Beyond the Guns of August

At this writing, American and Iraqi forces still face each other warily across the Saudi sands. Sooner or later, Iraq will likely have to reverse course. But beyond the question of how and when the immediate military crisis will be resolved, the Iraqi annexation of Kuwait has given momentum to the development of a post-Cold War international system based on collective security. That movement may also help bring about progress toward a regional settlement in the Mideast and a more stable regime for the price and supply of oil.

In his address to Congress on September 11, President Bush declared, "We are now in sight of a United Nations that performs as envisioned by its founders." For a decade, the U.N. has been the stepchild of American diplomacy, the object of disuse and scorn. The original vision of collective security, of course, was predicated on a concert of great powers. The U.N. could not function as planned so long as the central geopolitical reality was the rivalry of the two greatest powers and the belligerence of the Soviet Union.

It took nearly a year, between the Malta Summit and Helsinki Summit, for it to become clear that President Gorbachev is genuinely eager to play a collaborative role. The Persian Gulf crisis has accelerated President Bush's willingness to treat the Soviets as a potential partner, rather than as a force stirring up regional conflict for its own policy ends. In recent months, the Soviets have demonstrated their bona fides not only in Eastern Europe. They have used their regional influence in close consultation with the U.S. to prod the Palestine

Liberation Organization toward a peace process with the Israelis, and they have backed the U.N. embargo against Iraq. The concomitant evolution in Bush's view of the Soviets between Malta and Helsinki, has been swift, bold, and in defiance of his own Republican right wing.

In 1945 and 1946, American policy towards Germany and Japan underwent a similar shift, and for similar reasons. With stunning abruptness, Germany and Japan evolved in U.S. strategic thinking from objects of postwar containment to intimate allies. American public opinion swiftly went along, despite fresh memories of battlefield casualties and wartime propaganda about Huns and Japs. The reason was that a new enemy loomed -- Soviet expansionism. In the current case, the common threat of Saddam (and other regional Saddams) has accelerated the pace of U.S.-Soviet rapprochement. It helps, of course, that the Gorbachev revolution was already consummated; one shudders to imagine what sort of great-power conflict might have occurred in the Persian Gulf if Leonid Brezhnev were still the Soviet leader. That could have led directly to the World War I scenario that the Mideast has been most likely to trigger throughout the era of postwar alliance politics. Now, with the U.S. and the Soviet Union acting as allies and the U.S. willing to consider Moscow's participation in a regional peace conference, a broader settlement in the Mideast becomes thinkable.

In a fortuitously timed cover piece in the September Atlantic Monthly, "The Roots of Muslim Rage," which hit the streets of Washington just as Saddam's troops were hitting the streets of Kuwait City, Bernard Lewis, a professor emeritus of Near Eastern Studies at Princeton University, wrote that the United States reaps the accumulated resentment of Muslim civilization against the West because the United States has become the principal agent and symbol of westernization, sometimes in its coarsest form. The U.S. bears the burden of that resentment even though the Arab nations are westernizing in spite of themselves, and some Arabs are attracted to Western notions of liberal democracy.

Our postwar policy goals for the Mideast should include a rapprochement with the Arab world, and this will not be accomplished solely through a tactical military alliance with its most westernized (and most resented) elite. In addition to addressing the Palestinian question and the calamities elsewhere in the region linked to intra-Arab rivalries, such as Lebanon, our post-conflict aims should include a long-term energy policy that stabilizes the price and supply of oil and in the process helps stabilize both regional politics and global economic growth. It would be tragic if this conflict ended merely with a Korea-style "truce," a long-term stalemate, and continued volatility of energy prices and supplies. This crisis has complex, long-term causes, and it will require no less than a comprehensive solution.

* * *

Before the August 2 invasion, Congress was seriously thinking about energy taxes, partly to address environmental concerns, partly as elements of a revenue package. No sooner did oil become scarce than most of Washington immediately concluded that gas or oil taxes were now politically dead. Consumers were already enraged paying gas prices a quarter a gallon higher than in July, and Congress would not dare compound the damage. But as congressional Democrats gradually grasped, this is precisely the moment to impose higher energy taxes, since the public is again aware of our vulnerability to the vagaries of imported oil. If Washington had enacted energy taxes in the mid-1980s, when oil prices began plummeting, we would have reaped the revenues, and the incentive of higher prices would have put us that much closer to energy self-sufficiency. (See David Callahan, "Me Greening of the Tax System," in this issue.)

The 1980s were an era of celebration of free markets. Standard economics insisted that no cartel can last forever and that any attempt to regulate or manipulate oil prices would backfire. When the price of oil broke in 1985-86, it was a moment of I-told-you-so. Temporarily cheaper oil prices prolonged the economic recovery, and led to new heights of profligacy in energy consumption. Dependence on imported oil, which had declined to 32 percent of consumption in 1982, went back up to 45 percent. Despite greater energy efficiency, Americans were driving more cars longer distances and consuming more gasoline than before the first oil crisis.

In theory, no cartel can last. But in practice oil has been cartelized one way or another almost ever since it was discovered. It is virtually costless to extract once discovered, and the demand for it is relatively inelastic. As a result, producers have an immense incentive to structure markets. If oil were literally produced according to the principles of supply and demand -- that is, if suppliers produced all they could and had no control over price -- crude oil would trade at the marginal cost of extraction plus shipping costs and a small profit. That would amount to only a few dollars a barrel. The only difference between now and pre-1973 is that oil is now cartelized mainly by producing nations rather than by Western oil companies.

Despite the economic theories they profess, Western governments have been tacit partners in the oil cartel. When the cartel briefly broke in 1985-86 and the spot price of oil plummeted to well under $15 dollars a barrel, Washington recognized the instability that so low a price invited. Not only did it create dangerous infighting among the oil producers; it damaged friendly producers in places like Mexico and Venezuela, to say nothing of Louisiana and Texas. The savings and loan debacle, in part, is the result of too-cheap oil; low oil prices also killed economic incentives for new domestic drilling, to say nothing of domestic conservation. So Washington helped the Saudis put the cartel back together, with a target price of $18 a barrel.

The cartel broke down for a second time in mid-1990, when the Kuwaitis and the United Arab Emirates began pumping more than their quota; it was this behavior that prompted Saddam Hussein to respond, as Fred Bergsten, president of the Institute for International Economics, put it, "like an enraged commodities trader."

The crisis began when Iraq, heavily in debt and long resentful of "playboy" sheikhdoms, felt cheated of some $8 billion in oil revenues when the Kuwaitis and the other Gulf emirs began overproducing and driving down the price. Although Saddam's response -- an anschluss -- was totally unacceptable, the precipitating event was the breakdown of the cartel. Other, less bellicose periods of instability in oil price and supply have had a similar genesis. Short of a total humiliation of Saddam, which is no guarantee of durable peace in the region or of an acceptable oil regime, the eventual settlement will undoubtedly include some measure to stabilize, not weaken, the cartel, to avoid repeating the dynamics of 1990.

Rather than recoil in horror from a stabilized oil regime as a violation of Economics 101, the Western nations ought to seek more explicit influence in the cartel. They ought to embrace a plan to stabilize the long-term price and supply of oil, even if it entails market management and market-sharing.

Indeed, at various times since 1973, policymakers have flirted with that alternative. OPEC from time to time has offered to discuss long-term contracts, but in every case either the consuming nations have been unable to agree on a common plan, or their economic advisers have warned them that the approach would be futile. But it is well worth considering.

Notwithstanding its free market bravado about breaking the cartel, Washington in practice has long sought to manage it. Oil is too important, too inherently connected to high politics and regional stability to be left to markets; one way or another it will be subjected to attempts to control prices -- either by producing nations, or by oil companies, or better yet by more explicit bargaining among producers and consumers. Both sides of the bargain have a common interest in restraining price and supply volatility.

It is worth imagining a much bolder "Bretton Woods for Oil," in which producer and consumer countries would enter into long-term, fixed-price contracts and jointly conduct open market operations, to sop up temporary oil surpluses and release reserves to stabilize prices in times of temporary shortfall. This approach is, of course, the antithesis of conventional free market ideas about oil that leave everything to futures markets. But history shows that politics overwhelms markets, which react in panic to the prospect of shortage or glut and exacerbate rather than moderate price volatility. Consuming and producing nations have proved over and over again by their actions that they consider oil too important to be left to the invisible hand. It is high time to make that recognition explicit and to search for the best available second-best.

For example, a slightly higher price than that prevailing before the crisis and a long-term supply contract in the range of $20 to $25 per barrel would allow us to plan a gradual reduction in dependence on oil imports. The premium price would compensate oil producers for the fact that the world, for environmental as well as energy-supply reasons, will be turning to oil substitutes. A $25 dollar net price could build in a $5 per barrel tax, with proceeds to be administered by the United Nations or by the International Energy Agency. The proceeds could be divided among renewable energy research, rebates to poor oil consuming countries, and Third World debt relief. The price volatility of oil, and the political instability it seeds, are far more dangerous than a benign cartel.

Recently, economist Philip Verleger of the Institute for International Economics forecast the price of oil in the coming months, extrapolating from the current behavior of futures markets. He projects retail gas prices in the $1.60 to 1.80 range by early 1991 and then a gradual subsiding of prices to a few cents a gallon more than they were immediately before August 2. But, of course, this forecast leaves out all the exogenous (or should we say exxogenous) variables that count -- the length of the war (if one breaks out), the nature of the settlement, and the condition of the cartel afterwards. Markets do not have a clue to what any of these will be, any more than they predicted the 1973 crisis, the 1979 crisis, the 1990 crisis, or the future crises that are certain to develop if we keep on doing business in this fashion.

* * *

For the first six weeks of the Persian Gulf crisis, American policy was a mixture of unilateralism and collective security We used the United Nations to get quick resolutions condemning Iraq and authorizing the embargo, but the expeditionary force flew the Stars and Stripes. We badgered the Europeans for destroyers and the Saudis and Japanese for dollars, but the generals as well as the ground troops were mostly American.

Until the Helsinki Summit, the U.S. sought Soviet support for its policy but resisted broader Soviet participation. Certainly, a military mobilization is not the best moment to pursue broad multilateralism. And, at first, it appeared as if the central opportunities of the post-Cold War era for collective security pluralism, and an emphasis on economic interests and burden-sharing in our foreign policy were at risk of being lost. With the U.S. playing Lone Ranger, our allies would revert to their usual roles as Free Rider. The foreign policy hawks would be vindicated in their insistence that despite the Cold War's end, there was no substitute in a perilous world for American police actions. But with the Helsinki Summit of September 9, President Bush signaled a new willingness to think boldly and to pursue the broader opportunities latent in the crisis.

If the first phase of the crisis was a tonic to hawks who feared neoisolationism, the post-Helsinki phase should reassure liberals who want America's post-Cold War internationalism to be rooted in collective security, burden-sharing, and joint responsibility. Treating the Persian Gulf crisis as a simple act of military aggression needing to be repelled has turned out to be only part of the story. To be sure, Saddam Hussein is about as unsavory and isolated an adversary as the U.S. is ever likely to encounter. But the Iraq-Kuwait affair is deeply rooted in oil politics and broader regional conflict. Even a quick and decisive victory over Saddam, by itself, is unlikely to bring durable stability to the region.

Now, the silver fining in this crisis is the prospect that its eventual solution could be far broader than President Bush ever intended when he first made the decision to send troops to Saudi Arabia. In the process, President Bush and his man Jim Baker may mature from clever tacticians to statesmen of boldness and vision.

For purely partisan motives, Democrats and liberals have wondered throughout the Persian Gulf crisis whether Bush's gamble would ultimately redound to his gain or loss politically. A long standoff would undoubtedly undermine the administration's credibility and its popularity. But if the crisis leads to greater maturity on the President's part and a new brand of higher statecraft aimed at rebuilding a stable world order, he will have richly earned whatever political benefit he reaps.

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