Energy Squeeze Could Mean War

While it’s true that all the current signals are pointing in the direction of a US-led slowdown in the world economy - relatively high oil prices and low credit availability, to name two - this is not what should be worrying the general public. Instead, the real worry is that current oil prices imply the threat of a looming energy squeeze.

The financial troubles of our day could well have been anticipated; U.S. consumer growth was in a six-year 'boom' and the time for the 'bust' phase of the infamous business cycle would eventually come. Therefore, there is no doubt that global markets can absorb this expected bust phase and recover without major disruptions to the financial order. Also, in recent years emerging markets have matured to a level at which a downturn in the US economy is no longer the end of the world. So a global financial doomsday is not what we are set for.

Yet a doomsday scenario based on the shortage of energy resources is not out of question. By many measures US$100 is not necessarily a high price for oil. In fact, it is still considerably cheap compared to global energy agencies’ projections made two decades ago. In the long run, as former U.S. Federal Reserve Chairman Alan Greenspan openly explains in his memoir The Age of Turbulence, by 2020 the growing world economy will need more oil than can be produced, and a rally in oil prices is inevitable. The main drivers of this demand will be the economies of China and India. Come 2020, the power of those two giant economies will also have coupled with their political ambitions, which is an alarming development for world peace.

In his book, Alan Greenspan also makes the sobering confession that the Iraq war was largely a pre-emptive move to secure the production and flow of oil from Iraq before the squeeze arrives. The possibility that the Iraq war was only a start to a buildup that parallels the resource-based pre-WWI tensions is spine chilling for all Middle Eastern citizens, especially liberals and globalization optimists wherever they may exist. The reality of the energy squeeze means that the tension with Iran is no joke. If Iran is not a convincing, secure partner supplying the west with energy products, America will have every motivation to strike again. Given how the aftermath of the Iraq War went for the region, this could create an irreversible backlash not just to America but to everything liberalism and globalization stand for. The region is already boiling with such sentiment. It cannot afford another blow.

The 'squeeze' also explains why Turkey, a country completely dependent on imported oil and which recently hosted U.S. secretary of Energy Samuel W. Bodman, shows restraint in escalating tensions with oil-producing Northern Iraq in the face of the PKK crisis. Turkey needs a stable neighbor and a secure energy source to feed its growing economy. The awareness of this need keeps Turkey away from a large-scale attack to quell its enemies harbored by the administration in Northern Iraq, despite 81% public support for such an operation. But with the winds of a backlash strengthening, liberals who currently control Turkey could lose power to anti-globalization nationalists and yet another war could be unavoidable.

The surest method to avoid such looming disasters is, again, using the markets. While speculative traders of energy products have been blamed for high prices, they have also been creating a buffer by pricing in more and more risk premium to oil prices, perhaps saving the world from another possible war. Stable and low prices work like a drug that keeps western economies' addiction to oil alive. It has been proven during the oil embargo of the 1970s and on many other occasions that high prices are the most effective way to drive producers and consumers away from oil. It is best for western economies to bear the burden of high energy prices now, to produce results before an inevitable squeeze comes and reduces options to war.