Whether or not the United States goes to war with Iraq, the price of oil seems destined to head north at some point in the not-so-distant future. That's the view of Charles Maxwell, the legendary oil analyst and former president of Cyrus J. Lawrence & Co. who now works as senior energy analyst at Weeden & Co., an institutional brokerage firm in Greenwich, Conn.
Maxwell was one of the first to anticipate the energy crisis of the 1970s, and his views have been solicited for decades by senior policymakers in the White House and other corridors of power. Since the Arab oil embargo in 1973, the price of oil has fluctuated between $10 and $30 a barrel, except for a four-year stretch in the early 1980s and a few months surrounding the Persian Gulf War in 1990 and 1991. In real terms, the price of oil has barely kept pace with inflation since 1974. Speaking at the Financial Advisor Symposium in Chicago on September 13, Maxwell reiterated his opinion that the price of oil is likely to break out of a 27-year trading range, probably sooner rather than later.
With both the Senate and House of Representatives giving President Bush the authority to attack Iraq without the support of the United Nations Security Council, war with that nation appears increasingly likely. Maxwell's own thinking has evolved in the last year. In October 2001, he predicted that political and economic forces would conspire to prompt many Americans to demand the U.S. military seize the Persian Gulf oil fields and hold them. At that time he warned that such naked economic imperialism would betray America's most cherished principles.
Since then, Maxwell, one of the few Americans to attend OPEC oil meetings in the 1970s, has attended several meetings in the last year with top officials in the Bush Administration, including the President. Perhaps as a result of what he has learned, the oil analyst is starting to look at the intractable problems in the Middle East through a different lens. Although he still doesn't advocate seizing Persian Gulf oil fields, he says that a war with Iraq, if prosecuted correctly, could be successful. "It depends how we do it," he said. "If we go in there like imperialists, it won't [succeed]. If we go in there to liberate the people, it could."
Some observers think that the chain-smoking Iraqi leader is ill with lung cancer or emphysema; in the last year, pulmonary specialists from France have made trips to Baghdad to visit him. Maxwell openly voiced the fear Saddam Hussein could become increasingly irrational and, if he obtained a nuclear weapon, might use it. One possible scenario, Maxwell predicted, would be for Iraq to attack northern and southern Israel. It's unlikely that he "would attack Jerusalem."
Such an attack would make large sections of Israel, and some of its closest neighbors, uninhabitable for a generation, but the Iraqi strongman could boast that he liberated Palestine, Maxwell said. Though he didn't say so, it's likely Israel would retaliate and the ensuing conflict could quickly engulf the whole region in an Armageddon. More than anything else, the desire to avert such an apocalyptic scenario may explain why Maxwell's thinking has undergone such fundamental change in the last year. It also underscores why many in the Bush Administration and Congress believe the risk of inaction could outweigh the risks of action. However, there is no guarantee that pre-emptive American intervention won't set off another disastrous chain of events.
Recent reports indicate that the United States is drawing up plans for a prolonged occupation of Iraq along the lines of the MacArthur-led occupation of Japan after World War II with the Wilsonian goal of establishing a democracy in that country. Were a democracy to succeed in Iraq, Maxwell says its repressive neighbors, most notably Saudi Arabia, would feel deeply threatened. But whatever the geopolitical implications, don't expect a friendly new regime in Iraq to become an instant source of cheap oil. It would take years before a new regime in Iraq, which sits on 10% of the world's oil reserves, could rebuild its infrastructure sufficiently to increase its production from one or two million to four or five million barrels a day.
Maxwell believes Iraq possesses a great deal of untapped economic potential beyond its oil reserves, calling Iraqis a "well-educated" people who are skilled at trade. If the United States and its allies "could set up a functional government with democracy, it could be a beacon of light within the Arab world."
However, he is equally critical of many Arab governments that he views as "dysfunctional." Why? "If you subtract the oil revenues from 21 Arab states' gross domestic product, you get the gross domestic product of Finland," Maxwell explained. Other commentators have noted that it is no accident that the less oil a Middle Eastern nation has, the more likely it is to have at least some democratic institutions and freedoms. Western dependence on oil causes both the American and European governments to ignore the human rights failures in these societies, fueling anti-Western resentment among its people.
Though commentators such as former President Bill Clinton say the United States can overthrow Saddam Hussein in a few weeks, transforming Iraq into a democracy won't be as easy. Such a move could provoke outrage among Arabs and others. And the notion that little Iraqi children will embrace hot dogs and Little League baseball as easily as their parents adapt to democracy seems ludicrous. After all, Japanese citizens were playing baseball long before General MacArthur arrived, and that island nation already possessed a fairly sophisticated representative government, even if it was undercut by a monarchy and the military.
The Inevitable Oil Crisis
November 1, 2002