Snarky Behavior

Dropping Knowledge: Stating the Obvious

November 26, 2007 · 1 Comment

oil map of world

One thing I’ve learned studying IR Theory is that most decisions at their core are based on the theory of structural realism. That is to say, at a minimum all states make decisions to ensure their survival, and that states with greater capacities will seek to increase their capabilities (also known as “power maximization”). Great powers constrain each others’ maximization pursuits, resulting in what is known as a “balance of power.”

In today’s world, the key to power is oil. This point tends to get vastly understated in the discussions we have about current affairs. For example:

1. When we talk about the rising cost of oil (which is now flirting with $100 per barrel), we tend to neglect two important facts: first, that the price elasticity of demand for oil is extremely inelastic. That is to say, it doesn’t matter how much oil prices drop or rise, the quantity demanded remains the same. As President Bush said in this years’ State of the Union Address: “Our nation has an oil addiction.” And it’s not just our country, although we’ve got it the worst. It’s a global addiction.

Second, addiction by its very definition implies lack of control. Which brings us back full circle to the original point: whomever controls oil, controls the world. From the perspective of industry, this is because the factors of production of almost every sector include components that are sensitive to oil prices. These price sensitivities can have a direct impact on cost, as in manufacturing, or an indirect impact (via transportation costs), as in technology. And every sector has varying degrees of energy costs. So the more sensitive an industry is to oil prices, the more power whomever controls the oil supply has over that industry.

From the perspective of the consumer, rising oil prices are also felt directly (at the pump and airport), and indirectly, by both a constrained budget set (more money spent on gas means less for movies, clothes, etc.) and by the increased prices for consumer goods (the costs of which are passed along by producers). You know what they call the combination of rising prices, low interests rates, and decreased purchasing power? Inflation.

2. If I lost you above, I shouldn’t have. Go back and read it again. I’m just stating the obvious here. The first point was meant to establish just how important of a position the global control of oil is to whomever can secure it. Take a look at the map above. You see how little oil Europe has? China? The US? India? The less oil a country has, the more it is willing to give up to get oil. The more globally integrated oil is within consumption and factors of production, the more dependent consumers and producers become on oil.

Now take a look at this map. Notice how many US military bases are in the Middle East? You think that’s a coincidence?

3. The logical “next steps” everyone seems to recognize, especially given the environmental considerations of oil, is the pursuit of “alternative” sources of energy. There is of course some game theory to this though. Even if there were a cost-effective substitute for oil (and there most certainly is not, at least yet), the transition costs of adopting that alternative source across sectors would be enormous. And the countries that undertook such an enterprise would be buried by the “cheaters” who continued to use oil (and at an even lesser price due to drop-out of demand). No, oil is a fixed commodity, and unless we find some form of global governance to ration it (highly unlikely), it seems the race is on to squeeze the orange and horde the juice before its all gone in the next 25 years or so.

In the meantime, there is evidence to believe that the financial markets are grossly distorting the price of oil by placing a premium on the political risks associated with its extraction. Based on global supply and demand, it is argued that the price should not be any higher than $60 per barrel. Speculative trading creates a self-fulfilling prophecy, where oil rises to $100 because traders spread unsubstantiated rumors that China and India are insatiable, or Nigeria/Venezuela/Iran are unstable. The consumer ultimately suffers here for the reasons mentioned previously, including inflationary risks, and even risks of recession.

All of this information is extremely relevant when we consider the following foreign policy “debates.”

1.)  Iran and Nuclear Energy– Notice how much oil Iran has?  Notice how much they consume?  It would be economically advantageous if they were to consume nuclear energy and maximize foreign oil sales.  When hawks argue about Iran “obtaining nuclear weapons,” they’re really pushing an agenda that says “Iran holds the potential to leverage and balance the oil oligarchy, and once they obtain nukes we can’t foment a regime change.”

2.)  “Democratizing the Middle East”– The so called “Bush Doctrine” is a fanciful liberal justification for a realist policy.  Oil rich countries really only have two options:  1) illiberal autocracies (Saudi Arabia) or 2.)  illiberal democracies (Venezuela).  The distribution of wealth obtained from a natural resource is complicated in state systems because the citizens of the state feel entitled to the financial windfalls in some form or another.  Elites must either find their power base internally (by implementing fiscally irresponsible, short-term, socialist programs) or externally (by charging rent to the United States in return for a strong military presence or other forms of foreign “aid”).

3.)  Iraq — With the above point in mind, the US objective has become to contain the sectarian violence within the confines of Baghdad.  Let politics play out on a political stage, but keep the pipelines flowing in the fringe regions.  A true power-sharing constitutional government isn’t possible as long as the US is present: because the emergent elites are reliant on the US for security provision, they will never have popular support, and vice versa.  Not to say the US prefers a disorganized central government, only that it benefits from one.  Our presence is justified for as long as there is insecurity.

So that was my Thanksgiving dinner conversation with my parents to justify my expensive Ivy education.  No solutions provided, only a survey analysis.  My stepmother thinks that Hillary will have solutions to these problems.  I introduced her to Mark Penn, the next Karl Rove.  She’s no longer so optimistic.

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1 response so far ↓

  • Rohit // November 26, 2007 at 5:44 pm | Reply

    You know what they call the combination of rising prices, low interests rates, and decreased purchasing power? Inflation.

    Add to that a subprime-fueled clusterfuck in the financial industry that is somehow subsuming markets across the world (gotta love them financial innovations!), and banks writing off debt (and soon, people) like it’s going out of style, and what we have is not only inflation, but also recession—and everyone’s friend, stagflation.

    I’ve read arguments going both ways on whether we are in for a repeat of the 1970s. Obviously, for my own sake, I hope not, but it certainly isn’t out of the realm of possibilities.

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