Petrodictators and you...

I've been reading in my latest book "Hot, Flat & Crowded" by T. Friedman (wonderful thus far) about the economics of oil and why the middle east is such a awful place. There appears to be a direct correlation between the price of oil and the crushing of freedom.

Ever wondered why the Berlin Wall really came down? Russia, is one of the world's largest producers of oil. In the early 1970's with the OPEC embargo and subsequent oil crisis, the price of oil went from $10 a barrel to almost $70/barrel. Russia had meandered along up until the early 1970's and was relatively self sufficient, but with the rise in oil prices, they had an immense income from the state controlled oil fields and started to spend and subsidize their citizens energy uses and a trade imbalance occurred.

What's a trade imbalance consist of, you might be wondering (I'm sure you were)? Countries can suffer from what economist call the "Dutch Disease". When the Dutch discovered vast resources of oil and gas in their waters, they were able to sell this windfall of natural resources which, in turn, drove up the price of their currency (basically, everyone wants what you've got and it inflates the currency exchange value between nations - which is what allows other nations to actually buy what you're selling). With this increased buying power of the Dutch currency, it was far cheaper to import goods/services rather than produce them internally. This actually causes deindustrialization as companies move off shore because of the imbalance in cost for manufacture. The Dutch Disease is a complication of a nation trying to take advantage of a sudden windfall and how it ultimately destroys that nations capacity to grow domestically.

Russia went through this very thing - they grew and grew on the wealth that $70/barrel oil created for the USSR. Meanwhile, as the rest of the world's consumers, mainly America started to finally get their act together by lowering their use of oil (by raising fuel economy standards, for example). This, in turn, dropped world consumption and there was suddenly a surplus of oil being produced by countries like Russia. Since oil is a commodity and is sold based on demand, the price dropped drastically and fell back to $10/barrel.

This may not seem like a big deal, but the country had created it's infrastructure around $70/barrel oil prices, when that dropped to $10/barrel, their economy fell out from underneath them. Civil unrest popped up and came to a head and the USSR came apart. Contrary to popular belief, the real cause of the Berlin Wall to fall wasn't the eloquence of then President Reagan, but the oil conservationship started with the Ford and Carter administrations a decade earlier that finally got enough steam to make a dent in world oil prices.

Now, what we didn't do was put two and two together and America started to think that $10/barrel oil was back around to stay so we started to do the same thing we did in the 1950's - 60's and build inefficient vehicles and allowed for the overall energy consumption per American household to increase again. Why not? Gas was cheap!

Here we are - nearly 20 years later and with oil prices back up above $70/barrel (with all-time high of $140/barrel), those oil producing nations, like Russia, Iran, Saudi Arabia, etc now have another windfall on their hands and they're using their oil money to buy the freedoms of their populations. It's it any wonder that 10 years ago, Vladimir Putin was the next great hope for democracy in Russia and now he has flexed his muscle by showing the world what he really is made of (the recent events in Georgia for example). Energy producing nations have incredible power when it is they who control the gates to who gets energy and who doesn't.

And with the terrorism funding and extremist behaviors of nations in the Middle East - who, without oil production, would be a vast expanse of sparse goat herders and relatively nothing else, have vast amounts of wealth to pour back into their countries. Iran, for example, subsidizes the gasoline used in it's own country from the profits it makes from oil sales on the world level. Gas there is reportedly around $0.35/gal.

Almost every single one of the oil producing nations are under the control of dictatorships. The only exceptions were those that were established democracies before the rise of oil (US, Great Britain, etc). And of all of those nations that we hear about - like Venezuela, Iran, Russia - who rule their countries with an iron fist can get away with it because they can placate their citizens with generous subsidies from the oil profits. In fact, the higher the price of oil, the more bold these countries get - they have incredible wealth!

Instead of pouring $10/Billion a month into Iraq to remove Saddam and now try to "rebuild" the country. The thing we should have done was take one year's worth of military spending on this campaign - only one - around $120 Billion and spent the same amount of time - roughly a decade - to create energy independence and drive the price of oil down to under $10/barrel.

With that crash in oil prices - those nations will not have the leverage to purchase their way out of controlling their citizens. Oil in the last 12 months due to America's own financial crisis and subsequent western world crisis of cash flow - oil has dropped drastically - over 50% in the last few months. In just that, we've cut the incomes of dictatorship nations like Iran and Venezuela in half. By dropping the price of oil to inconsequential levels - each of those nations will have the severe consequences of the trade imbalances.

And since none of these nations have invested in a diverse industrialization internally (or any industrialization at all, period), with that oil drop they find themselves very shortly with a mutiny on their hands with inabilities to continue funding their citizens subsidies and individual crashing of their economies. We wouldn't have needed to invade Iraq - the Iraqi's would have overthrown the government in mass uprising!

Friedman used the example of Bahrain - the tiny island oil producing nation has poured massive resources into retooling it's infrastructure to survive on non-oil production. Why would they do this? Simple- they're the first oil producing nation to start to run out of oil. Importing cheap foreigners to work there and subsidizing their citizens will not work for a sustainable economy in the future.

Since we've been in Iraq for the last five years - we've roughly spent around $600 billion on just trying to stabilize one nation. 1/5th of that amount would have funded a massive energy infrastructure redesign for America. The entire amount would have made it happen in 1/2 of the time. This would have created an incredible new jobs program in America and would have fostered internal industrialization, job growth and prosperity that we would be enjoying right now.

So in a nutshell - if we really want to ditch the kooks in the middle east, we need to undermine the cost of oil - now - and strive to keep it there. Take the financial power out of those nations that hate us and in effect force them to find other ways to make a living. And, within a decade, we'd possibly see a whole new type of Glasnost.