Is The American Engine Grounding to a Halt?

Posted: Oct 03, 2005 12:00 AM
The United States economy is taking a beating. Gas is selling over $3 a gallon. Oil is trading for more than $40. The country remains dependent on oil. But as we are now learning, oil is becoming increasingly scarce. Does this mean the great American engine is about to ground to a halt?

The administration no doubt hoped that the Iraq invasion would transform the United States into an instant member of OPEC. It did not. Iraq is producing significantly less oil now than before the war. Oil production has been stymied by insurgent attacks on oil pipelines and tankers, as well as the general political upheaval in Iraq. Unsurprisingly, the Saudis aren’t jumping at the chance to help America’s long term strategic interests.

As reserves continue to be depleted, we will become more dependent on OPEC than ever. OPEC is unlikely to respond sympathetically. Especially considering that the Iraq invasion pretty much makes it impossible for the Middle East oil prices to publicly adopt an outright pro-American stance. At the same time, the war in Iraq has alienated Russia, which the administration had been positioning to compete with OPEC as an alternative source of oil.

Rather than changing the political landscape in the Middle East, the Iraq invasion has arguably fortified the Middle East oil regimes. Iran and the Saudi ruling family continue to realize huge profits from skyrocketing oil prices. As capital markets continue to respond to the attacks on Iraq’s oil supply by effectively raising the price of crude, those regimes once slated for takeover actually grow stronger.

So, are skyrocketing oil prices, the Iraq morass, and the domestic energy crises harbingers of a slow economic decline? More to the point, is the American engine slowly grounding to a halt? Not necessarily. It is undisputed that, due to their capacity for oil production, the Middle East is the center of the global economy. If the region destabilized, it could very well drag the global economy down with it. From this perspective, our presence in Iraq presents a valuable conduit to the internal affairs of the region.

It also presents a direct response capability. Given the inevitability that Iran will become nuclearized, we will be increasingly dependent on a military foothold in the region to launch quick strikes against rogue states. Maintaining a democracy in the region could provide a powerful deterrent to the further radicalization of Muslim states. In a nutshell, a strong U.S. presence in Iraq sends a signal that any violent fundamentalists in the region will have to answer to the United States. This accountability could help prevent the peace process from completely unraveling. It also provides a hedge against the violent expansion of religious zealots. For example, if Muslim fundamentalists were to engineer a violent coup in Egypt, they would effectively be thrusting themselves into a war with America that they could not possibly win. In other words, a strong American presence in the region could help maintain the balance of power in the Middle East. Remove that presence, and you run an increased risk of regional destabilization.

Of course, one hopes that we did not overplay our hand. If oil production in Iraq continues to drop or if the Saudi family is overthrown precisely because of our presence in the area, the global economy will freefall. It is a delicate balance. But as long as the Unite States remains dependent on oil supplies from the Gulf, it was a necessary step that we needed to take.