While we are all reveling in prices at the pump approaching $2.50 a gallon and its salutary impact on the U.S. economy, we ought to consider the broader economic and national security implications of the ongoing decline in energy prices. We have been through these cycles before. In particular, we need to distinguish between short and long-term impacts and implications not only for the United States and the industrialized world, but also for this country’s competitors and adversaries.
The two key players behind the current drop in energy prices are U.S. energy producers and Saudi Arabia. The boom in U.S. energy production, largely attributable to the rise of fracking techniques, could change the face of the U.S. economy and the global energy market for decades to come. For Saudi Arabia, the motivations for opening the oil spigot are several, both economic and strategic.
From a U.S. national security perspective, the question of a high versus low oil price is extremely important; it also is a little complex. I would like to suggest there are two sets of broad strategic impacts and implications that we need to consider:
- High oil prices hurt the U.S. in some respects because of our dual position as both an industrialized nation and a major energy producer. It also hurts virtually all the OECD countries and some of our competitors, notably China. But high oil prices help another set of adversaries: Russia, Iran, Venezuela and the states financing Islamic terrorism. High prices also help to encourage new entrants into the oil and gas production space such as Israel which is looking to new domestic energy sources to liberate it from foreign dependence.
- Low oil prices help the U.S. economy, with the exception of our energy sector, those of the Western powers, in general, but also China. However, it hurts a number of our competitors and adversaries, specifically those dependent on oil exports for a large fraction of their national income.
The national security issue is, how to leverage the current drop in oil prices to our best advantage?
I submit that from a national security perspective, low energy prices serve American interests in the short-term, provided we take appropriate measures to mitigate its impact on the innovative portion of our energy sector responsible for the current boom in domestic production. A protracted period of low oil prices will impact the Russian, Iranian and Venezuelan economies. The effects already are several times greater than those achieved by all economic sanctions imposed on these states. Also, it will siphon money out of the accounts of those who use oil revenues to finance terrorist groups such as the Islamic State and Hamas. Yes, China will benefit to some extent from low oil prices.
The national security benefits of the negative impacts of low oil prices on Russia, Iran, Venezuela and the other producers who also fund terrorism is of immediate benefit to U.S. national security. Low oil prices will crimp the Kremlin’s efforts to invest in its military at a critical time for the future of European security. As negotiations with Iran reach a culminating state, it is advisable to continue to maintain pressure on that country’s economy. These are reasons why a low oil price regime should be our preferred position, for now.
If this is the right strategy to pursue, the remaining questions are, should we seek to protect or support our own energy production sector and if so, how? My response to the first question is yes, if for no other reason than it is our protection against the day when the Saudis turn the spigot off. Think of it as a form of deterrence in a protracted period of stable yet relatively low energy prices.
If this were any other product category, we would have already initiated a World Trade Organization case against Saudi Arabia for, in effect, dumping. But energy, most of all, and really commodities, in general, are treated differently. What I am suggesting is we take more of a national security perspective on the current effort to damage our energy sector by dumping low price oil on the market and craft a strategy that both maintains low prices and protects a critical and strategic sector of our economy.
How then should we protect our energy sector, specifically the part of it which has produced the recent production boom? A tariff on imported oil is the wrong approach because it would potentially raise world prices, thereby helping those adversaries we seek to confound. It would also hurt American consumers.
We require a strategy that supports a specific portion of the U.S. energy production sector, that which has been the source of the recent boom in domestic energy production. This would involve some kind of financial support to small and medium companies so that they are protected from catastrophic loss and bankruptcy. There are obvious examples in current tax and subsidy programs that could serve as analogs for such a program in the energy sector. We offer money and retraining funds for workers who lose their jobs due to the impact of foreign trade. This could be a model. Or the government could offer cheap loans to small drillers/producers to keep them in business. I realize just the word subsidy may be anathema to some who believe in the chimera of a free market in energy. But again I emphasize that this is also, perhaps foremost, a national security problem.
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