High oil prices, like a walk under the summer moon, can drive normally rational people to do foolish things they later regret. For Barack Obama, it is a fling with a windfall profits tax on American oil companies—one of the most thoroughly discredited economic policies of the past few decades. A 2006 Congressional Research Service report found that Jimmy Carter’s version of the tax generated less than one-fourth of expected government revenue while depressing domestic oil output between 1.2 percent and 8 percent and increasing dependence on imported oil between 3 percent and 13 percent.
It is typical of a tired economic liberalism to look at the global energy crisis and see American companies as the problem—even if punishing them leads to greater dependence on foreign oil. But it is also naive to believe this dependence will be addressed by the normal working of energy markets.
Those markets are producing what one economist calls the “greatest wealth transfer the world has ever known.” In a single year, the revenue of oil- and natural gas-producing Persian Gulf states have nearly doubled—giving nations in the region hundreds of billions of surplus dollars to play with. Recent Saudi promises to increase oil production may help ease prices. It is also the profitable accommodation of an addiction.
How much money are we talking about? Because the Gulf monarchies are extravagantly secretive, the estimates vary. The Saudi Arabian Monetary Agency declares official reserves exceeding $300 billion, but the real number is probably much larger. And this does not include the wealth of individual royals. Brad Setser, my colleague at the Council on Foreign Relations, estimates that Middle Eastern sovereign wealth funds have perhaps $1.5 trillion set aside for a rainy day.
And what do these countries do with this money? Mainly they buy bonds through Swiss and English financial intermediaries. But they are also trying to defuse world outrage at this massive wealth transfer through some high-profile charity work. Saudi Arabia recently pledged $500 million for the World Food Program. Late last year, members of the Arab League promised about $700 million to the cash-starved Palestinian Authority.
In both cases, there is less to this generosity than meets the eye.
Oil-producing countries in the Middle East are large importers of food and declining producers (as water in the desert becomes too valuable for use on grain). So Saudi Arabia, the United Arab Emirates and others have begun using petrodollars to buy and rent farmland in other countries—nations such as Egypt, Pakistan, Cambodia and the Philippines—to ensure their own “food security.” This may eventually lead to political instability in food-producing countries, as citizens ask: “Why are we sending staples to the Saudis while we have our own food shortages and inflation?” And by abandoning their production and locking up arable land in other countries for their own use, oil producers will only make global food markets tighter, accelerating the rise in food costs.
On help for the Palestinians, the pledges of Arab countries have always come easier than actual donations. As of May, many Arab League members had yet to honor their promises to Prime Minister Mahmoud Abbas. The Saudis have performed better than most. But their $170 million-a-year commitment needs to be put in perspective. London’s Sunday Times reported that the late Saudi King Fahd, in preparation for a 2002 summer vacation, spent about $200 million to renovate his Mar Mar Palace in Marbella, Spain—a mansion built as a replica of the White House.
And by far the most consistent form of Saudi “generosity” since the 1970s has been the promotion of Wahhabism—a minority form of Islam that tends toward extremism and anti-Semitism—through the global distribution of madrassas, mosques and missionaries. According to one knowledgeable estimate, this effort has cost at least $75 billion.
It should not surprise us that oil producers pursue their interests, excesses and ideologies with our money. But the massive transfer of wealth to some of the world’s least responsible nations should disturb us. And confronting this problem—with rapid increases in auto fuel efficiency and the urgent encouragement of alternatives to oil—will involve a cost and commitment more general and more serious than a misguided windfall profits tax.
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.