There is no technology on the horizon that can completely replace oil as the fuel for the United States’ massive manufacturing, transportation, and military needs; any future, no matter how wishful, will include a mix of renewable and nonrenewable fuels.
Another factor in rising oil prices is the shortage in the world’s refining capacity. In the United States, for example, not one new refinery has been built in more than 30 years. Add to this problem another: “boutique oil,” the different grades of gasoline required in different localities. I encountered one of these anomalies when I visited Chicago three years ago. There is an oil refinery 50 miles from Chicago, but it does not supply the city with gasoline because the grade does not comply with Chicago’s standards. Instead, Chicago has to import its gas from the East Coast. Prices at the pump would be much lower if there were direct supplies from the refinery to the city.
Thankfully, the world has enough oil to support this growth in output. But here’s where the financial crisis matters: A lack of investment where it is needed, particularly in the short to medium term, has become a key risk to supply. We estimate that global upstream oil and gas investment budgets for 2009 have already been cut about 21 percent compared with 2008 — a reduction of almost $100 billion. There is a danger that investment in the coming months and years will be reduced too much, pushing up decline rates and leading to a shortage of capacity when the economy begins to recover. To complicate matters, rich countries, as they depend on ever more imports from ever fewer sources, are becoming more vulnerable to supply disruptions and sharp price hikes.
And the links between oil and terrorism don’t stop there. As oil exporters mimic the consumption behavior of advanced economies during booms, young populations develop highly unrealistic expectations, premised on a sense of entitlement to oil wealth. It’s these frustrated expectations that drive youth toward radical and militant ideologies, not poverty per se. In Saudi Arabia, for example, real per capita income in the early 1980s was higher than that of the United States. Saudi nationals were accustomed to free housing, guaranteed incomes, and subsidized electricity and gasoline until low oil prices caused budget cutbacks in the mid-1990s. The Sept. 11, 2001, hijackers, after all, were mainly educated middle-class men. They were undoubtedly influenced by the arguments of Osama bin Laden, who in the 1990s was raging against “the greatest theft in history,” arguing that the real price of oil in late 1979 should have persisted for the next two decades.
Without a change, the next phase of the cycle could be catastrophic. The next banking crisis, for example, might be accompanied by a currency crisis for the U.S. dollar, which has been the linchpin of the international financial system since World War II. Or conventional Middle Eastern arms races could easily turn into unconventional ones, increasing the chances that terrorists will get their hands on weapons of mass destruction.
Perhaps even more significantly, the oil curse also nurtures bad politics, and herein lies its autoimmune nature. Because governments of such countries do not need to tax the population to amass giant fiscal revenues, their leaders can afford to be unresponsive and unaccountable to taxpayers, who in turn have tenuous and often parasitic links with the state. With their ability to allocate immense financial resources pretty much at will, such governments inevitably grow corrupt.
