[Allan Topol / AllanTopol.Com]
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Oil Slipping Away
by Allan Topol, [IMAGE]2005

ARTICLE ORIGINALLY APPEARED AT MILITARY.COM, August 30, 2005

Photo Courtesy: Julie Zitin
[Allan Topol / AllanTopol.Com] Next to loss of life and property damage, the impact of Katrina that has received the most attention is oil. Three quarters of the oil platforms in the Gulf of Mexico were evacuated. Oil production in the Gulf dropped by nearly ninety-two percent or nearly 1.4 million barrels per day. At this point, there is no reliable information as to how serious or long lasting the impact may be on Gulf oil production.

Even though the extent of the disruption is undetermined, economists have begun to predict the impact on the American economy. The news is not good. Impacts will be felt not only at the gasoline pump, but in costs of heating oil. These are already high as a result of oil prices which could easily break through the $80 a barrel by the end of September. Moreover, higher oil prices are likely to have a considerable further drag on the American economy as a whole at a time when we are tottering on the brink between continued expansion or a fallback into possible recession. In a relative sense, the amount of oil impacted by Katrina isn’t large. It’s approximately ten percent of the U.S. demand. What is troublesome is that even an impact of this magnitude could have such a potentially devastating effect on the American economy.

This analysis drives home how fragile our economy is in its dependence upon oil supply and prices. We are like a critically ill patient whose lifeline is a slender tube through which oil is flowing into the body. Restrict that tube, and the patient’s condition will worsen immeasurably. Once again, Katrina provides a wakeup to the American people and our government of the absurd situation of having an economy so dependent on oil and events outside of our control.

The impacts of Katrina are bad enough, but let’s imagine a different and not wholly unlikely scenario. Far and away the world’s largest producer of oil with the greatest proven reserves is Saudi Arabia. The Saudis are the lynchpin for the American economy and for Western Europe and Japan. If anything were to happen to disrupt the flow of Saudi oil, the impacts from Katrina would be like a nursery school exercise.

Unfortunately, our supplies of oil from Saudi Arabia are not secure. Here the potential danger is not weather. Rather it is espionage and terrorism. Even more than these, is the risk that the House of Saud, already weak and losing its stronghold on the country, might fall. If that were to happen and the flow of Saudi oil were to be blocked, even temporarily, there would be chaos for the American economy as well as for our allies in the free world.

There are other producers of oil in the Middle East, but for one reason or another all of those are in a currently tenuous situation. Iraq is a huge potential source, but we haven’t been able to get the oil pumping in that country up to anything like an optimum level. Iran, another one of the three major producers, has become a political nightmare for the United States.

At the same time that Middle Eastern oil has become an uncertain bet for the future, two of our economic competitors, China and India, are moving aggressively to lock in future supplies of oil in places as diverse as the Sudan, Venezuela and republics that were formerly part of the USSR. In a recent bold move, a Chinese government supported oil company made a daring effort to take over Unocal, which had been viewed as an American company, in order to get control of the oil and gas for which Unocal had contracts. After a great political flap in Washington, the Chinese oil company backed down. In the weeks since that occurred, we have seen indications that China will redouble its efforts in other parts of the world to lock in future oil supplies.

The reaction in the United States has been almost indifference as long as Unocal was not being taken over. We are assuming that somehow oil will always be available on the free market, although at a price that may be greater than we wish to pay. The difficulty with this free market analysis is that it flies in the face of what Chinese and Indians are doing. To the extent they tie up supplies in third world countries, then those supplies are no longer flowing into the world’s market because they’re not available for purchase for nations other than China or India. Restated, it’s only a free market if everyone’s playing by the same rules, and it’s clear they are not.

This raises the question of what the United States should do in response. At the present time, Canada and Mexico have become two of the largest suppliers of oil to the United States. Both have very considerable reserves. The time has come for the United States to explore ways in which we can reach agreements with those countries for assurances of long term supply of oil. It’s only a question of time before the Chinese and Indians show up in Ottawa and Mexico City. Even that oil will be slipping away.