CHRIS LESTER: Oil and war mix all too well
www.kansascity.com Posted on Tue, Feb. 25, 2003 By CHRIS LESTER Columnist
This may seem rather small and petty as the world dances on the knife's edge of war, but it's also true. For the vast majority of Americans, the single most tangible consequence of our ever more menacing geopolitical moves is higher energy prices.
War jitters stemming from our plans to invade Iraq, possessor of the world's second-largest pool of proven oil reserves, combined with the ongoing general strike in Venezuela, another major oil producer, has driven crude oil prices uncomfortably close to $40 per barrel.
We're paying for it at the pump. Collectively, Economy.com reckons that Americans are on track to spend $50 billion more on energy than they did last year because of spiking gasoline and home heating prices.
Such an increase in energy expenses at the margin of a weak economy effectively acts as a tax increase for consumers, shifting funds from spending or saving into a commodity that they would purchase in good times or bad. Higher energy prices also gnaw at the profit margins of many businesses, discouraging hiring and capital spending.
Bottom line: Higher energy prices threaten to extend the slow, grinding wallow of recession that is about to officially mark its second anniversary.
The link between energy prices and the broader economy remains remarkably strong, despite the fact that our economy is somewhat less reliant on energy as a percentage of economic activity than in the past. Each of the last four recessions has been preceded by an energy shock of some form, making spiking energy prices one of the most reliable predictors of recession.
The ongoing debate at the United Nations already has delayed a resolution of the current Iraq crisis and appears likely to do so for some time to come, increasing the risk to the economy.
From an oil politics perspective, the fact that the French are leading the opposition to war in Iraq is no small matter. The French have longstanding economic ties to Iraq and a stake in future oil development of the country. Understandably, the French dread both scorched-earth defensive tactics and growing American influence in Iraq.
Here are three possible oil scenarios resulting from the current face-off over Iraq:
• Best-case scenario: A quick and decisive victory in Iraq, with Saddam Hussein captured or killed and the creation of a more democratic Iraq devoted to economic development. This outcome would pop the bubble in crude oil prices, providing a much needed short-term economic spark. Over the longer haul, such an outcome could free up vast oil reserves that would keep a cap on oil prices even with our ravenous energy appetite.
• Worst-case scenario: We get bogged down in a messy, unsuccessful invasion that destabilizes the entire Middle East and drives oil prices to previously unimagined levels, pushing the entire world economy into a deep recession.
• Most-rational scenario: We win militarily but quickly realize that Iraq was merely one conflict in a war on terror likely to last generations. Oil prices moderate for now, but it remains a very dangerous, unstable world prone to oil shocks. America belatedly adopts a strategy that diversifies our energy sources and encourages greater energy efficiency at the industrial and consumer level.
Various hawkish types emphasize that war in Iraq is about deposing a tyrant with designs on acquiring weapons of mass destruction, countering global terrorism or even the lofty aim of liberating an oppressed populace.
But the elephant in the room remains oil, plain and simple, a commodity for which Americans already have displayed a willingness to kill.
To reach Chris Lester, assistant managing editor-business, call (816) 234-4424 or send e-mail to clester@kcstar.com.