What is OPEC Up To?

The economic boom we’ve enjoyed for the last few years may be brought to a crashing halt by a combination of events. In the past few weeks, the stock market first stumbled and then seemingly recovered from the major write-offs banks have taken in the sub-prime mortgage market. But what OPEC has in store for us may be much worse.

What was true in 1973 remains true today: oil is the most potent weapon against the US economy because we’ve done almost nothing erect defenses against its use. In the coming year, one of the most critical problems will be the political manipulation of oil prices by the OPEC, the Organization of Petroleum Exporting Countries. At the OPEC summit this weekend in Saudi Arabia (only the third such summit since the organization was formed in 1960) we were accidentally treated to a glimpse of what the feudal oil lords are talking about among themselves: the weakness of the US dollar.

The price of oil has hovered around $100/barrel for several weeks, up 25% from August. While it has, the dollar has sunk to new lows against the Euro and the yen. According to the Washington Post, the dollar is now worth about one-third of what it was worth in 1971 when global exchange rates began to float.

As The Economist reports this week, “Higher fuel costs are the equivalent of a tax on consumers, reducing the amount of money they can spend on other things.” It quotes one analyst to the effect that a one cent per gallon price increase translates into a reduction of disposable income of $1.2 billion and to drag consumer spending down by $600 million. As the oil “tax” rises, our economy has to slow.

According to reports in the Financial Times and al-Jazeera, the “price hawks” — Iran and Venezuela — want to push the price of oil even higher to keep their profit levels high and maintain pressure on the dollar. They wanted to make a statement on the dollar’s weakness in the announcement of the summit’s conclusions. The Saudi foreign minister (Saud al-Faisal, former ambassador to the US) objected indicating that the dollar would fall further in response to such an announcement. Which is precisely the effect Iran and Venezuela want.

Publicly, Saudi King Abdullah said, “Oil is an energy for development, it should not become a tool for conflict and emotions." Which is contrary to the Saudis’ private position today and their actions over the past 34 years as a major OPEC member.

A few years after the dollar exchange rates were left to float in 1970, OPEC nations began to nationalize oil production companies. In a matter of weeks, oil prices went from $2.50/barrel to $11/barrel.

On October 6, 1973 the Arab nations attacked Israel in what came to be called the “Yom Kippur War.” For the first few days, the fate of Israel was very much in doubt. America began resupplying the Israelis, but in those first days the Israelis were faring so badly that US Air Force fighters and bombers were being armed and fueled to fly into the fight. Israel survived and, on October 19 in retaliation for our aid to the Israelis, the OPEC nations embargoed oil shipments to the US.

We stood in line for hours to gas up our cars, paying hitherto unheard-of prices. While Americans felt the pinch personally, it directly affected national security. Navy fleet operations were soon reduced because of the oil shortages. A global recession — and US inflation — followed.

The crisis was repeated in 1979 due to the Iranian revolution. Though there was no embargo, oil prices tripled to about $70/barrel due to war concerns and speculation.

In later Middle East crises, there were no oil crises. Neither during the 1991 Gulf War nor in the 2003 invasion of Iraq did the OPEC nations repeat their actions of 1973.

Now, the price of oil may again be manipulated to bring political pressure on the United States. At this weekend’s OPEC summit, Venezuela’s Hugo Chavez said, "If the United States was mad enough to attack Iran or aggress Venezuela again the price of a barrel of oil won’t just reach $100 but even $200 dollars."

The Venezuelan’s statement is part bluster and part blunder, revealing internal OPEC debates. He is saying publicly even less than what the other OPEC members are probably thinking. OPEC members are looking at how they can affect the 2008 elections. The Arab nations among them want a weaker America: strong enough to buy oil but too weak to interfere in their individual ambitions, from Iran’s nuclear weapons program to Saudi financial support of terrorists.

Right now, there’s no oil shortage driving up its price. Even with China’s insatiable thirst for oil, there is enough to supply the world’s demand of about 85 million barrels/day. Some analysts say that speculators account for up to 30% of the price of oil, factoring the “war risk” into their bids for oil futures. Sen. Carl Levin (D-Mi) has introduced legislation to provide government intervention in the market to prevent speculators from driving up the price. But Levin’s legislation cannot prevent OPEC action. What will OPEC nations do in 2008?

Despite the tut-tutting by the Saudis, they and the other Arab nations are looking at two things as they plan for 2008: Iraq and the White House race. At this point, the war in Iraq is going very well. Al-Queda in Iraq has been driven under ground, the Iranian-sponsored Mahdi militia of Moqtada al-Sadr has stood down and the Iranian Quds Force intervention has been slowed. Political progress is being made at the local level but not by the national government.

Next year, the withdrawal of our forces will accelerate. By mid-spring, the “surge” will end and the locals who have stood up against al-Queda and the rest will have to carry the burden. If Iran steps up its intervention again — and if nations including Saudi Arabia continue to fund terrorism there indirectly — the progress made in Iraq could be reversed suddenly.

As the presidential race continues, Iran and Venezuela could easily do what Chavez has often threatened: drive the price of oil up suddenly or even cut off sales to the US. (We currently buy about 18% of our oil from Venezuela). The Saudis don’t want to kill the golden American goose but they won’t mind if its wings are clipped. They wouldn’t — and probably couldn’t — increase supply sufficiently to make up for a Venezuelan embargo or a price hike engineered by Iran, Venezuela and others.

What if the price hike or even the Venezuelan embargo happens? The US economy could be under enormous pressure, driving up inflation and causing a recession that some analysts have said is already under way. The OPEC nations, especially the terrorist states among them, remember the good old days under Bill & Hillary’s co-presidency. The Clinton machine’s famous campaign theme, “it’s the economy, stupid”, worked then. The oil producing nations could make it work again.