Oil and Its Relation to U.S. Foreign Policy

Via the Economist, high oil prices are here to stay. Here's why.

... [A]s the authors of the Goldman Sachs report point out, the laws of supply and demand are catching up with an oil-hungry world. There is barely any excess capacity in the oil industry, which makes it hard for the market to meet new demand. Russia, the producer to whom markets have been looking for salvation, has seen its rapid production growth level off in recent months, and the other non-OPEC nations are thought to be producing about as much as they can. Meanwhile, even OPEC has little margin to spare: by one estimate, the cartel can pump only another 1.5m bpd—a small fraction of its members’ current quotas of 27.5m bpd—before it smacks up against its production ceiling. With the International Energy Agency (IEA) forecasting oil demand to grow by 1.81m bpd in 2005, supply and demand would seem to be heading for a showdown.

The rest of the article indirectly demonstrates why U.S. foreign policy is concentrated on access to strategic resources such as oil.

Part of the reason that prices are so high is that today’s tight margins mean that a natural disaster or political unrest can leave the world without enough oil to go round. With big producers like Nigeria, Venezuela and Iraq looking unstable, people selling contracts to deliver oil in the future are demanding a hefty premium to cover the risk that the contract may mature in the middle of a shortage.

This is why people on both sides of the aisle sound ridiculous when the discussion of oil gets mixed up with Iraq. The right sounds foolish because oil had to be a big factor in the decision to invade Iraq, while the left sounds foolish because the U.S. and the globe has to have access to more and more oil as more countries develop, or the global economy will go south. Like it or not, the world is reliant on the U.S. economy to keep the motor of global commerce running. As the Economist ruminates:

Perhaps the biggest worry of all is America, which is highly exposed to the price of oil, because of its low taxes, and because oil is priced in its currency. America has led the way out of the global slowdown. If oil prices hit hard, might it lead the way back into the next one?

Obviously, the U.S. needs to avoid this, so expect more interventions by the U.S. in the internal affairs of other oil-producing countries, particularly Venezuela under Chavez. Like it or not, (and I dont'), this is why realpolitik foreign policy has no room for moralizing.