How to Escape the Oil Trap

Both Iran and Saudi Arabia are now awash in oil money, and no matter what the controls, some is surely getting to unsavory groups.

By Fareed Zakaria

Aug. 29 - Sept. 5, 2005 issue - If I could change one thing about American foreign policy, what would it be? The answer is easy, but it's not something most of us think of as foreign policy. I would adopt a serious national program geared toward energy efficiency and independence. Reducing our dependence on oil would be the single greatest multiplier of American power in the world. I leave it to economists to sort out what expensive oil does to America's growth and inflation prospects. What is less often noticed is how crippling this situation is for American foreign policy. "Everything we're trying to do in the world is made much more difficult in the current environment of rising oil prices," says Michael Mandelbaum, author of "The Ideas That Conquered the World." Consider:

Terror. Over the last three decades, Islamic extremism and violence have been funded from two countries, Saudi Arabia and Iran, not coincidentally the world's first and second largest oil exporters. Both countries are now awash in money and, no matter what the controls, some of this cash is surely getting to unsavory groups and individuals.

Democracy. The centerpiece of Bush's foreign policy—encouraging democracy in the Middle East—could easily lose steam in a world of high-priced oil. Governments reform when they have to. But many Middle Eastern governments are likely to have easy access to huge surpluses for years, making it easier for them to avoid change. Saudi Arabia will probably have a budget surplus of more than $26 billion this year because the price of oil is so much higher than anticipated. That means it can keep the old ways going, bribing the Wahhabi imams, funding the Army and National Guard, spending freely on patronage programs. (And that would still leave plenty to fund dozens of new palaces and yachts.) Ditto for other corrupt, quasi-feudal oil states.

Iran. Tehran has launched a breathtakingly ambitious foreign policy, moving determinedly on a nuclear path, and is also making a bid for influence in neighboring Iraq. This is nothing less than an attempt to replace the United States as the dominant power in the region. And it will prove extremely difficult to counter—more so, given Tehran's current resources. Despite massive economic inefficiency and corruption, Iran today has built up foreign reserves of $29.87 billion.

Russia. A modern, Westernized Russia firmly anchored in Europe would mean peace and stability in the region. But a gush of oil revenues has strengthened the Kremlin's might, allowing Putin to consolidate power, defund his opponents, destroy competing centers of power and continue his disastrous and expensive war in Chechnya. And the "Russian model" appears to have taken hold in much of Central Asia.

Latin America. After two decades of political and economic progress in Latin America, we are watching a serious anti-American movement gain ground. Hugo Chavez in Venezuela—emboldened by his rising oil wealth—was the first in recent years to rebel against American influence, but similar sentiments are beginning to be heard in other countries, from Ecuador to Bolivia.

I could go on, from Central Asia to Nigeria. In almost every region, efforts to produce a more stable, peaceful and open world order are being compromised and complicated by high oil prices. And while America spends enormous time, money and effort dealing with the symptoms of this problem, we are actively fueling the cause.

Rising oil prices are the result of many different forces coming together. We have little control over some of them, like China's growth rate. But America remains the 800-pound gorilla of petroleum demand. In 2004, China consumed 6.5 million barrels of oil per day. The United States consumed 20.4 million barrels, and demand is rising. That is because of strong growth, but also because American cars—which guzzle the bulk of oil imports—are much less efficient than they used to be. This is the only area of the American economy in which we have become less energy-efficient than we were 20 years ago, and we are the only industrialized country to have slid backward in this way. There's one reason: SUVs. They made up 5 percent of the American fleet in 1990. They make up almost 54 percent today.

It's true that there is no silver bullet that will entirely solve America's energy problem, but there is one that goes a long way: more-efficient cars. If American cars averaged 40 miles per gallon, we would soon reduce consumption by 2 million to 3 million barrels of oil a day. That could translate into a sustained price drop of more than $20 a barrel. And getting cars to be that efficient is easy. For the most powerful study that explains how, read "Winning the Oil Endgame" by energy expert Amory Lovins (or go to oilendgame.com). I would start by raising fuel-efficiency standards, providing incentives for hybrids and making gasoline somewhat more expensive (yes, that means raising taxes). Of course, the energy bill recently passed by Congress does none of these things.

We don't need a Manhattan Project to find our way out of our current energy trap. The technologies already exist. But what we're searching for is perhaps even harder—political leadership and vision.

Write the author at comments@fareedzakaria.com.

URL: http://www.msnbc.msn.com/id/9024768/site/newsweek/