this is an article that I found on the non-partisan blog "Pendulum Politics." everyone has been complaining about gas prices, but it seems like no one is ready nor willing to make a true sacrifice. please read this article and consider the message.
As politicians and candidates continue to pay lip service to solutions to the energy crisis, people who know what they’re talking about provide solid diagnosis and prescription for the problem.
Daniel Yergin is one of the world’s foremost experts on oil. His book The Prize, a tome of nearly 1,000 pages, describes how we got to where we are with the oil situation; this book is considered by many to be the Bible of oil (embarrassed yet? It’s cheap on Amazon). Today in the Financial Times,Yergin opines about the oil situation.
In one chapter of The Prize, Yergin discusses the economic and political factors that led to a dramatic shift in the market for oil. This shift culminated with the 1973 Yom Kippur War and oil shock
The conditions of international political economy in the Middle East of 1973 were very complex. During the previous years, Middle Eastern states had continually increased their power over Western oil companies and supplies. World demand for oil had gradually increased, and US consumption had finally exceeded US oil supplies. The supply and demand equation for oil had become very tight—there was little supply in excess of demand, making developed countries, especially the US, precariously dependent upon Middle Eastern supplies. Meanwhile, the existence of Israel continued to annoy Arab states.
These complex conditions enabled Middle Eastern states to seriously consider their power—the “oil weapon.” With the US economy so dependent upon oil, US oil producers dependent on retaining ownership of assets in the Middle East, and OPEC having increased production and bargaining power, these states were in a very powerful situation. With increasing demand from the US, restriction of the supply meant that OPEC could name its price. The West would have to pay whatever OPEC demanded, because Western oil sources were operating at full capacity, and OPEC controlled marginal supplies. For many years, OPEC had considered using the oil weapon, but Saudi Arabia had been reluctant. “Politics and oil should not be mixed,” as Yergin states, was the Saudi King’s opinion (how ludicrous does that sound today!). However, as Yom Kippur approached in 1973, the King began to understand the tremendous power he had.
US support of Israel had long been a threat to the Arab world. Egypt’sNasser was making preparations for war. Arab states knew that Israel was dependent upon US assistance. The oil weapon would be a powerful deterrent against US involvement in a Middle Eastern War. Further, theSoviet Union would supply the Middle Eastern states. This would put theUS in a very difficult position. The US economy would be at risk due to oil embargo threats; the conflict would be an extension of the Cold War with the Soviets; and Israel’s existence would be in danger. The Saudi King recognized the strong position he had. He understood the power of oil over politics. The Arab states mounted an attack on Israel.
Meanwhile, Nixon was caught in the Watergate scandal. Kissinger assumed responsibility for US foreign policy, negotiating with the Soviets over how to handle the crisis. US allies like Japan were forced to evaluate their relationship with the US and OPEC, ultimately choosing economic concerns as the top priority. The US got caught shipping desperately needed supplies to Israel. At a crucial meeting in Europe the Seven Sisters (oil companies) were bereft of bargaining power; OPEC raised prices while most oil producing states embargoed the US as a penalty for its conduct with Israel. This was the oil weapon. Middle Eastern states could have powerful influence over US foreign policy because of USdependence on foreign oil.
Paradoxically, this transition from Western power over oil to Middle Eastern power also made oil behave more like a normal good on the market. Whereas before the shock oil was supplied on long-term price bases, after the shock the price was allowed to fluctuate more dramatically and frequently.
Today, Yergin argues that the current prices are a result of both rising world demand caused by emerging markets and increasing US consumption, and three factors that make oil supply inelastic: (1) time, (2) access to new resources, and (3) factor costs for oil production.
Regardless, the continuing demand for a finite resource means that, in the long-run, prices are not going to fall. What is the solution? As usual, something that pandering politicians and ignorant partisan Americans are unlikely to agree to. While the Left complains about SUVs (how much gas per person does your private jet guzzle, Obama?) and the Right thinks that drilling in ANWR will provide a long-term solution, it is clear that neither approach will really solve the problem. This problem is much bigger than SUVs; and ANWR, though perhaps necessary, can only provide a temporary relief as a part of a comprehensive solution. True to form, the politicians fail to deliver.
As always, Thomas Friedman pleas for politicians to approach a reasonable solution to a long-term problem (these kinds of pleas usually fall on deaf ears). Ostensibly having given up on Mankiw’s Pigovian tax idea(because nobody listened), Friedman now argues that the US government should set a price floor on gas at $4.00 per gallon (based on an analysis by energy economist Philip Verleger Jr.). “We need to make a structural shift in our energy economy,” argues Friedman. “Ultimately, we need to move our entire fleet to plug-in electric cars. The only way to get from here to there is to start now with a price signal that will force the change.” Of course, plug-in cars (the technology will get better) would necessitate that we base our grid on nuclear power. This is another necessary solution that doesn't seem to get much political traction, despite its obvious advantages.
This may not be the specific solution we need, but Friedman has the right idea. Something must be done to curb demand in the United States. Our dependence holds us hostage to states like Iran, Venezuela, and Saudi Arabia—states that wouldn’t even matter if they didn’t have the black gold. While Bush gets on his knees for the Saudis, the presidential candidates come up with populist, irrational ideas that make the problem worse, and Americans cancel their vacations, few are talking about real solutions. Solving our energy dependence problem will make a substantial contribution to solutions to other problems: nuclear proliferation and terrorism in the Middle East, climate change, and the long-term health of the economy.
