the 1990 Iraqi invasion of Kuwait, and the 2002-03
strikes in the Venezuelan oilfields - market
dynamics quickly mitigated the costs borne by
consumers.
Even if one believes that
al-Qaeda would like to disrupt oil-tanker traffic,
as the White House claimed in the "10 Foiled
al-Qaeda Plots" document it released in October
2005, the result would not be very significant.
The JEC study found, "The key aspects of a
disruption of tanker traffic in the Strait of
Hormuz, therefore, are whether it would reshape
future supply from the Persian Gulf and how the
market assesses this possibility.
"The
immediate loss of oil from the disruption would be
secondary. Due to the experience of six oil crises
since World War II, most oil-importing nations
have accumulated substantial oil stores already.
While a blockage of the strait would have a much
larger impact on the daily flow of oil than any
prior interruption in supply, oil released from
private and strategic inventories, in theory,
could manage the physical loss of oil for many
months."
What impact the JEC study will
have remains to be seen. Chris Preble, director of
Foreign Policy Studies at Cato, said by phone, "I
and others have long wondered why it is so hard to
break that [oil threat] orthodoxy. I don't have a
good answer for that."
David
Isenberg is a senior research analyst at the
British American Security Information Council, a
member of the Coalition for a Realistic Foreign
Policy, a research fellow at the Independent
Institute, and an adviser to the Straus Military
Reform Project of the Center for Defense
Information, Washington. These views are his own.
(Copyright 2007 Asia Times Online Ltd.
All rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
