The Oil Conundrum

The Wall Street Journal on Monday ran an intriguing article on Monday entitled, "Oil Industry Braces for Drop in US Thirst for Gasoline." The article makes the argument that several important factors are contributing to a permanent decline in US demand for gasoline- a decline in driving distances, increasing use of ethanol in gas mixtures, and advances in engine efficiency. These factors will lead to a 22% decline in US gas consumption between now and 2030, according to Exxon-Mobil estimates cited in the article. These estimates are of course absent any additional move to find new and renewable resources for transportation and/or further federal mandates towards engine efficiency. It also largely assumes the vehicle fleet will remain its current mix of cars, SUVs, and pick-ups.

The Journal article explores the implications of this possibly permanent drop in demand on the US, particularly local governments who rely on taxes on gas consumption to fund local transportation projects among other things. But there is another important ramification that the article doesn't touch on that strikes me as equally unsettling: our prestige in the Middle East, particularly with the oil producing countries.

The possible future downturn in US oil consumption likely will not be replicated in the developing world, particularly in India and China. In fact, Exxon-Mobil is expecting passenger vehicle fuel demand in China to triple by 2030. Exxon-Mobil is so sure of this shift in global oil consumption that it is actively looking to get out of the retail gasoline business in the US but is building a refinery complex in China that will feed 750 gas stations throughout the country. If Exxon-Mobil, a US incorporated company, sees this shift, one can only imagine what oil producing countries think.

Much has been written about the gradual shift of the Middle East/Persian Gulf's orientation towards the East so I don't really think it's necessary to repeat here. Instead, I'd like to posit the following: US influence in the Persian Gulf almost entirely stems from our importance as a customer. Sure, since 1990, we've added the role of protector and security guarantor and, more recently, trade and investment partner. But what got us into the region and what keeps us there is our consumption of Gulf oil. And even for those countries that don't export directly to us (in fact, only Saudi Arabia counts the US as a primary customer), our consumption levels keep global demand up and prices higher since oil is fungible and priced on a market, not customer, basis. So local governments are willing to make some concessions towards US policy, in the past have been willing to fund US ventures or adventures overseas, buy US weapons systems, and play a good cop role in the region in order to keep us happy and keep us buying.

But what happens to that flexibility when US consumptions starts to fall? Will the Gulf be so keen to court us once our position as preeminent oil consumer begins to deteriorate? Historians and foreign policy experts will argue that the shared history between the US and the Gulf of the past 80 yrs, a general cultural antipathy still present between East and Middle East, the continued centrality of the US economy in global markets, and the dominance of US military capabilities compared to other countries, will bolster the relationship between the US and the Gulf for years to come. This is possibly and likely true. But in certain ways, Gulf governments and societies remain deeply mercantilistic. They are traders by nature and are willing and able to seek out the best customers. And they like to keep them. It's the only way I can sufficiently explain why the Gulf producers have been so pliable to US requests over the years even when they don't appear to be on the surface to be in those countries national interests. I wonder as the eastward shift of global oil consumption continues if we might not see policies and allegiances also begin to shift more definitively that way as well.

Perhaps the consequences of such a shift won't be quite as dramatic as they may have been. Certainly, we've moved away from the Cold War necessity of having the Gulf producers fund anti-communist movements. And as the Obama administration contemplates bringing far enemies closer in (today's papers indicate that Iran might be willing to table a new suggestion for restarting talks on its nuclear program), the need to use the Gulf as buffer from other regional aggressors might also be waning. Still, China's interests don't line up quite as neatly with ours as we would perhaps like to think. And it would be more comforting than not to know that you have natural resource producers with endless commodity supplies and significant cash reserves on your side.