Middle East Oil  Jude Wanniski September 17, 1997

[With Mideast tensions again on the rise, it's a good possibility that rhetoric regarding threats to our "oil lifeline" will be brought to the fore. This "Memo on the Margin" first appeared more than a year ago, but its perspective remains relevant to the current geopolitical climate.]

September 5, 1996

Middle East Oil

Memo To: Jim Lehrer, NewsHour, PBS
From: Jude Wanniski
Re: Middle East Oil

Your show last night on Iraq was most unsatisfying, because your producers failed to provide any counterpoint. You had four experts who have narrow fields of expertise, each of whom felt constrained to make an argument against Saddam Hussein. Even the devil should have an advocate when war and peace is involved, and the devil is in the details. The least expert of your experts was Daniel Yergin, the so-called "energy expert." If he is right, that Saddam Hussein poses a threat to the world oil supply, forcing us all to freeze in the dark, then of course we should send in the Marines on any excuse, even to stop a fistfight between Kurdish brothers in the no-fly zone. When I wrote the energy editorials for the WSJournal between 1974 and 1978, Yergin, just out of school, began his career as a Harvard energy expert by taking up the Malthusian cry that the world was running out of liquid petroleum and natural gas. He didn't know what he was talking about then, and he is no better now, permanently fixed in a drop of liquid amber as an energy pessimist. My optimism rests on my early schooling in geophysics, at UCLA, prior to a segue into political science and journalism. That is why the WSJ editorial page from 1974 to 1978 was arguing that there was no energy problem — that the oil crisis had occurred because Richard Nixon took us off the gold standard in 1971 ~ which led Canadian economist Robert Mundell to predict there would soon be a dramatic increase in the price of oil, and thence all other commodities. Supply-side economics was born out of the "energy crisis."

The Gulf War itself was predicated on the idea that it was our responsibility to prevent one Middle East dictator from taking oil reserves from another. Those who already itch to get into a brawl with our cruise missiles, not to mention several infantry divisions, were quick to announce our national security depended upon Iraq not getting control of Kuwaiti oil. This was baloney at the time and it is preposterous baloney at present, when the skirmishing involves a neighborhood beef among Kurdish families on a tiny plot of land. But Dan Yergin has to be wheeled into action in order to stretch his moth-eaten playbook by Malthus into a justification for the use of U.S. military might. When he said that two thirds of world oil reserves are in the Middle East, I could see your eyebrows arch in astonishment, as if to say: Wow, now I understand why we better send in the Marines. Two thirds is a lot!

Hold on. Two thirds of what? The man said reserves. Of course he is correct, but in actual fact the statistic is meaningless, because there is at least a 10-year reserve of oil in inventory around the world. Two thirds of the stuff is scattered over many countries in the Middle East, all of whom wish they could sell it faster. As fast as they sell it, it gets put right back on the shelf by other countries, who have an incentive to add to reserves once the price rises above the marginal cost of production. The truth of the matter is that there is probably a thousand times more oil and gas that has not yet been discovered than has been discovered.

In the worst-case scenarios presented, we are to imagine Saddam getting control of Saudi Arabia and Kuwait and Iran and the Gulf states, with the evil intent of halting all oil sales, just sitting there on all that wealth, smiling like a Cheshire cat. This means he controls two thirds often years supply of oil. Suppose in this worst case scenario the United States would persuade the rest of the world to wait him out. There is still one-third of current reserves available to the world ~ more than three years, even if there was no new exploration and production in that part of the world not controlled by the Evil Saddam. Including the United States.

I'm walking you down this silly analytical path, Jim, to assure you that you need not arch your eyebrows at Dan Yergin's warnings about oil reserves. If Saddam controlled two-thirds of the world's oil and decided to turn off the taps for ten seconds, not seven years, the world's armies would incinerate him and all his troops in one wave of cruise missiles.

By the way, your questions last night were much better than the answers you got from your panel of experts. The problem is that each was a narrow "expert," able to follow a narrow tactical line on the battlefield. It would be the equivalent of interviewing four lieutenants and light colonels during the Normandy Invasion on how things were going, when you should be talking to the equivalent of Eisenhower. Where do you find such a person? I would ask Kissinger, Colin Powell, Jim Baker. The shrewdest analysis I came across on TV was from Texas Senator Kay Bailey Hutchinson, who was the most properly skeptical. There are a lot of funny things going on over there, but none of them has much to do with the world freezing in the dark.