Oil as energy, oil as power

Wild fluctuations in the price of crude oil over the past year (a high of $147 this summer, now selling for less than half that) have capped off a long cycle of price increases driven more by speculators' reactions to global instability than by actual demand or shortages. After the collapse of the tech stock bubble of 1999 and 2000, real estate and energy stocks surged as the new source of easy profits. The invasion of Iraq in 2003, ostensibly done to maintain energy security (as well as rid the world of WMDs and Saddam Hussein) only pushed prices and profits higher.

Supposedly the war in Iraq would teach a lesson to nations we called "rogues," such as Iran and North Korea. Instead, by its effects on oil prices, it strengthened oil-producing nations particularly Iran and Russia. Instead of being intimidated into cooperation with us, they were steadily empowered by growing oil profits to maintain a hard line of opposition. Consider the transformation of Vladimir Putin from Bush's soul-gazing ally in 2001 to the once-and-future enemy king of recent days.

So two stories this week reveal contradictory consequences of sinking oil fortunes this fall: first, after admitting to insomnia and exhaustion in recent weeks, hardline president Mahmoud Ahmadinejad of Iran is discovering that his weakness is also political. Iran's parliament has just slapped down an unqualified but loyal advisor to the president (sound familiar?), a harbinger of further erosion in Ahmadinejad's position. Thomas "The World Is Flat" Friedman gives an excellent analysis of president-elect Barack Obama's strong hand in negotiating with Iran which he, unlike his predecessor or Republican opponent, expressed a willingness to do.

The other story concerns Russia's rush to lock in strategic advantages of its recent oil fortunes before the money is spent other ways: by deploying short-range strategic missiles to the border of Poland, it raises a flashy reminder of its former superpower status and continued ambitions for regional hegemony. As an article in the current issue of Foreign Affairs points out, the only real purpose for our (or, by extension, Russia's) nuclear arsenal is "to prevent the use of nuclear weapons by others." Consequently, this missile deployment will be militarily useless to Russia, while (Russia hopes) providing a powerful psychological bargaining chip with the West. (The probable outcome here resembles the outcome of the Cuban Missile Crisis, with a mutual agreement to withdraw needlessly provocative weapons installations.)

The oil shocks of the 1970s boosted Soviet fortunes, and falling prices in the 1980s brought pressures for reform in the 1980s that ultimately caused the Soviet regime to collapse. Some U. S. investors and the oil companies have benefited from high oil prices, but most of the country has not. Meanwhile record oil profits strengthened the hands of both Iran and Russia.

Cheaper oil prices now reduce the incentives for developing alternative energy sources. But doing so will be crucial if we hope to undermine the power Iran and Russia derive from oil profits. President Bush and his advisors wanted these countries to learn a lesson from Iraq, but wartime inflation of oil prices had the opposite effect. President Obama has the opportuntity to achieve the desired results by changing paths.