Leaning on the Oil Cartel Isn't As Easy As It Seems

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The rhetoric has been tough. The United States, say legislators and consumers, needs to put its large foot down and make it clear to the oil-producing nations of OPEC that it means business over rocketing energy prices. The reality, though, is delicate: The politics of oil involves the balancing of U.S. economic interests against the nation's strategic concerns, and that is why the U.S.'s efforts to increase oil output, led by Energy Secretary Bill Richardson, have taken the form of persuasion rather than threat. "The reason is that in the U.S.'s relationship with a number of oil-producing countries, economics takes a backseat to politics," says TIME senior business writer Bernard Baumohl. After all, OPEC and its allies are engaging in price-fixing that contravenes World Trade Organization rules, but there's been no rush by Washington to file suit. "Last year the administration was prepared to fight a trade war with Europe over bananas," says Baumohl, "but nobody's challenged OPEC's actions, which are a lot more dangerous to the U.S. and world economy. And that's despite the fact that more than half of OPEC affiliates are WTO members, and others, like Saudi Arabia, are trying to join."

Saudi Arabia, for example, remains the key U.S. ally in the Gulf region, an important buyer of U.S. arms exports and an unpopular regime whose long-term stability is threatened by a hostile neighbor and rising Islamic militancy at home. The depressed oil prices of recent years have left its one-trick economy in the doldrums, further threatening the political survival of its pro-Western royal family.

But U.S. economic data released Thursday showed that the rising cost of oil had driven up the price of U.S. imports by a full percentage point in February, the largest increase in a decade. Imported inflation underscores the Fed's inclination to raise interest rates next Tuesday in an effort to slow the economy's growth. "When the rising oil price begins to jeopardize the U.S. economic expansion," says Baumohl, "we may have reached the point where the question becomes: Are we saving the Saudi royal family at the expense of the U.S. economy? That's prompting calls for some arm-twisting on OPEC — after all, as their effective protector and godfather, the U.S. has considerable leverage over countries like Saudi Arabia and Kuwait."

Those countries have already gotten the message loud and clear, and have indicated they'll push OPEC to agree to increase production when the cartel meets on March 28. Still, the increase they're currently proposing amounts to 1 million barrels a day, whereas the production cut in effect since last March amounted to 4 million barrels a day — and the recovery in the world economy since then has actually seen an increase in demand. "The production increase they're currently offering may slow down the price rises, but it isn't going to bring the price down," says Baumohl.

The House Foreign Relations Committee on Wednesday night approved legislation authorizing cuts in foreign aid and arms sales to countries responsible for fixing oil prices. Similar legislation is pending in the Senate, although the Clinton administration is urging caution. Blocking arms sales to Saudi Arabia, which spent some $10 billion on U.S. weapons systems in 1998, may be somewhat self-defeating. "The Saudis aren't buying F-16's in order to become self-sufficient in defense," says TIME U.N. correspondent William Dowell. "They buy those things to give the U.S. an economic incentive to keep on supporting them, actually funneling some of their oil revenues back into the U.S. economy." Of course, threatening to remove of U.S. military resources might be a more effective ultimatum, but then the reason the U.S. sent its army there in the first place was to stop Saudi oil reserves from falling into the hands of Saddam Hussein, so they're hardly likely to pull out and let the Iraqi dictator duke it out with Osama bin Laden to fill the void.

Then there's the fact that the record low oil prices of the '90s ushered in some habits detrimental to Washington's long-term goals of increasing fuel efficiency to help combat global warming. "Twenty years ago there was a lot more emphasis on fuel efficiency in the automobile industry," says Dowell. "Now everybody's driving gas-guzzling trucks. While the government doesn't want the sort of sharp increases we've seen over the past month, a gradual increase in the price of gasoline may suit its environmental goals."

So while U.S. pressure will almost certainly prompt OPEC to at least partially back down, the price is unlikely to be pushed down to the depressed levels of the late '90s. "In the end," says Baumohl, "neither the U.S. nor its oil-producing allies want the price to fall too far. They'll probably look to find an optimal level, at which everybody wins." And that's a matter that will probably be settled nowhere near the free-trade mecca of the WTO.