Tuesday, September 13, 2005

Why High Oil Prices are Good for Bush

Pundits on the left and right decry the "Pain at the Pump", and other catch-phrases to describe the high oil prices affecting us at present. Traditional wisdom suggests that we need to lower these oil prices in order to prevent economic slowdown, and to prevent too much money from flowing into the hands of terrorist-supporting states. While it certainly makes for good PR for the current administration to say they're doing everything they can to reduce oil prices, here's why high prices--in fact, even higher prices--are good for their agenda:

1. High oil prices subsidize US defecit spending. When other countries need to buy US Dollar-denominated oil from OPEC, they need to buy dollars to do this. This significantly raises the demand for dollars, meaning that the US can operate on larger and larger deficits (more supply of dollars) without impacting the exchange rate (equillibrium). This means that Bush can spend more without asking the American people to foot the bill. If, as Philip Bobbitt says, the legitimacy of the nation state is predicated upon the continual increase of the well-being of its people, then Bush can maintain this illusion as long as oil prices are rising.

2. High oil prices help keep the House of Saud in power. Saudi Arabia exports about 360 million barrels of oil a year. If they profit around $60 per barrel, then they have an oil-income of $21.6 billion per year, or twice what they get when oil is selling for $30 per barrel. Most analysts, myself included, think that Saudi Arabia is a ticking time-bomb, and that the continual growth in population, and subsequent decrease in standard of living, will inevitably lead to the overthrow of the House of Saud, to be replaced with an islamic government of some sort. So far, the House of Saud has postponed these problems by throwing money at the people through stipends, pensions, works projects, cushy government jobs...whatever it takes to keep the people of Saudi Arabia thinking that it's in their best interest to keep the Sauds in power. As long as oil prices keep going up, the Saudis will continue to be able to maintain this revolving-credit regime insurance policy. Since keeping the House of Saud in power is clearly in the best interest of the administration, rising oil prices are also in their best interest...

With these two factors combined, it seems likely that even if Bush is telling the public that he's working to bring down oil prices, the real policies of the administration will work to ensure that prices rise steadily and controllably for the next decade...


Anonymous said...

Dude, your statistics on Saudi Oil exports are waaaaay off.


healing_one said...


I have assumed the following and you may want to make some corrections in your estimates.

7.7 million bbl/d from (http://www.eia.doe.gov/cabs/saudi.html) x 365 days = 2.815 billion barrels per year

2.815 x $60 profit per barrel = $168.63 Billion

What are your calculations for the $60 per barrel profit? I want to able to argue this without being criticized about my estimates.

Thanks for your help. This is a very insightful analysis of the real politic.

healing_one said...

Actually it's 2.8105 billion barrels per year.

Jeff Vail said...

Absolutely correct...

My mental math error dropped a 0, so I should have written 3.6 billion barrels/day. (for the record, I plan to go back and edit the article, but it initially read 360 million barrels per year) That's based on a rough estimate of 10mbpd.

The 2004 article listed the export at 7.7, which was the official word from the Saudis at the time (though probably an underestimate, as most of OPEC was exporting beyond their quotas to make more money). The latest official word from the Saudis was 10.5 mbpd, which I think is probably an over-estimate, as the last 500,000 bpd is really a political statement, and probably hasn't come to pass yet, if ever.

The $60/barrel figure is based on a crude price of $65 and a wellhead cost of $5/barrel. These are estimates based on Matt Simmons' briefings.

Bottom line is that it's the relative increase that's important. I don't think that it's contestable that Saudi makes the vast majority of their revenue from oil exports, and that this revenue has increased dramatically with the price of oil.

Jeff Vail said...

...and yet another mistake. I should have written 3.6 billion barrels per YEAR above...

Sal said...

Bush can spend more without asking the American people to foot the bill

When the price of gas at the pump is high, and it's not because of taxes, then gas guzzling Americans are partially footing the bill.

Jeff Vail said...

partially footing the bill is absolutely correct. Our economy in general is being subsidized to the tune of roughly 2:1 (roughly the ratio of dollar-denominated oil sales to US use of that oil). It's like saying: I'm going to charge you $5 more for gas, but I'm going to put $10 in your pocket...

Additionally, it acts as a comparative advantage for US industry against those nations that are not getting that $10 back, but still have to pay the extra $5 "at the pump"

gilemon said...

If you’re article makes so much sense, so what about what’s happening right now with Rita?

Ok I might sound a little paranoid, but… what could we expect from a government able to send its population to massacre for oil industry?
I don’t know, it’s just that 5 years ago there was a rumor going on the feasibility of manipulating the climate to trigger a giant storm… I know it sounds so weird. But…Try to think about it. It’s such a huge coincidence?

You should have added Iran issue to your two points. It may sound stupid but what about asking to invade this juicy country to a population pissed off by high price at the pump
Jeff; you’ve been working for military industry; you might have some leads…

Just to stress the danger about being paranoid about paranoia.
10 years ago there was rumor about some large scale microwave weapons used in the American invasion of panama. I remember all my friends laughing at me when I was describing the device. But now it’s a well known fact! They just weakened the strength to use it for crowd control…Well…

Anonymous said...

HAARP - High-frequency Active Aurol Research Project - what mankind came out with Manhattan Project is more about project management than technology, a massive weapon of individual destruction.

Jeff Vail said...

A very good friend of mine is actually a project lead on the very microwave weapons that you're talking about...

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