The violence in Israel and the West Bank–however it turns out–has provided a sobering tutorial in the vulnerabilities of the global economy. The enthusiasm for “globalization” overlooked the disturbing possibility that nationalism, religious hatreds and old-fashioned regional rivalries could disrupt world trade and investment. Geopolitics and global economics are colliding in ways that we resist contemplating because the possible consequences are too upsetting and confusing. Oil is the largest flash point but not the only one. This is globalization’s dark side.
Of course, oil’s strategic importance is no secret. The world now uses about 76 million barrels a day of oil. In September, about 21 mbd of that came from the Persian Gulf. Saudi Arabia was the biggest producer (8.9 mbd), followed by Iran (3.7 mbd), Iraq (2.9 mbd), the United Arab Emirates (2.3 mbd), Kuwait (2.2 mbd) and Qatar (0.7 mbd). Any sizable reduction might raise prices sharply and even trigger a recession. Global stock markets are naturally nervous.
Nor are the Mideast’s politics any secret. Crises occur with depressing regularity. Despite this history, the hazards have recently been minimized.
Globalization presumes that materialism refashions world politics. Countries that trade and invest together accommodate political difference. In the Persian Gulf, Iran and Iraq remain hostile to the West. But even they need oil revenues. Saudi Arabia, Kuwait and other producers invest heavily in world stock markets. They don’t want to damage the economies of their biggest customers. And the Saudis and Kuwaitis rely on the U.S. military for security. So oil won’t be used as a political weapon.
These arguments make some sense–but only up to a point. They also rationalize wishful thinking by ignoring the potential for chaos, which may force governments to do things they would ordinarily reject.
“There’s a hair trigger between the Israeli crisis and the [Persian] Gulf,” says Geoffrey Kemp, a Mideast expert at the Nixon Center, a bipartisan think tank. The man who could pull the trigger is Saddam Hussein. One possibility would be “to shut down [some or all] oil production in sympathy with the Palestinian people. He’d become a hero.”
The Saudis have spare capacity of about 1.6 million barrels a day, estimates the International Energy Agency. That’s not enough to offset a full Iraqi shutdown. But Kemp wonders whether the Saudis would offset even a partial Iraqi cutback. “In the passion of the moment, the Saudis have to be sensitive to the street,” he says. “They’re superb survivors. They’re not going to defy the consensus of the Arab world.”
Oil-consuming nations are not entirely defenseless. “The Europeans, the United States and Japan have 1.2 billion barrels in strategic [oil] reserves,” says oil economist Philip Verleger. A quick release of these reserves, he says, could neutralize any Iraqi cutback. Existing stocks could offset a 3 mbd loss for slightly more than a year.
But the larger point is that no strategic reserve, regardless of how large, can erase the basic conflict. The world inevitably depends on Persian Gulf oil. The Gulf War was an economic conflict. It was fought to keep oil supplies in friendly hands.
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World trade and investment are constantly redefining national security and economic stability. Asia’s 1997-98 financial crisis showed that bad investments made in distant countries can boomerang on the advanced world. Similarly, changing production patterns can make global industries vulnerable to local disruptions. Consider electronics. Components from one country are assembled with components from another to create final products. Taiwan is the world leader in 10 computer products, including circuit boards and modems. China has increasingly become a supplier of components. In 1999, U.S. electronic imports were nearly $20 billion from China and almost $18 billion from Taiwan.
Political upheaval in China or a war over Taiwan would affect world electronics production–especially if the war involved the United States. Some production losses could be replaced fairly quickly. New factories could be built elsewhere within a year. But as U.S.-China trade develops, the connections may become closer and costlier to break.
Hardly anyone discusses these issues, because they do not suggest obvious answers. Once a country decides to join the world economy (as China did), it cannot easily be excluded. Too many other countries want its business. The U.S. economy is now so intertwined with the global economy that isolationism is unimaginable. But Americans fear relying on trade with countries that are unfriendly, if not always downright hostile. The promise of globalization is that mutual dependence will prevent conflict and inspire cooperation. But it’s just a promise.
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Robert Samuelson is a syndicated columnist based in Washington, D.C.