Who Cares if the Oil Runs Out?

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Saddam Hussein is a madman, who should not be allowed control of the worlds oil resources, as this will put the West in permanent recession. This is the argument of the “hard nosed realists” who have been conned into supporting our continuing presence in the Middle East. The idea that Saddam is any more irrational than the other brutal dictators who inhabit that region, our erstwhile ally Assad for instance or our continuing allies in the Saud family, is a hard point to prove at least objectively. Similarly, the idea that the Arab world, or at least the Arabian peninsular, would be able to stick together under one ruler ignores the whole history of false starts of the Pan-Arabist movement. These two points are interesting, but not really our business, unless the third point has any relevance turning the spigot on the worlds oil supply will cast the West into permanent darkness.

One other thing I will not mention is the idea that the whole process has badly backfired. The embargo on Iraq has severely restricted oil supplies worldwide, which combined with an increased demand from recovering economies in Europe and Asia has given OPEC new life. Of course, this is all true; the one action that could do most to lift the upward pressure on oil prices would be lifting the blockade on Iraq. This is beside the point as it purely shows bad execution of the original plot and not the intellectual conceit behind it. Similarly, the fact that Britain, as an offshore (and therefore expensive) producer and exporter of oil, actually benefits from expensive oil is ignored by our leaders.

So, were stripped to the essentials, minus the implausibility and unintended consequences, of the economic case for intervening in Iraq. If Saddam is set loose he will take over all the oil producing regions of the Arabian peninsular, block the pipelines and the oil dependent will be cast into darkness and perpetual recession. Will it? Are we not ignoring something quite basic here, like supply and demand?

Imagine a world where the lily-livered West ignored Saddams threat to their basic values and he went and invaded Kuwait, and Saudi Arabia, and the United Arab Emirates, and Qatar, and Iran. No, stop smirking at the back, we have to pretend that this is plausible after all, our leaders think it is. So evil Saddam gets to overrun all these model democracies and just to prove that he is mad as well he decides to sharply restrict the oil supply so much that the price of oil rockets. What happens then?

When the supply falls and demand remains constant the price rises. That is basic economics, and this law is familiar to every intelligent adult. However, what happens then? The first thing that would happen would be that oil from other sources would come back on line attracted by the high prices. In the short term, some of it may be stockpiled but others would come from marginal or nearly exhausted oil drillings. Too expensive at present prices, these would suddenly become economical. Some of the marginal fields will even be in the North Sea, and benefit Britains economy. Investment in these fields would rocket, and it would rocket for every other part of the oil industry as profits are suddenly more attractive. This would show in the medium term as new drilling and transportation technologies are developed and previously uneconomic or politically unstable fields are drilled. In the long term, of course, there will be a large amount of money going to the almost speculative art of oil exploration. The returns will mean that more money will be gambled and more oil sources found. In fact, this is largely what happened after 1973, which is why our oil supply is now far more diverse than it was then. These new sources of supply will mean that the price will still rise sharply, but much of the savage edge will be taken off.

As oil prices will still be high, another effect will also kick in, alternative energy. Im not talking just about sea, solar and wind power although all of these will get a boost, but about other fossil fuels and even shock nuclear power. As the oil price rises, and the comparative price differentials with other forms of energy will mean that it suddenly will be profitable to switch to these forms. This may take the form of power generators switching from oil to coal, or even investing in new plant (including dams and windmills). Nevertheless, if that evil and mad Saddam still keeps his grip on the Middle East for a few years (no sniggering), technological innovation would kick in. Ethanol may actually be a decent alternative to petroleum; even electric cars may not seem so silly. Well, maybe not the electric cars. It will not be a hippie nirvana coal and nuclear power will do as well as renewable energy but a large part of the increase in oil prices will be displaced to a diversification to other energy sources.

Of course, with supply and demand, there are two sides, and it is on the demand side that we believe that we would suffer. Therefore, prices rise, and despite the new sources of oil and alternative energy, they rise significantly. This is a fully reasonable assumption. What then happens to those of us who demand oil? The first thing there will be is a renewed interest in energy conservation. Cars that burn less oil will suddenly be more attractive than gas-guzzlers. Energy efficiency will be big. This will apply to heating systems, domestic appliances and new houses. Industry will also see energy efficiency as a higher priority. This is not to say that people recklessly burn energy now, just that it is not economically rational for them to invest money on saving energy or too spend time on this seemingly low priority. This will change. Less energy will be “wasted”, and the demand will drop it will be the equivalent of ten Kyoto congresses. This of course in itself will moderate the price rise.

Of course expensive oil, no matter how well conserved is still going to put some people out of business. Some heavy users of energy who will be unable to pass on their increased costs and so go out of business. About which I say, perhaps somewhat callously, so what? Companies go out of business all the time in a free market, and new businesses start up. In a free market this is merely a reallocation of labor, capital and resources from a less productive to a more productive area. There will be dislocation, but that happens in any half way dynamic economy, indeed it is the price we pay for living with the opportunity, freedom and high living standards that only capitalism can give us. The idea that we have to pay the enormous price we are in the Middle East, purely to avoid the economic dislocation caused heavier oil prices smacks of the interventionist folly that kept open uneconomic heavy industry. In the long term, we pay a higher price. On the individual level people may find that it is better to walk less than a mile, rather than drive, and they may even sometimes be indoor in winter, but not wearing summer clothes.

This brief and incomplete summary of the consequences of higher oil prices should show that the world would not end if oil prices rise. The highly implausible scenario of Saddam Hussein invading all the oil producing regions of the Middle East and then surviving more than a minute and then drastically lowering his oil revenues will not kill us off. The fact is that we are embarked on the most foolhardy, expensive and dangerous economic intervention and all to avoid higher oil prices. The fact is that the free market is a far better way of organizing our economic affairs than government intervention, including foreign military intervention. If the government really is worried about the effect of high oil prices, it should take our troops home, cut export guarantees to the Middle East, and use that money to cut the 80% tax on petrol. Keeping the shipyards and coal mines open may have been economic idiocy, but at least they did not put us in line for a new world war.

Emmanuel Goldstein is the pseudonym of a political drifter on the fringes of English classical liberal and Euro-skeptic activity. He is a regular contributors to Antiwar.com.

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