Republish Thursday (okay, it's Friday): Why Oil is so High

This week's theme, obviously, has been the sky-rocketing price of Oil. One of my favorite writer's over at MSNBC.com has this to say about why Oil is so high.

April 21, 2006 - When your heart starts racing faster than the digital numbers on the gas pump, you know there’s a problem with the price. And if you haven’t had that shock already, you will soon. Last week, the U.S. Energy Department estimated regular gasoline would cost an average of $2.62 a gallon this summer, up 10.5 percent from last year. Already that sounds optimistic. By the beginning of this week, the average price of regular was $2.79. On Wednesday, the DOE suggested prices might actually get up to around $3 this summer, but wouldn’t remain “that high, on average, over a whole month.” Meanwhile, the price of crude oil—which determines the base price of gasoline—has jumped to record highs, and looks set to climb some more.

Yep, there is a problem. And while oil industry analysts and the Bush administration will make the reasons sound very complicated, throwing in every market variable from refinery capacities to inventories to Nigerian guerrillas, I’ll sum it up for you in one word: “Iran.”

Although Tehran has yet to use “the oil weapon” by cutting supplies—far from it—saber-rattling President Mahmoud Ahmadinejad is learning fast that he can shake up the nervous global energy market with just a calculated remark here or there. In economic language so measured it sounded vaguely Greenspanian, the Iranian president told Tehran Radio this week that “the global oil price has not reached its real value yet.” At that, the cost of a barrel went splashing over the unprecedented $72 mark. “Every time there's an issue with Iran, the oil market freaks out," as one New York analyst told the Associated Press.

Ahmadinejad has a reputation as a wild-eyed provocateur. (How often has he said, in various ways, he’d like to see Israel wiped off the map?) And nothing drives up prices like rumors of war. But it’s the United States and Israel cranking up the volume at the moment. After a Palestinian blew himself up in front of a Tel Aviv falafel stand this week, killing nine people and wounding dozens, Israeli Ambassador to the United Nations Dan Gillerman told the press there’s a new “axis of terror” in the Middle East. “A dark cloud is looming over our region, and it is metastasizing as a result of the statements and actions by leaders of Iran, Syria and the newly elected [Hamas] government of the Palestinian Authority,” said Gillerman, that amount to “clear declarations of war.”

President George W. Bush, meanwhile, remains coy about what military options he may or may not use, eventually, to try to eliminate Iran’s rapidly progressing nuclear research, which Iran says is purely for peaceful purposes—even as it perfects possible bomb-related technologies. And while the clock ticks, every dollar increase in the price of oil brings the Iranian government an extra dividend of roughly $2 million a day, plus the tens of billions reaped in rising prices since 2003.

None of these apparent ironies should be surprising. Iran, the second largest petroleum producer in the Persian Gulf, has sometimes been a frustrating ally and sometimes an avowed enemy of the United States. But it has always been the epicenter of major oil shocks.

Consider the performance of the last Shah. A 1953 coup engineered by Britain and the United States restored him to power after his rather more democratic opponents, who’d ousted him, threatened Western oil interests. “I owe my throne to God, my people, my army—and to you!” the Shah told Kermit “Kim” Roosevelt, the CIA’s man in Tehran at the time. Yet 20 years later the same Shah took advantage of the 1973 Arab oil embargo to ram through prices more than 10 times higher than they’d been in 1970. “Iran will be one of the serious countries of the world,” the Shah insisted, evoking the millennia-old glories of Persia’s past.

As Daniel Yergin writes in his classic 1990 study “The Prize: The Epic Quest for Oil, Money and Power,” after that surge in prices the Shah was soon talking with regal airs about petroleum as a “noble product.” He haughtily advised Western nations that “they will have to realize that the era of their terrific progress and even more terrific income and wealth based on cheap oil is finished.” He talked of the United States, and all of the West, with undisguised disdain.

“Eventually all those children of well-to-do families who have plenty to eat at every meal, who have their cars, and who act almost as terrorists and throw bombs here and there, they will have to rethink all these aspects of the advanced industrial world. And they will have to work harder,” said the Shah. “Your young boys and young girls who receive so much money from their fathers will also have to think that they must earn their living somehow.” Ahmadinejad could lift those lines verbatim to rouse Iranian crowds today, and practically does.
In 1979, when the Shah fell to the Islamic revolution of Ayatollah Khomeini, new oil shocks rocked the world economy. Suddenly there were places in the United States where gasoline was not to be had at any price. (I worked at a service station outside Washington, D.C., during the July 4 holidays that year, reporting a story for The Washington Post. Part of my job was to carry the “Last Car” sign down the long line of motorists, marking the end of hope for those who had waited the better part of a day to fill their tanks. I was offered bribes. I was threatened. But there was nothing to be done.) It seemed as if a whole way of life had ended. By 1980, the price of oil reached highs that, adjusted for inflation, would top $90 a barrel today. That same threshold is approaching now.

Before we get that far, it’s worth considering that Iran’s assertiveness in regional and world affairs seems, quite literally, to follow the market. When the Shah depended on the CIA in 1953 (and the barrel of oil was priced in pennies) he was a more-or-less craven ally. Two decades later, flush with petro-dollars, he was a raving imperialist, who later started Iran’s nuclear program. So, too, with the mullahs. When oil prices were astronomical in the early 1980s, ayatollahs were looking to spread their revolution far and wide. When the price had sunk to about $10 a barrel in the late 1990s, reformists were ascendant in Tehran, and wanted to accommodate the West almost any way they could.

More recently, on the nuclear front, when the mullahs agreed to freeze their enrichment research in 2003, the average price of oil was about $30 a barrel. They again started up nuclear fuel enrichment activities—the same process that can be used to make fissionable material for atomic weapons—last year when the price of oil had reached $50. By the time they announced earlier this month that they’d succeeded with enrichment, oil prices were on their way to $70. Tensions drive up the cost of oil, international pressure inspires Iranian nationalism and increased revenues underwrite the mullahs’ ability to resist.

I’m not sure there’s a quick way out of this spiral. But I do know this: if global oil consumption goes down—and the United States accounts for 25 percent of that—then so will the price of oil. And history suggests that if oil prices fall, so will the ambition and intransigence of any Iranian regime. So if you want to force the mullahs to make a deal, talk peace, not war. And think about trading in that SUV before you end up in the line on the wrong side of the “last car” sign.