US national security interests require it to make war on high oil prices.

This New York times article highlights the geopolitical peril of continuing high oil prices. The big Western oil companies like Exxon Mobil and BP have the best technology and people for finding and developing petroleum, but continuing nationalization of petroleum gives them few and decreasing opportunities to apply their skills in the places around the world that have the best potential. I have never bought the idea that the world is approaching "peak oil" in a geological sense, but we may be there geopolitically. I note some implications for the geopolitical strategies of the US and our global adversaries and for the business strategies of Western oil companies.

As late as the 1970s, Western corporations controlled well over half of the world's oil production. These companies—Exxon Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips, Total of France and Eni of Italy—now produce just 13 percent.

Today's 10 largest holders of petroleum reserves are state-owned companies, like Russia's Gazprom and Iran's national oil company.

We should be concerned that national oil companies are not only less able to keep pace with growing demand but also that they may be less willing to do so because they have in mind a much higher world price range for oil than we do. For example, the Russian economy was a basket case until oil prices started to rise and would be a basket case again if oil prices dropped to $30, which is about where they were in real dollars 10 years ago. Clearly, the Russians' strategy for enhancing its geopolitical position depends in large part on maintaining high oil prices. The same is true of Iran and Venezuela, and other OPEC nations may be more willing than they were to see sustained higher oil prices.

The entire US transportation system and our military run on oil, and that is true also of all industrialized nations. Temporary supply interruptions like we had twice in the 1970s are, of course, possible, but today the much more likely and more debilitating threat is sustained high oil price levels. Sustained high prices cripple us and our oil-short partners like Europe, Japan and China. Sustained low prices would cripple our most dangerous geopolitical adversaries like Russia and Iran.

We could open up all of the US, onshore and offshore, to oil drilling, and I'm not opposed to that, but that would have zero impact on oil supplies and prices for at least 10 years. Meanwhile, America may be bled dry economically by high oil prices, and our most dangerous adversaries would become more powerful. Our national security requires that we take other actions to put immediate and continuing downward pressure on world oil prices. The best way to do that is to manage our one-quarter share of world oil consumption rapidly downward by mandating dramatic efficiency improvements. If, despite this, oil prices are nonetheless too high, the effect on our economy will be much less if we consume only half as much as we do now. These actions would also reduce the US contribution to greenhouse gas emissions and create good domestic jobs.

This is a strategically difficult time for big Western "oil companies." They are locked out of the best petroleum provinces where they could potentially earn the biggest margins. To the extent they are able to continue exploring and developing petroleum in less attractive places, they are likely to be the highest-cost producers in the world market and, thus, most vulnerable to profit destruction if/when world oil prices are low. Even worse, if my recommendation in the previous paragraph were adopted, there would be a long-term slump in oil prices, and they would be closing refineries. All of the big Western "oil companies" seem to be positioning themselves to participate in the businesses that would grow if there were a public policy mandate to dramatically reduce oil consumption, but if those new businesses are not stimulated by government subsidies or mandates, those efforts are likely to come to naught. Until a policy direction becomes clear they are likely to continue to dis-invest in the energy business by buying back their own stocks.

Update on Wednesday, August 20, 2008 at 08:42PM by Skeptic

Here is a perspective on the importance of oil prices to Russia.

Update on Sunday, August 24, 2008 at 08:12PM by Skeptic

And what if Russia perceives that global warming would be a strategic benefit to it?  Joe Romm discusses the problem in the context of US Presidential politics. 

Update on Monday, August 25, 2008 at 02:44PM by Skeptic

In this Foreign Affairs essay, Richard Holbrook expands on the dangers of the US, China, the EU, India and Japan transferring more than $2 trillion annually to oil producing nations.  He does not call for a war on price, but there is no other way to slow down that wealth transfer in the short term.