Americans are focused more than ever on the price of oil. After all, gasoline is at an all-time high; airline prices have gone up because of the extra costs of fuel; and even the cost of home delivery of a pizza has gone up — all because of rising oil prices.
However, although Americans are presently being hit in their pocketbooks because of rising oil prices, most of us are losing sight of another phenomenon caused by rising energy prices that will likely affect us for years to come. This phenomenon is the result of a massive transfer of wealth — ours — to the Middle East.
Why the Price of Oil Is Rising So Rapidly
As most of us are aware, opinions abound as to why oil is going up so rapidly. Some people blame the oil traders and speculators for putting so much pressure on prices. These traders, though they don’t actually own the oil, speculate on the future price of oil based upon a complex and arcane analysis of oil supplies, economic factors and geopolitical happenings. This type of speculation is not without its downside, however — the oil traders themselves might get severely burned if their guesses are wrong.
Another factor is that China and India both have rapidly expanding economies. The engine that drives these economies is energy, be it oil or coal. Both of these countries have an outsized appetite for oil. That appetite will continue to grow and will be difficult to satiate. As a result, the demand for energy by China and India is certainly having a negative impact on oil prices today, driving them ever upward.
The weak dollar also contributes to costly oil. The reason is that oil is priced in dollars. Because our dollar is not currently highly valued by foreigners, it takes more dollars to purchase a barrel of oil. In fact, I just returned from a trip to Europe, and can tell you that everything was more expensive — the airline tickets, car rental, restaurants and hotel prices. The simple fact is that it takes more dollars to pay for a hotel room in Europe today than it did five years ago.
The final factor that I would cite as a cause of high oil prices is that the U.S. hasn’t made any major strides in reining in its dependence on foreign oil. I believe that finally we realize that oil is not a limitless resource and we must start looking at alternatives to oil consumption, be they nuclear power, coal, wind, solar or hydropower. Unfortunately, it will take some time for us to “retool” for new sources of energy and for our economy to really accommodate a substantial increase in alternative sources of power.
Loss of US Hegemony
Recently, President Bush made a trip to the Middle East and met with Saudi officials, asking them to increase production in order to reduce the pressure on oil prices. Unfortunately, his request went unheeded. The simple reason is that the Saudis are no longer as dependent on the U.S. for their oil sales. They have Europe, China, India and Asia all competing with us to consume a goodly quantity of oil.
It’s hard for us Americans to understand that we no longer have the hegemony — the clout — that we once had throughout the world. This means that we must absolutely readjust our energy goals to take this loss of clout into effect. Therefore, the need for us to take alternative energy sources more seriously is absolutely critical, if for no other reason than our national security.
Transfer of US Wealth to the Middle East
The phenomenon of wealth transference is addressed in a book entitled The Price of Wealth: Economics and Institutions in the Middle East by Kiren Aziz Chaudhry. This book speaks to the massive transfer of wealth to the Middle East. In fact, Chapter One starts out by saying, “In 1973, the international price of oil quadrupled, precipitating the largest and most rapid transfer of wealth in the 20th century.” It goes on to say, “At the epicenter of these systemic changes — the Middle East — the deluge of oil revenues flooded a region.”
In the above instance, Chaudhry was talking about the early ’70s, the time of long lines at gas stations. Today, though we might not have long lines at gas stations, we certainly have pain at gas stations — gas is too expensive. Additionally, the money is flowing to a very volatile region, a region where we probably have more enemies than friends — not a good thing when it comes to our national security.
No Quick Fix
There is a solution, albeit no quick fix. There is no doubt in my mind that we, as a country, must achieve energy independence. However, I don’t believe that there is one single path to this independence. I think that we have to have a multipronged approach — an approach that includes nuclear energy, clean coal technology, hybrid cars, solar and wind power, just to mention the major possibilities. Incidentally, the engineers with whom I’ve spoken of late think that we are still quite a few years away from having hydrogen power on any mass scale.
So, we have work to do as a country, and I have no doubt that we have finally become serious about energy independence. Let’s hope it happens sooner rather than later. Good luck!
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].
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I was going to say something along the lines that knoydotcom did (except for Patrick Henry), but it was perfect. I’ll quote that in my own blog. Democrats lied in 2006 when they said they had a solution to oil prices, but voters bought it. Without our own sources and refineries, which the environmental hoods won’t allow, we’re hostages in our own country.