Oil shortages; neo-Mahdism

(More from Niall Ferguson's extraordinary NY Times Magazine article. 
The following passage essentially brings together the two themes that 
Mark Jones and I have been hammering away at since 9/11.)

The second trend that Sept. 11 did nothing to change is the economic 
downturn. The asset bubble of the late 1990's peaked a year and a 
half before the terrorists struck. And despite their proximity to 
Wall Street, the real crashes of Sept. 11 did not cause a 
metaphorical crash on the stock market -- just its temporary closure. 

Admittedly, in the immediate aftermath of the attacks, investors had 
to grit their teeth as prices threatened to go into free fall. Yet so 
far, the deflation of the late 1990's asset price bubble has been a 
gentle affair compared with the cataclysmic meltdown that followed 
the bubble of the 1920's. To give some orders of magnitude, a crash 
on the 1929-32 scale would take the Dow down from over 11,723 -- 
where it stood at its peak in January last year -- to about 1,266 by 
November next year. On Nov. 15, it stood at 9,872, less than 3 
percent down from Sept. 10. When Alan Greenspan coined the phrase 
''irrational exuberance,'' the index was 6,473. In this light, the 
most striking thing about the economic consequences of Sept. 11 would 
seem to be their insignificance. A 3 percent drop in the Dow is 
nothing. Oil prices, too, have continued their yearlong decline. And 
there has been virtually no movement in long-term interest rates, 
which might have been expected at a time of increased political risk. 

Nevertheless, the world economy has two serious economic weaknesses 
-- also predating Sept. 11 -- that cannot be ignored. 

The first is the nonglobal nature of globalization. Far from being 
perfectly integrated, the world's markets for goods, capital and 
labor appear to have become remarkably segmented. Thus, the 
overwhelming bulk of American, Canadian and Mexican trade now takes 
place within the North American Free Trade Area, just as most 
European trade takes place within Europe. Back in 1913, international 
capital was truly international: about 63 percent of foreign direct 
investment in 1913 went to developing countries. But in 1996, the 
proportion was just 28 percent. Labor mobility is also distorted, 
with the United States able to cherry-pick the best-qualified and 
most-talented workers from European and Asian economies under its 
various visa programs while letting in many more unskilled (and 
untaxed) Latino workers through the Mexican back door. 

This is one key reason that the process we call globalization has 
tended to result in widening inequality between nations. In the 
1960's, the richest fifth of the world's population had a total 
income 30 times as great as the poorest fifth's; in 1998, the ratio 
was 74:1. In 1965, real gross domestic product per capita in Chad was 
one-fifteenth of the U.S.'s ; in 1990, one-fiftieth. If there was a 
substantial measure of convergence of incomes during the first age of 
globalization, in this age there is a pronounced divergence. And such 
inequality seems likely to increase the resentment felt in poorer 
countries toward the super-rich United States. (That said, we should 
not make the mistake of assuming that this poverty is the principal 
cause of support for organizations like Al Qaeda, most of whose 
recruits come from relatively prosperous backgrounds.) 

Even more worrying is the medium-term outlook for global energy 
supplies. The rise of the S.U.V. as a status symbol shows how 
complacent Americans are about their supply of oil and petroleum. 
They should not be. True, oil prices are low right now: a barrel of 
West Texas crude sells for about $20, less than half the price (in 
real terms) as at the peak of the oil crisis in 1982. But what made 
prices go through the roof in the 1970's and early 1980's was 
political instability in the Middle East: the anti-Israel Arab oil 
embargo, the Iranian revolution and the Iran-Iraq war. It's no great 
stretch to imagine something similar happening again. (Even the 
demand-side shock of the recent U.S. boom trebled the oil price 
between December 1998 and October 2000's $33 peak.) 

The realities are stark. The Middle East accounts for 31 percent of 
world oil production but just 6 percent of consumption. North America 
accounts for about 18 percent of world oil production but consumes 30 
percent. Even more sobering, however, are the figures for world oil 
reserves: North America has just 6 percent of them; the Middle East 
65 percent. 

Feeling comfortable? Total U.S. energy consumption -- of which 
petroleum accounts for about two-fifths -- has risen about 27 percent 
since 1972, while oil reserves have fallen by about 30 percent. Right 
now, the United States depends on the Persian Gulf -- mainly Saudi 
Arabia -- for about 12 percent of its oil imports, but that figure is 
bound to rise as OPEC countries account for an ever-increasing share 
of the world's available oil. 

The time frame may be much tighter than S.U.V. manufacturers realize. 
Kenneth S. Deffeyes of Princeton University predicts that global oil 
production will start to decline from 2004. At a conference at the 
Royal United Services Institute in London in October, experts warned 
that from 2008 supplies of non-OPEC oil will fall steeply -- reaching 
close to zero in 2040 -- and that, barring some major technological 
breakthroughs, there will be an effective world shortage from 2010. 

Yet even that estimate could prove to be overoptimistic if there is a 
regime change in Saudi Arabia. Like ''the coming oil crisis,'' the 
fall of the Saudi monarchy has been prophesied so often that many 
people have stopped believing it could ever happen. Don't be so sure. 
The position of the ruling dynasty increasingly resembles that of the 
shah of Iran in the late 1970's. Low oil prices may have been good 
for the West, but they have produced a significant fall in per capita 
income in Saudi Arabia, creating a reserve army of disenchanted young 
men who are the natural recruits of Al Qaeda. 

Make no mistake: radical Islam -- especially the Wahhabist strain 
found in Saudi Arabia -- is a revolutionary movement that has set the 
Middle East ablaze before now (in the 1880's for example, when a 
Sudanese holy man calling himself the ''Mahdi,'' or ''expected 
guide,'' emerged as the Victorian Osama bin Laden). A revolution in 
Saudi Arabia would be as traumatic a blow to the world economy as the 
Iranian revolution of 1979. 

The days of the S.U.V. -- perhaps even the days of the 
internal-combustion engine -- are therefore numbered. American car 
manufacturers have less than a decade to come up with an alternative 
and affordable energy source to gasoline. If they fail, the world 
economy could well find itself reliving the stagflation of the 
1970's. 

-- 
Louis Proyect, lnp3@panix.com on 12/02/2001

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