Thursday, June 29, 2006

Globalization and the Windfall

Some advocates of a crash effort on US energy independence have as an explicit goal of driving down the price of oil, and thus drying up the oil wealth fueling Al Qaeda and Islamo-fascism. Implicit in this argument, however, are assumptions about how oil dollars are being spent that may not be entirely accurate. As this article from today's Financial Times suggests, large portions of the Persian Gulf oil windfall are financing the industries and business sectors intended to create a post-oil, or at least post-high-oil price economy in the region.

Most of us who remember the first oil crisis also recall extravagant spending by "oil sheikhs" on Rolls Royce cars, private jets, and Beverly Hills mansions. This time, the picture is more complicated, with at least some of the money supporting terrorists. But that's clearly not the whole picture. The sums in question are large enough to finance nearly anything we can imagine, and possibly large enough to begin addressing the serious problem of un- and under-employed youth in Saudi Arabia and elsewhere around the Gulf.

At the current OPEC "basket price" and with regional production running at 23.4 million barrels per day, the flow amounts to over a half trillion dollars per year. But even if oil prices fell to $20 per barrel, a figure that seems hard to imagine today but that is much closer to the long-term average oil price, the Persian Gulf would still be drawing in $170 billion per year, which seems more than adequate to finance the other side of the War on Terror. The losers from that scenario probably wouldn't be Al Qaeda, but rather average Arabs.

Skeptics would be right to point out that we've been down this road before. The 1970s-1980s modernization slowed dramatically when oil prices fell back, and it created tremendous wealth disparities within and between the Gulf countries. Nor did it prevent the rise of the anti-American and anti-Western sentiment that blossomed into the present terrorist campaign. But at least two circumstances are different today, offering some hope for a better outcome. The enormous transfer of wealth to oil producers is occurring within the context of rapid globalization and the development of a world-class economy next door: India. It is also able to build on the investments in education and training that have been made in the last several decades, a condition that didn't exist to nearly this degree in the '70s.

None of this means I'm happy with the current state of affairs or prefer $70 oil to, say, $30 oil. I can think of lots of good reasons to reverse the present trends of rising demand and falling production that I discussed yesterday, but I don't include in that the impoverishment of the Arab world. Even if we succeed in reducing our oil imports--a worthy goal, though not at the expense of US economic growth--we all must hope for the success of this round of oil-financed Arab modernization. A prosperous Persian Gulf, with a more diversified economy, may just be our best strategy for an ultimate victory in this protracted conflict.

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