Kicking the Oil Habit

Chancellor Angela Merkel has made addressing climate change a high priority on Germany’s agenda for its EU and G-8 presidencies that begin in January. Here is a concrete proposal, one general enough for world leaders to consider and accept, and clear enough for other governments and businesses to grasp: simply set a date, at the next G-8 summit, by which oil-powered cars would no longer be licensed in major industrialized countries.

Such a decision would have a strongly positive economic and geopolitical impact. The real cause of today’s worries over energy is not the decline in world oil reserves, but rather that domestic oil production by the top consumers – Europe, the United States, and China – will decline at the very moment that growing Asian demand strains the market. Available reserves will increasingly be concentrated in the Middle East simply because supplies in all other regions will be depleted sooner.

Moreover, the main oil exporters are unwilling to subordinate their investment policies to market requirements. Saudi Arabia seeks to run its oil production independently, while Iran scares off potential investors with bureaucratic hurdles and corruption. Iraq suffers from a lack of security, and foreign investors in Russia are thwarted at every turn. Those four states contain half of the world’s proven oil reserves and two-thirds of what could potentially be exported. All this, not production costs, lies at the heart of high oil prices and the scramble for oil contracts in Central Asia and Africa.

To believe that high oil prices are good because they serve the environment ignores some basic facts of international politics. First, in many of the poorest African and Asian countries, oil imports account for a significantly higher share of national expenditure than in industrialized countries, which means that economic growth and social development are being imperiled, while new debt crises loom.