Oil and the New Cold War

(Author’s note:  This article was originally published in 2010.  It has proven to be prescient.)

A new cold war is quietly escalating around the world. The basis for the conflict is the control of oil and the fortunes and power that come with it.

America imports 70% of the oil that it consumes. By itself, this statistic is not alarming, because global commerce is ubiquitous, and generally a good thing. Unfortunately, most of the world’s supply of fossil fuels is controlled by rogue states that are like Cerberus, the three-headed dog that guards Hades. It is impossible to talk about the continuity of supply of oil without also discussing terrorism, totalitarianism, radical Islam, and military adventurism. The supply of oil is so intertwined with international situations teetering on the edge of catastrophe that our security and standard of living will depend on fundamentally changing our outdated approaches to energy supply.

Let’s begin by candidly examining our predicament. Here is the stark battlefield assessment of this nascent cold war:

• The world is running out of cheap oil. It is only a matter of time. The supply is dwindling, extraction is becoming more challenging and costly, and the demand is growing dramatically as India and China go through their industrial revolutions. Conservation should be part of our strategy, but it is like spitting into the wind when billions of Indians and Chinese are contemplating buying cars. The biggest oil fields in the world have passed their peak and are becoming more difficult to harvest. When the world runs low on oil, the price will rise, tensions will escalate, and all of our economic, political, and military entanglements with the supply of oil will become potential nightmares.

• We are addicted to low-priced fossil fuels. Whenever the price of oil increases, we throw a collective tantrum and demand that our politicians and businessmen somehow fix the matter. Unfortunately, there is no long-term fix for the price of oil, and our addiction to cheap oil is life-threatening. It suppresses the development of alternative solutions, it encourages over-consumption, it entices automotive companies to design and market inefficient vehicles, it leaves us dangerously exposed to purveyors of fossil fuels who are our enemies, and in the most tragic of all ironies, it forces us to transfer enormous sums of money to these enemies as we buy their oil.

• Totalitarian regimes now control most of the non-domestic oil reserves. We are familiar with the control that OPEC exerts over this market, but other nationalistic forces are moving to center stage. Foreign nationalized oil companies now control 90% of the world’s reserves.  Examples of nationalized energy operations include Petrochina Ltd. (China), Gazprom (Russia), PetroBras (Brazil), Petroleos de Venezuela, and Oil and Natural Gas Corp. (India). Each of these are expanding rapidly and gaining control of larger and larger shares of world oil production. In years to come, when oil supplies tighten further and the crisis escalates, these nationalized monopolies will serve their masters and not us.

• Many of the countries we import oil from hate us. Let’s take a frank look at where much of our imported oil comes from. Some comes from the Orinoco Valley in Venezuela, led by Castro-wannabe Chavez, who hates America. Some comes from Iraq, which is embroiled in a religious civil war between Muslim factions that both hate America. Some comes from Iran, led by the Islamic fascist Achmadinejad, who hates America. Some comes from Russia, led by Putin and his gang of ex-Marxist Mafioso, who have always hated America and who want to reinvigorate the old USSR. Some comes from Nigeria, which is becoming infested with Islamic provocateurs. Even King Abdullah of Saudi Arabia, our biggest supplier and nominally an ally, is trying to stave off radical Shiite factions that surreptitiously funded and manned the 9/11 attacks.

• To expand on the previous point, Islamic terrorists are trying to kill us. Osama Bin Laden officially declared war on America in the 1990’s, issuing a formal statement calling all Muslims to jihad. Al Qaeda and other surrogates of Islamic Fascism have been attacking America and the West ever since. Some argue that their hatred of us is because of our recent military adventures in the Middle East, but the truth is that the first World Trade Center assault, the USS Cole attack, the bombings of our embassies, and the despicable plane crashes into the WTC and the Pentagon, all occurred before our invasions of Afghanistan and Iraq. Islamic Fascists have a much broader agenda that is fundamental to radical interpretations of their religion. Their mission, fueled by centuries of xenophobia, is the destruction of Christianity, Judaism, and Western Democracy. This manifest destiny of Islam is being taught in thousands of madrassas around the world, in which millions of future militants are being indoctrinated. These terrorists may soon have access to nuclear weapons via Iran and Pakistan. They are funded by wealthy Arabic and Islamic individuals and governments who squat atop lucrative oil deposits. Their wealth comes from us, when we buy oil from them. We transfer $700 billion every year to regimes that behave like our enemies.

• We are in a shooting war in the Middle East. Our sons and daughters are being killed in a cross-fire between factions who have hated each other for 1500 hundred years, and will hate each other for another 1500 years. Our noble goal is to instill democracy, with the hope that peace and stability will follow in a region that is vital to the economic well-being of the free world. Our enemies seek to kill us and sometimes each other. Are the lives of our citizens the price we want to pay for an uninterrupted supply of this limited commodity from such an inimical region of the world?

• Our politicians are helplessly posturing while this crisis unfolds. While we wait for a Churchill or a Reagan to emerge, we get instead Pelosi, Obama, and a host of other small-minded, parochial, and gridlocked puffer fish. The oil crisis is a situation so sinister and dire than it cannot be about Democrats or Republicans. It’s time for those entrusted with being our representatives to stop being politicians and to become leaders. No one will remember party affiliations when this pterodactyl of a disaster spreads its awful wings.

• Our government bureaucrats are inept. If we expect the various government departments to solve this dilemma, we may as well expect pigs to fly. We will get nothing but hollow guidelines like CAFÉ standards, higher taxes on the very businesses that must innovate us out this mess, rules and regulations that discourage rather than encourage energy development, special interest groups buying influence that is adverse to our national interests, toothless international treaties, and gut-wrenching slowness to progress that always results from government involvement. As Reagan put it, the surest way to kill an initiative is to put the government in charge of it.

Escape from this dire predicament requires a bold plan, a dramatic change of course, and an immediate shift in paradigms. We need a revolution in our thinking, along with an executable strategy that can accomplish the following critical objectives:

1. End our reliance on imported oil
2. End our co-dependence with despots around the world
3. Stop the flow of money going to our enemies
4. Disentangle us from terrorists and rogues overseas
5. Unleash American innovation and enterprise
6. Encourage the development of alternative energy sources
7. Protect our economy from unplanned chaos promulgated by foreign provocateurs

This can’t be a political gambit. It cannot be a façade foisted by candidates trying to win the next election with shallow campaign promises that will be abandoned shortly after the oath of office. Our leaders must think like military commanders, because we are at war, in every sense of the word, and our future hangs in the balance. In the heat of battle, military commanders are not politicians or panderers. They are strategists and tacticians. They are mission-driven, cold-hearted arbiters of risk and reward. They are what keep the enemy from raping our women and pillaging our homes.

So what strategies will save America from impending tragedy? Here is a proposed plan:

• Skew the marketplace to abhor imported oil. This is an imperative matter of national defense. We must end our addiction in a controlled manner that serves our strategic interests. The simplest way to do this is to tax oil imported from outside North America. Specifically, we must gradually increase the tax on imported oil over the next ten years. At the end of these ten years, the tax rate should be so high that no rational person or company in the United States would consider importing oil. The steady and predictable escalation of import taxes will give our economy time to systematically re-allocate capital and labor, and to develop alternative energy technologies, based on market indicators and forces.

• End all other government involvement in the energy marketplace. The government shouldn’t influence the prices for domestic energy, either by taxation policies or by legislation. The government should remove all restrictions on fracking, on fossil fuel exploration (especially on federal land), on pipeline construction, and on refinery and nuclear power plant construction. The government should not decide what alternative technologies to pursue. Carter’s disastrous Synfuels program in the 1970’s and Bush’s equally inane focus on corn-derived ethanol should dissuade us from allowing the government to pick winners and losers. The government should not fund any company or institution to study alternatives, to develop alternatives, or to establish the infrastructure for alternatives. The free market should be allowed to allocate venture capital to promising ideas, and to appropriately reward successful ventures. The free market will move far faster, with dramatically greater innovation, than any government agency, as long as the players in the market have certainty that the cost of imported oil has been permanently skewed higher by import taxes at a predetermined rate. The gradually increasing tax on imported oil will provide the proper market signals and incentives for financiers, risk-takers, and people of genius to find and develop alternative solutions. There is no need to even attempt to predict what these solutions might be. The answers will emerge if we let the market do its unfettered work during the next decade. This is exactly what America does better than any other country in the world.

• Use the revenue from the oil import tax to protect ourselves . Specifically, earmark this money to fund the war on terror, to provide for homeland security, and to position our military to end its involvement in the Middle East when the proper time comes. Instead of the awful irony of paying our enemies for oil so that they can kill us, we will gradually transition to paying ourselves to kill our enemies and to disentangle from them. This tax will be self-limiting, because after ten years, the tax-inflated price of imported oil will be so dear that no one will buy any, and our domestic energy production will astound the world. The import tax revenue will disappear at that point.

• Resist the urge to buffer the pain. There will undoubtedly be disruptions and transformations in our economy as we execute this strategy. However, we shouldn’t subsidize industries or products that consequently lose their relevance, because it will impede the changes that must occur. We shouldn’t subsidize consumers when petroleum prices rise, because it will fuel our gluttony and impede the transition to alternatives. New industries will arise. New technologies will emerge. New skills will be required. New jobs will be created. The market will send the proper signals to facilitate all of this. We must let those signals be heard. We will then leap ahead of a world that is still wallowing in oil dependence and the horrors that will come with it. The transition will be painful to some. Wars always are, and so are revolutions in technology. Keeping our national will in the face of these transitional disruptions is a matter of life and death. To paraphrase Thomas Jefferson, we cannot expect to be transported from hardship in a feather bed.

Is skewing the price of imported oil isolationist, and does it run counter to free market principles? Consider the following points, which are corollaries of the general recognition that we are already engaged in a cold war and therefore must act accordingly:

• The strategy is indeed isolationist, with specific regard to the international oil marketplace. However, the purpose of this isolationism is not to disavow the merits of world commerce and interaction, which are many and diverse, but to specifically insulate us from a broad terrorist and fascist threat that is a near and present danger to our livelihoods. In all other matters, we must remain committed to world commerce, and to remain peacefully and politically engaged with all civilized nations.

• The strategy does indeed run counter to free market principles, in a very narrow sense. We will be intentionally influencing the price of one commodity from one group of suppliers. Again, the purpose of this market intervention is not to disavow the merits of unfettered free trade, which are also many and diverse, but to once again insulate us from a grave threat. In all other matters, we must continue to recognize the power of free markets. Ironically, this particular intentional market intervention will trigger other markets in our economy to solve the imported oil problem permanently.

The strategy outline above can end our addiction to imported oil, insulate us from enemies abroad, unleash market-driven innovation of alternative energy solutions, and stop our economy from being held hostage by inimical forces outside of our control. It is a strategy that is administratively simple and targeted with laser-like precision. The only ones to fear it should be our enemies. We must act immediately, before the Strait of Hormuz is closed by Iran, before Russia invades Georgia and cuts off the pipelines there, or before….