Wednesday, May 10, 2006

We're facing a choice

Ian Bremmer in today's Slate showcases the growing importance of the world's marginal oil producers. In a tight market (there is only about 0.5 to 1.0 million barrels per day excess capacity, all of it in Saudi Arabia, in a world that consumes 85 million barrels per day), even the most peripheral production capacity can make a huge difference. Chad, which produces only 0.18 mbpd, used the threat of shutting it down to broker a deal with the IMF to double the money it funnels from oil revenues into its treasury.

The list of countries with similar production capacities is populated with names that seldom enter the American political consciousness: Ecuador, Angola, Ecuatorial Guinea, Yemen, Bahrain, and Azerbaijan. Each has their own peculiar form of local political conflict, and each runs the risk of losing control of production, threatening the stability of the oil markets.

We are paying for this added turbulence in the form of a risk premium, now about $20 out of the $70 or so we currently pay for a barrel of light, sweet crude. Ten years ago, OPEC has sufficient additional production capacity to cover the difference should one or even several of these countries stop production. Not so, today.

Oil supply is now globally vulnerable. And so we face a choice -- continue the policy of aggressively reining in countries that threaten our national security, waving our guns at the faintest sign of local disatisfaction at the US; or slog through the very difficult work of establishing stability where our interests are threatened, wagging our tongues instead.

The neocons tried aggression in Iraq just as China and India ramped up their demand, making themselves obsolete just as they got started. Let's not let them do the same in Iran. War is no longer just an inadvisable approach -- the tight oil market and the increasing smallness of the world makes it irrelevant.

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