Times, UK

The West must break its addiction to oil

ANATOLE KALETSKY

If there is one thing demonstrated by yesterday’s assassination of an Israeli minister it is that the Middle East is a madhouse. When lunatics take over the asylum — whether they are religious fundamentalists, as in Afghanistan, Iran and Saudi Arabia, or secular megalomaniacs, as in Iraq — there are two sensible ways for the rest of the world to respond.

The first is to restore some semblance of order and the rule of law, if not of reason. That is what America and its allies are now doing in Afghanistan, with every prospect of success in the short term. The second response is to try to protect the rest of the world from the consequences of future outbreaks of Middle East madness.

Much has been said about the military and diplomatic components of this “second phase” of the war against terror. But if the long-term objective is to offer permanent security for the people of America, Europe and Asia from the consequences of sharing a world with the Middle Eastern madhouse, then the most important element of the war against terror has not even been discussed. That element is a coherent, patient and relentless strategy to free the world from its addiction to Middle Eastern oil.

There are several clear links between terrorism and Middle Eastern oil. One such link is noted on this page by Gary Hart: American foreign policy has become a “hostage” to oil dependence. Energy dependence has tied the West’s hands in pursuing long-term diplomatic interests.

An even more direct link runs from oil money to terror. Oil money is the main source of financing for terrorism and religious fanaticism throughout the Islamic world.

Another link with terror runs through the debilitating economic effect of oil wealth on the producing countries themselves. Economically, oil has been more of a curse than a blessing for the Middle East. While it has produced fabulous riches for ruling families and their cronies, oil wealth has devalued education, protected medieval social structures and discouraged genuine wealth creation. The creativity and entrepreneurial drive that were once synonymous with Arab culture have been diverted into a corrupt, zero-sum game of squabbling over inert mineral wealth.

It has long been a maxim of development economics that “the lucky countries are the ones with no resources”. The economies that have developed fastest — and have done best for their common people — have been countries such as Korea, Taiwan, Malaysia and China, which have been forced to rely on education, technology and commerce, rather than living off natural resources in the style of such “richer” countries as Russia or Nigeria. Even in the Middle East, some of the most prosperous and stable countries, for example Jordan, Morocco and Bahrain, have been the ones with little or no oil.

But isn’t reducing our dependence on Middle Eastern oil just a pipe-dream? After all, energy use will inevitably keep expanding as living standards grow around the world. And crude oil currently accounts for 49 per cent of global energy consumption. To make matters worse, the Middle Eastern members of the Organisation of Petroleum Exporting Countries (Opec) are sitting on 53 per cent of the world’s proven oil reserves, and Saudi Arabia alone controls almost half this sea of oil.

All this is true, yet the quest for energy independence may not be as quixotic as suggested by many energy experts, who tend to have an interest in preserving the status quo. For a start, the figures on current oil production — as opposed to the reserves which may or may not be pumped from the ground in future decades — make the problem look rather less daunting. At present, Middle Eastern Opec members produce 26 per cent of the global supply of crude oil, equivalent to just under 13 per cent of the world’s total energy consumption. Saudi Arabia alone provides just 5 per cent of global energy supply. Iraq and Iran each account for around 1 per cent.

In any other business, the idea that the world could be held to ransom by a producer controlling just a few per cent of global output would be dismissed as absurd. What, then, is so different about oil? The answer consists of three parts, each of which relates to a different component of the strategy for energy independence that is urgently needed after the terrorist attacks.

First, it is widely assumed that nothing can be done to reduce energy consumption without hitting living standards and economic growth. This is utter nonsense. A simple shift in tax structures — sharply increasing energy taxes and recycling the money back to consumers through other tax cuts — could have a dramatic effect on energy demand.

Of course, President Bush has rejected any such policy, in part because he represented an oil state. And the British Government last year moved in the opposite direction — Gordon Brown unforgivably cut petrol duties and eased industrial energy taxes in his capitulation to the fuel protesters. But if either the US or British Government are serious about their war against terrorism, these egregious policy errors can surely be reversed.

Secondly, the Opec cartel has amplified the power of individual Middle Eastern countries. Opec countries account for 40 per cent of world oil production and 19 per cent of total energy demand. The second step in disarming the oil weapon is therefore to try to break the cohesion of Opec and, above all, to accelerate the development of non-Opec oil sources. The most promising region for increasing non-Opec production is the former Soviet Union. If the West was willing to put extra investment into that region, new oil equivalent to half Saudi Arabia’s current production could be pumped within a few years.

The West could also work much more effectively to neutralise Opec’s power by using strategic reserves owned by the US, European and Japanese Governments. These reserves should be built up to much larger volumes during periods of low demand (such as now) and then dumped on to the markets whenever Opec tries to squeeze supply.

The third reason for the Middle East’s excessive economic power is the assumption that oil must remain the world’s dominant energy source for at least the next 20 or 30 years. But there is nothing inevitable about the dominance of oil. Car engines that can run on liquified natural gas and fuel cells have already been developed by several motor manufacturers. Vast amounts of electricity can be generated from wind, nuclear, solar, biomass and other non-oil sources, all of which have the additional advantage of eliminating carbon dioxide and the greenhouse effect.

Why are these new technologies not already in use, or at least built into long-term energy planning, which still rests overwhelmingly on oil? The global energy and motor industries believe it is in their interests to delay for as long as possible the transition from oil. Oil companies and car makers know that alternative technologies, ranging from car fuel-cells for cars to wind turbines for electricity generation, will never become economic until they benefit from the rapid cost reductions that come from mass production. As long as these technologies are relegated to experimental and pilot programmes, they will always appear prohibitively expensive and premature. But mass production will remain impossible until there is mass demand — and mass demand is out of the question until energy companies convert their distribution networks to offer alternative energy supplies.

This is a clear case for government intervention, through the tax system, through subsidies and through direct regulation — for example, by requiring drastically lower fuel economy standards and instructing oil companies to make alternative fuels available at their filling stations during the next five years.

Sheikh Yamani, the former Saudi oil minister, once warned his countrymen against being too provocative in exploiting their market power during the golden age of oil. He noted that “the Stone Age did not end because the cavemen ran out of stone”. It is now time for the Western world to prove Sheikh Yamani right. For the oil age, September 11 must mark the beginning of the end.

-- Anonymous, October 18, 2001