Free-market purists are getting a lot of mileage out of scoffing at all the hysteria about rising oil prices. From a strictly economic point of view, they’ve got a point. Even with crude selling at more than $71 a barrel and gasoline at about $3 a gallon, the U.S. economy continues to expand. It grew at a healthy annualized rate of 4.8% in the first quarter, and there has been no sign of a slowdown since. Oil is a much smaller part of the economy than it was during the oil shocks of the 1970s, and retail prices are still half of what the more heavily taxed Europeans pay.
Eventually, if oil prices keep rising, it may put a damper on the economy, but the odds are, if history is a guide, that prices will soon plunge as demand decreases (people drive less) and supply increases (oil companies dig more wells). Libertarians fret that political meddling will only interfere with the beneficent work of the invisible hand.
If oil were a commodity like any other, the free-marketers would be right. But it’s not. Most oil reserves are controlled by governments, many of which conspire through the OPEC cartel to manipulate the market. These governments aren’t the kind that any sane person would want to see in control of such a vital asset. Their power can only be countered by action from our own government.
Of the top 14 oil exporters, only one is a well-established liberal democracy—Norway. Two others have recently made a transition to democracy—Mexico and Nigeria. Iraq is trying to follow in their footsteps. That’s it. Every other major oil exporter is a dictatorship—and the run-up in oil prices has been a tremendous boon to them.
My associate at the Council on Foreign Relations, Ian Cornwall, calculates that if oil averages $71 a barrel this year, 10 autocracies stand to make about $500 billion more than in 2003, when oil was at $27. This windfall helps to squelch liberal forces and entrench noxious dictators in such oil producers as Russia (which stands to make $115 billion more this year than in 2003) and Venezuela ($36 billion). Vladimir Putin and Hugo Chavez can buy off their publics with generous subsidies and ignore Western pressure while sabotaging democratic developments from Central America to Central Asia.
The “dictatorship dividend” also subsidizes Sudan’s ethnic cleansing (it stands to earn $4.7 billion more this year than in 2003), Iran’s development of nuclear weapons ($45 billion) and Saudi Arabia’s proselytization for Wahhabi fundamentalism ($149 billion). Even in such close American allies as Kuwait ($35 billion) and the United Arab Emirates ($36 billion), odds are that some of the extra lucre will find its way into the pockets of terrorists.
In short, although high oil prices may not be a cause for economic panic, they do represent a big strategic headache—and one that requires a serious governmental response. But what? Most of the “solutions” being debated in Washington, such as sending taxpayers a $100 rebate or imposing a windfall profits tax on oil companies, would do nothing to address the crux of the problem: How do we defund the dictators?
That is not an issue that the United States can solve by itself. Although we are No. 1 when it comes to oil demand, our use represents only 25% of the global total—and falling. The U.S. should try to forge a consensus among major consumers, including the second-biggest oil guzzler, China, on how to wean our transportation infrastructure away from gasoline, which would have the additional benefit of reducing greenhouse gas emissions.
In the meantime, there are some unilateral steps we can take: Drill in the Arctic National Wildlife Refuge. Ease restrictions on building new refineries and pipelines. Eliminate the 57-cent-a-gallon tariff on ethanol imports made from Brazilian sugar cane. Increase federal funding for research and rollout of fossil-fuel substitutes such as hydrogen, cellulosic ethanol (produced from grasses and agricultural waste) and plug-in electric engines.
The most important step would be to increase the federal gasoline tax, currently a paltry 18.4 cents a gallon. Congress should enact a sliding-scale tax that rises as oil prices fall and vice versa. That would shape demand, which would in turn shape prices. The goal would be to create a “floor” at, say, $50 a barrel, which would avert the kind of precipitous price collapse that in the past has eviscerated investment in alternative energy sources and kept low-cost oil producers such as the Saudis and Russians in the driver’s seat.
The tragedy of American politics is that it’s still not possible to take this small, sensible step, even as our worst enemies, from Tehran to Caracas, grow more rich and powerful at our expense.