How important is the rising price of oil? A few months ago it was said that if it cost more than about $60 per barrel, the U.S. Navy would do well to switch to nuclear power for all its larger surface
ships, such as major amphibious units. By late November oil cost nearly $100 per barrel, and it seemed to go higher each time the unstable Middle East lurched. There is little reason to imagine that the rise will end. The fact that a key Western resource comes mainly from such an unstable place ensures that the market will remain nervous. The growing hunger for oil in major developing countries, particularly China and India, will exacerbate the situation. Current world oil production cannot support Chinese and Indian car ownership on the scale to be expected in a decade if their rates of development hold.
Impact on Russia
The rising price of oil has already had important consequences. It provided Russia with desperately needed cash. Without high-priced oil, that country would have had to deal with its failure to create a viable industrial economy out of the ashes of its Soviet-era arms economy. Given abundant oil money, President Vladimir Putin has been able to revive, at least to some extent, the Soviet-era arms producers, who are his major supporters. It is no great surprise that his foreign policy encourages their exports. Apart from weapons and natural resources, Russia has little else to sell. In this sense President Putin has brought back the Soviet-era economic structure, in which oil was the major source of income and arms the major product.
There is, however, an interesting twist. During the Soviet era, the state controlled what the average Russian received. Economic incentives were not too important, so most of the state's cash could go directly to military research and production. Now average Russians expect to be paid with something they can convert into what they want. If Russia does not produce enough of what they want, it must come from outside, paid for by the hard-currency the country earns. That money cannot go into building missiles or tanks or warships. Despite its higher price, the same output of oil now buys much less military power.
That is obvious from the Russian press. When it was announced that the Russian strategic missile force would be modernized using new Topol-M missiles, a newspaper writer pointed out that, at the current production rate, that modernization would take a century to complete. A few years ago the decision was taken to use a solid-fuel missile based on Topol to arm future Russian strategic submarines. Some in the Russian press claimed that the choice resulted from corruption (the writers argued that the designer of the earlier liquid-fueled missiles should have received this work). Whether or not that was true, the developer of this new Bulava missile claimed that work had been grossly underfunded. This year all but one Bulava test failed. Unfortunately the new Russian strategic submarine was designed to be armed only with Bulava. Similarly, current Russian warship-building programs are a very pale shadow of what the Soviet Union was doing when it collapsed.
An economy based on oil income tends not to invest in the sort of industrial development that can provide income after the oil runs out. Instead, it buys goods. Oil income becomes a sort of welfare payment, because most of those who benefit from it do nothing to earn it. In the case of the Russians, conversion from the Soviet-era economy was always going to be painful, not only physically but also psychologically. Hence the misery that helped make Russians yearn for what they imagined the old system had been like.
However, for us the effect of rising oil prices is more complicated. There is still a great deal of oil in the United States. All of it is more expensive to extract than Middle Eastern oil. At one time that was all that mattered, because the same oil companies drilled for oil in both the United States and the Middle East. Now, however, the Middle Eastern parts of those companies have either been nationalized or forced to leave far more of their profits in the countries whose oil they pumped. In effect, Middle Eastern oil is no longer cheap, at least to the oil companies. Oil reserves here and in other places are far more attractive. Alternative sources of oil, such as the vast tar sands of Alberta, Canada, will be tapped if companies and investors decide that oil really is going to be expensive for a protracted period.
Escaping the Oil Trap
The other effect of very expensive oil may be to shift us away from oil itself. It seems unlikely that the structure of the United States will change, but we will probably see a shift toward an energy economy based more on electricity provided mainly by nuclear plants. In the past, that was unlikely not only because of the sheer money involved, but also because of fears about the safety and longevity of such an energy source. These problems will be resolved as the price of oil rises and environmentalists continue to attack the oil-based economy. Some of them have already pointed out that none of the alternative sources of energy, other than nuclear, is likely to produce what the world currently needs.
It is of course possible that the threat of such a shift would force down the price of oil. In the past, the Saudis in particular have often pointed out to their OPEC partners that raising the price might be counter-productive. Their argument was generally that triggering a world depression would so cut energy demand in the West that oil income would actually fall. Whether the Saudis or others would look beyond the possibility of economic disaster to the possibility that oil itself might be displaced as the key world commodity is far less certain.
Even so, it might be interesting to examine the strategic effect of a West less dependent on oil, imported or otherwise. Imagine a future in which, although we no longer depend on Middle Eastern (and Russian) oil, the expanding Chinese and Indian economies do. Both use energy far less efficiently than we; the Chinese the least efficient of all. Much of the rising price of oil is attributed to the increasing thirst of these two economies. There is also a long-term prediction that ultimately India and China will compete for the mastery of Southeast Asia, where both have interests. Does all of this suggest that the two great Asian powers will ultimately fight in the Middle East? Neither country appears to have anything like sufficient oil reserves of its own. For example, Chinese attempts to find oil in Sinkiang were unsuccessful, and so far nothing has come of the repeated predictions that vast reserves would be found under the South China Sea.
For China, Russia represents an interesting alternative. The main Russian oil reserves are in Siberia. For some years Chinese farmers have been emigrating into largely empty areas of that territory. Chinese historians have long pointed out that much of central Siberia was once Chinese, before the tsarists seized it and ejected all the ethnic Chinese living there. Much of the rationale of communist rule over present-day China is that the party can and will restore all of the territory stolen by foreigners. Although that is usually taken to mean Hong Kong, Macao, and Taiwan, widely-published Chinese maps of thefts include Siberia. At some point Chinese ethnics in Siberia might be inclined to raise the issue. Right now they may be happier to have escaped direct Chinese rule. However, the 20th century offered numerous examples of ardent nationalism by those separated by borders from the mother country. Why should Chinese heirs to a rich and ancient civilization be immune to nationalist impulses, particularly if they are sitting near resources of such importance to the mother country?
It used to be common to see the contest for natural resources, particularly oil, as the most likely cause of war in this century. Given the likelihood that the West will find alternatives to expensive oil, it seems less likely that we will be fighting that war. However, it seems quite possible that we will watch the Chinese and perhaps the Indians doing so.