No need to be deterred by the oil weapon

US policy towards Iraq is being shaped by mistaken fears that extending the war on terror would bring a 1970s price shock, says Amity Shlaes.

The US is now mulling over a confrontation with Saddam Hussein. But there is a reluctance, particularly at the state department, to anger the oil-producing nations of the Middle East.

Behind this hesitation looms the spectre of the 1970s, when the House of Saud deployed the "oil weapon", an embargo on exports to the US that led to queues at petrol stations and enormous concern that America would one day be cut off altogether.

Today, those expressing concern about President George W. Bush's new challenge to Iraq note that the US now imports a greater share of its oil than in the bad old days when the oil weapon was first brandished. They also argue that US citizens will not support a war that jeopardises their lifestyle - in short, that citizens will not be willing to give up their gas-guzzling sports utility vehicles.

These concerns are misplaced. The US ought not to let its oil preoccupation stop it from chasing down Osama bin Laden's Saudi connections or widening the war to halt aggressor states where it sees necessary. Oil shocks, if they come, are not likely to last long and the US will not be cut off. The bigger danger is that old-fashioned oil diplomacy will deter the US and its allies from combating the threat posed by many Middle Eastern regimes: that they will be ready to deploy nuclear or biological weapons in a period shorter than the average lifetime of a sports utility vehicle.

That is the thinking at the defence department, where an internal memo on the fallacy of the oil weapon is being circulated this week. Authored by Ben Zycher, a senior economist based at Rand, the old security think-tank in Santa Monica, California, the memo provides a snappy revision of 1970s history with important implications for current policy.

But to the history. Back in 1973, following the Yom Kippur war, the House of Saud declared an embargo on the US and the Netherlands as punishment for their support of Israel. It also, and importantly, led the Organisation of Petroleum Exporting Countries in a production cut. The market responded and prices rose fourfold. Opec said relief would come when Israel withdrew completely from areas it had claimed in the Six Day war and when the legitimate rights of the Palestinian people were restored.

But never, at any time, notes Mr Zycher, did the US in fact lose access to oil. Supplies were available on the global market - albeit at a higher price - at all times. It was the production cut, not the embargo per se, that caused the price rise.

The petrol station queues that are etched into American memories were due, Mr Zycher reminds us, to domestic policy: the decision by the Nixon administration in August 1971 to impose price controls on oil. The administration, for its part, rationalised its action by telling itself it was weaning Americans off their heavy dependence on Arab oil. In other words, the government was forcing consumers to share its own fears about oil dependence. But they were not necessarily realistic fears.

This is so for simple economic reasons. Oil, like any other commodity, is fungible. In the same way that water in the bath flows around the duck, oil flows around embargoes. Opec and anyone who chooses to join it in a production cut may succeed in lowering the water in that great bath that is the international oil market for a time - and in raising prices. But any act of hostility directed at a specific country or region by another does not achieve the desired isolating effect.

This, of course, is a lesson Iraq has taught the US, by circumventing the 1990s embargoes on the country. But the failure of embargoes also happened to have been studied, 20 years ago, by Douglas Feith, now under-secretary of defence for policy.* Soon after the embargo, multinational companies that distributed Arab oil juggled supplies of non-Arab oil so that the shortfall was shared by all oil-importing nations. Specifically, pointed out Mr Feith, during the October 1973-March 1974 embargo period, crude oil supplies in the US grew tightest in February 1974 - and even they were only 5.1 per cent lower then the daily average for the first three-quarters of the preceding year. What is more, the Netherlands, singled out by the Arabs, experienced less of a shortfall than France and Britain, the countries that led western Europe's pro-Arab political initiative. In addition, the Arab states of that period ended their reduction plan and embargo without winning their political demands.

To be sure, Opec countries could drive up oil prices enough to cause great pain to the world economy in the short term. But Mr Zycher argues that they will not. Dictatorships, like any government, need revenue.

Indeed, the politics of a government do not affect whether it sells oil or not. An example here is Ayatollah Khomeini's Iran, which enthusiastically resumed oil production and exporting after the revolution disrupted it. What matters is that dictatorships will use - and are using - their petrodollars to develop dirty weapons whose danger ranges far beyond the economic.

The real threat, therefore, as the Zycher memo puts it, is that US national security policy is seemingly being shaped in important ways by a perception that is incorrect. If the US, alone or with its allies, manages to set aside its preoccupation with a phantom oil weapon, it can evaluate whether it need uproot the regimes doing the frightening stockpiling. There is evidence that citizens will support such inquiries and action: Gallup and other polls show that backing for a wider war is even stronger than it was six weeks ago. Americans may be willing to trade their SUVs away for a while, if removal of a genuine threat, rather than a phantom one, is what they get in exchange.

* Policy Review, Winter 1981, The Oil Weapon Demystified (Heritage Foundation)

© Copyright 2001 Financial Times

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To book Amity Shlaes for a speaking engagement, contact Jamie Brickhouse at the Red Brick Agency, 646.281.9041.
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