Imagine an unexpected arrival at the end of the second millennium of an oil economist from Hell.
His contract, which began in about 1996 (exact dates are not available), requires him to devise a strategy that either will (a) intimidate the U.S. government into providing a billion dollars or so in unscheduled and unwarranted subsidies to domestic oil producers or (b) force the leading suppliers of oil to the U.S. to reunite in opposition, led by the Organization of Petroleum Exporting Countries, to U.S. trade policy on crude oil.
As a result of the first outcome, tax dollars from the vaunted fiscal surplus of the U.S. Treasury will find themselves on the bottom lines of the income statements of small producers and not in classrooms, public housing, or Medicare.
As a result of the second outcome, a third oil shock will be brought about, one in which prices for imported crude oil in the U.S. will jump overnight, impacting gasoline prices, interest rates, and the Dow Jones Industrial Average.
The oil economist asks himself: how to tilt things to favor the first outcome by putting the price of the second outcome at orders of magnitude higher than the first; how to make the consequences of the second outcome so ugly for all participants that the Clinton administration will turn over the billions of dollars needed by domestic oil producers?
Five-point exercise
After some deliberation, the oil economist reports to his clients, "Ladies and gentlemen, the solution is trivial, a five-point exercise:
- Find a way to alienate the major oil exporters to the U.S.
- Focus on Saudi Arabia, the linchpin of pro-American world oil supplies. Weaken the Saudi monarchy by creating the illusion of an anti-Saudi policy on the part of the U.S. executive branch.
- Turn the Arab oil embargo of 1973 on its head by unilateral imposition of a punitive tariff on Saudi oil exports to the U.S.
- To make sure that OPEC is brought back from the dead, include Venezuela and Iraq, as countries whose oil exports to the U.S. will be taxed.
- Also include Mexico, just to spite the North American Free Trade Agreement and to put that government`s feet to the fire for not opening up its upstream to private investment."
Bleak scenario
"What happens then?" the clients ask.
"One of two scenarios," the devilish economist replies. "Scenario A is the milder of the two scenarios. Call it the `two-tiered pricing` scenario. The punitive tariff on the crude oil exports of Saudi Arabia and friends to the U.S. will bring about a two-tiered pricing scheme for crude oil-whereas, outside of the U.S., crude oil will cost $15-18/bbl, it will cost $25-30/bbl inside the U.S. The difference between the two pricing levels corresponds to the effect of the punitive tariffs, varying in amount, on crude oil imports from Saudi Arabia and the others.
"But don`t think that there will be two price levels for imports in the U.S. Everyone else who exports crude oil to the U.S. will raise his prices to the levels of the penalized oil.
"Of course, some countries, such as Mexico and Venezuela, will suffer more than others, as they will have to pay into an escrow account for both past and future crude oil exports to the U.S. money that the Mexican and Venezuelan governments quite simply do not have. Perhaps these governments will have to go out on the capital markets to borrow money to pay the U.S. tariffs. Who knows what market rates they will find for a purpose like that?
"With higher crude oil prices, pump prices will also climb, the industrial and consumer price indexes will go up, U.S. manufactured exports will become more expensive, the U.S. economy will suffer a contraction, and bilateral relations with the member countries of OPEC and its friends will become strained. Mexico certainly will close its markets to U.S. petrochemicals, refined products, and natural gas. The Democrats, of course, will lose the year 2000 presidential election."
"But won`t other countries who are not on the list step in to supply crude oil at the old prices?" the clients wonder aloud.
"There is no spare capacity in 1999 to replace 6 million b/d," the economist whispers. "Only Saudi Arabia might have been able to fill the vacuum in supply, but the Saudis are at the top of the list to be penalized."
Bleaker scenario
The economist from Hell continues, "As I say, however, this scenario is mild compared with its alternative. Call this one `OPEC reunification.` This scenario comes to pass when angry core OPEC members, led by Saudi Arabia, call for a return to $30/bbl in all oil markets, not just the U.S.
"In this scenario, the small U.S. independent oil producers rejoice at getting double their current prices for crude oil, but they anguish at the fall of the market value of their retirement accounts on the New York Stock Exchange. As all countries now pay higher oil prices, the unequal impact on export competitiveness of manufactured goods of the U.S. that was predicted in the other scenario is neutralized. The world auto industry, drunk on profits from sports utility vehicles, will have to sober up to the need for gasoline economy.
"Needless to say, the Democrats also lose the Year 2000 presidential elections in this scenario as well-oh, and they also lose both houses of Congress."
"Well, how do we get started?" the clients ask as one.
"The way it`s done is to initiate an antidumping complaint against crude oil exports from Saudi Arabia to the U.S. It`s that simple," the economist replies.
"What do you mean, `antidumping complaint`?" the clients respond in consternation. "That`s never been done before in the case of crude oil. Tomatoes, steel, brooms, cattle, tuna-and who knows what else-but not crude oil."
"Of course," the economist rejoins, "there`s the simplicity of it. The infamous U.S. protectionist tariff of 1930 provides for domestic producers of whatever product to petition the U.S. Department of Commerce for protection against `foreign` producers who are either receiving subsidies from their governments or who are dumping their products on the U.S. market to damage U.S. producers and steal their market share.
"You are lucky, because U.S. procedures in this matter favor the U.S. producer-the foreign competitor must prove his innocence; you need only concoct something that can be called `the best available data.` The countries accused of dumping crude oil on the U.S. market will be required to show that their production costs were never higher than market prices. In the best of circumstances, the notion of `production cost` is open to interpretation and debate; you only need to show that the accounting systems of Saudi Arabia and the others fail to meet U.S. standards when it comes to showing that their oil exports are free from subsidies. By default, your one-eyed data-by-analogy will become the law of the land in the kingdom of the blind."
Devilish recommendations
The economist continues, "My recommendation is that two complaints be filed: one for dumping, the other for subsidies. Allege damage to your industry equal to your unfulfilled revenue expectations of the first quarter of 1998 through the first quarter of 1999. Allege past damages and the likely threat of future damage. Once your petition gets administrative standing-you have to show that you represent 25% of your `regional` market-you can ask Commerce to make Saudi Arabia and friends make payments to an escrow account for past and future exports for 12-18 months while the investigation proceeds into the esoteric microeconomics of cost accounting in the to-be-punished state oil companies. I guarantee that such a step will provoke the Saudis-to say nothing of the Venezuelans, Mexicans, and Iraqis."
"But wouldn`t the major oil companies object?" one of the clients asks. "After all, they are the ones who do almost all of the importing of oil from these countries."
"You raise an important point: in theory, the majors should oppose this strategy tooth and nail," the economist replies. "On the other hand, they are not likely to take this complaint seriously-until it`s too late and an interim tariff penalty will have already been ordered. Once in place the fun begins. It will take investigators months of work to come to no conclusions at all about real production costs in the countries named in the complaint."
"Once we do this, do we have any control over which of the two scenarios materializes?," the now concerned clients ask.
"Unfortunately not," the economist demurs. "You touch on the only weakness that I see in this strategy. Once you start the ball rolling with antidumping tariffs and countervailing duties, you lose control of its velocity and direction. Remember that your objective is to intimidate the weakened Clinton administration into giving you tax breaks and whatever else you can squeeze from them. You want to get your oil prices up by antagonizing U.S. key strategic allies only as a last resort.
"Incidentally, you did approve my consulting fee: one half of the revenues from any increases in your oil prices, whether from U.S. government subsidies or turmoil in world oil markets. Devil`s wages, you understand."
