Recent polls have made it clear that the US public is divided in believing the Bush Administration regarding US objectives behind the war in Iraq. In other parts of the world, the level of skepticism is even higher. Speculation on the real motivation behind the war has been widespread, and oil seems a more commonly accepted explanation than any factors offered by President George W. Bush and his cabinet.
The invasion of Iraq, many explain, was designed to guarantee a safe and cheap source of oil for the USA. This explanation is supported by the failure of successive US administrations to formulate a credible and practical US oil policy that would guarantee a peaceful and reliable source of oil to the world’s major economic powers. It stems from a parochial US outlook on the world oil supply and from a selfish, ethnocentric US approach to the Middle East that ignores the energy needs by other nations.
Given that the US is the largest oil consuming nation on Earth, there are two ways by which we can manage our demand for oil. The first is by acting unilaterally, as a confrontational superpower, securing our oil needs through brute force. This approach, employed by the Bush Administration in its first term, will inevitably lead to an unnecessary rivalry, political turmoil and increased worldwide resentment of US policy among the world’s largest oil producers and among our traditional European allies. Taking by force what we determine unilaterally is our share, in spite of international law and at the expense of other economies, will result in an oil shortage with far-reaching consequences. In an interconnected global economy, we have tied the fate of the US economy to the prosperity of the rest of the world. The impact of supply shortages by others will inevitably flow through and affect our own economic growth. As the other world economies suffer, our economy will suffer as well in spite of our having all the oil we need.
As an alternative to the Bush agenda, we can manage our demand for oil through responsible leadership, establishing consensus on the world’s demand, and collaborative efforts among producers and consumers to meet that demand. This consensus needs to be established in conjunction with all affected countries and must include the key oil producing nations, especially OPEC members, and the large oil consumers, the OECD countries.
World oil production will soon peak. The Energy Information Administration (EIA) of the US Department of Energy forecasts that the world demand for oil will increase from the current 82 million barrels per day to 120 million barrels per day by the year 2020. The EIA also forecasts that the world production may peak as early as the year 2026. The forecasts are based on the assumption that world economies will continue to grow moderately and the demand for oil will continue to increase, especially as the transportation requirements increase worldwide. Based on these forecasts, the supply of oil will fall short of consumption demands within a few years unless critical measures are taken. Key oil producers are content with producing at levels sufficient to guarantee the liquidity of their national economies and the prosperity of their populations; this level appears to be far lower than the world’s needs over the next two decades.
If additional income is not required in the short term, oil producing and exporting countries have little incentive to over extend their national budgets by spending countless billions of dollars on increasing production from existing fields or developing new fields. The world therefore needs to share the burden of these key oil producing countries, and provide incentives and assistance to develop untapped fields, as well as increase production from fields already producing, to satisfy the growing world oil demand.
The USA has an established record of building consensus in situations similar to the pending oil crisis. The US was instrumental in the establishment of the World Bank, the International Monetary Fund and the World Trade Organization, among the many international organizations that moderated the impact of various shocks to the economies of the world. Building upon this track record, the US can establish a new international organization, The International Oil Fund (IOF), to finance the development of new and existing fields; this can be done without resorting to conflict or even undue competition. Such an organization could be either completely independent from, or a part of, one of the existing international organizations such as the International Monetary Fund or the World Bank. In addition, the proposed IOF would regulate the responsible use of oil and other fossil fuels, including creating incentives for the implementation of conservation measures and research for alternative sources of energy. The IOF would also establish quotas for financial contributions to the development fund as well as for the national consumption of oil relative to other sources of energy.
The proposed International Oil Fund must result from convening an international body to consider and establish the following principles:
1). Recognize that the world oil supply is a finite resource, the producing fields are fast maturing and market forces do not provide adequate incentives for large scale new developments. Ensuring continued supply will require a massive infusion of capital and the financial burden can not be borne by oil producing and exporting countries alone.
2). Establish a fund to urgently develop new oil producing facilities, with priority given to fields where the cost of production per barrel would be lowest. All countries who become members of the IOF will contribute to the fund based on a formula that would take into account their oil consumption and their Gross Domestic Product (GDP), similar to the standard drawing rights, SDR, used by the International Monetary Fund.
3). The IOF would charge back any production development costs to the respective countries where the funds were spent, amortized over a period of time that would be agreed upon with each individual producing country based on their production capacity and that country’s resulting income from new development.
4). The IOF would establish a separate trust fund where the income of the oil producers, in excess of their national needs, would be held for social programs for each of the respective producing countries. The purpose of the trust would be to protect the citizens and future generations of the respective oil producing countries against potential mismanagement or economic crises of any kind.
5). Establish a coordinated, international effort to urgently develop alternative sources of energy for the benefit of all members.
The choice should be obvious. An international organization, the International Oil Fund, established by consensus worldwide for the benefit of mankind, is an alternative to the confrontational course we have embarked on. It is not too late to reverse course and adopt a policy of international coordination and reconciliation in our pursuit of world energy stability and world security.