Limits to Arab Oil Power, by Fred Singer. Foreign Policy Magazine

Main Point

At the time this article was written, 1978, there was talk in the U.S. about breaking up OPEC. There was fear in the U.S. that the Arabs in OPEC could raise prices of oil as it saw fit, causing major damage to the U.S. economy. The article cautions the U.S. to tone down it’s rhetoric, and gives reason why the Arabs could not, and would not hurt the U.S. with price hikes or embargoes.

Summary

Prices and Profits

“The price jump during the winter of 1973-1974 was the inevitable result of a one-time transition from a reasonably competitive world market to a cartel that is extracting monopoly profits.” Now that the transition has taken place, we should not expect it to happen again. Price should be expected to grow at a slow rate, taking into account inflation and the rising costs of exploration and production.

Limits to Oil Embargoes

“The price of oil cannot be raised for a single purchaser, for example the United States.” The supply of oil cannot be cut off. If Arab countries try to directly cut off oil to U.S. the price will rise for everyone, and the oil will go to the highest bidder, the U.S. The shortages that occurred in 73-74, were mainly caused by federal policy directives; “which discouraged production to an allocation scheme for crude oil whereby refiners importing oil were required to share with crude-poor refiners-thus actually discouraging imports, which promptly fell; and to a federal directive to refiners to produce more fuel and less gasoline.” Consumption fell because of shortages, and because people believed that had to conserve. Oil was redirected to the U.S. from Europe, and the Arab countries besides Saudi Arabia and Kuwait cheated. “They beat the drums but did not cut their own production.

Limits to Financial Power

“At one time it was feared that in the recycling of petrodollars the Arabs would shift their deposits from bank to bank and thereby create havoc within the Western banking system.” There was also a fear that the Arabs would stop recycling their petrodollars and build up a large payment deficit, if this did happen, which is unlikely, they would be giving oil and getting paper in return. There was also thought that the Arabs would pull their funds out of U.S. banks and put them into European ones. This would saturate those banks and lead to lower interest rates. Also it was thought that they would stop investing in U.S. and move to invest in Europe and Japan, this would not have been a problem either. Our assets would then be owned by Japanese and Europeans- instead of Arabs.

What to Do, and What Not to Do

“One should neither overestimate the power of the Arab oil-producers nor underestimate it.” OPEC will be around as long as it is profitable to be around. Measures against it, such as counter-embargoes and counter-boycotts will not work. The oil companies cannot be broken up and we cannot substitute the U.S. as the sole importer. Producing more oil then is demanded is the only way to hurt OPEC. “The United States had better stop talking about breaking up OPEC and work instead on the tough political problem of straightening out domestic energy policy.”

Summary by William Davis