The Other Oil Threat; in 2006, OPEC's Trade Surpluses Will Match Those of Developing Asia, at a Time When the U.S. Is Vulnerable to Financial Machinations

By Garten, Jeffrey E. | Newsweek International, October 23, 2006 | Go to article overview

The Other Oil Threat; in 2006, OPEC's Trade Surpluses Will Match Those of Developing Asia, at a Time When the U.S. Is Vulnerable to Financial Machinations


Garten, Jeffrey E., Newsweek International


Byline: Jeffrey E. Garten (Garten is the Juan Trippe Professor of International Trade and Finance at the Yale School of Management.)

As oil prices continue their steady slide, and as OPEC ministers move to cut production in an effort to halt the decline, all the talk is of how low prices will go, or whether cheaper oil will lessen the threat of inflation, help keep interest rates down and stimulate global economic growth. But despite all this speculation, the dismal long-term trends haven't changed.

In fact, as we pass another anniversary of the OPEC embargo launched on Oct. 17, 1973, the developed world and America in particular are far worse off today in terms of energy security than we have ever been.

In addition to the West's continuing dependence on OPEC oil reserves, a new financial threat is emerging from OPEC's other reserves: petrodollars. In 2006, the cartel's current-account surpluses will reach $240 billion, matching the combined surpluses of Asia's developing countries, including India and China. And while the U.S. economy has become far more streamlined in its use of energy since 1973, and thus in some ways less vulnerable to oil shocks, it has become more exposed to financial shocks. In 1973, the United States was the world's largest creditor, relatively impregnable to an attack on the dollar. But today it owes $3 trillion to overseas creditors, making it much more vulnerable to foreign financial machinations.

Unlike most Asian countries, many OPEC governments camouflage the management of their reserves by farming them out to trusted private investment firms. Also, the central banks in Iran, whose reserves have more than doubled in the past three years, and in Venezuela, whose reserves grew by 30 percent, are both under the thumb of political leaders openly hostile to the United States. If a political confrontation envelops Washington and Tehran, or Washington and Caracas, the two nations could create financial turmoil by, say, asking certain unregulated hedge funds to create a spark to set off a broader investor stampede that would harm the U.S. economy. Yes, this would be an irrational move, because it could devalue their own dollar holdings. But then, extreme behavior, motivated not by economics but by nationalist politics, has characterized both countries' policies for some time now.

While the Middle East remains the huge foreign-policy mess it was in 1973, many more acute geopolitical problems related to energy have also arisen. They include Iran's presumed race to acquire nuclear weapons, Russia's attempts to use its energy industry to bully its neighbors and China's drive to lock up energy supplies by offering trade and aid concessions to states on Uncle Sam's blacklist, such as Iran, Venezuela, Sudan and Burma. …

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