John Tamny writes March 21, 2019 at Real Clear Energy In His Saudi Arabia Documentary, Fareed Zakaria Omitted How Powerless the Country Is
The 1973 embargo “did not imply that we could reduce imports to the United States…[T]he world is really just one market. So the embargo was more symbolic than anything else.” Those were the words of Saudi oil minister Sheik Yamani, in response to the impact of the 1973 Arab (“Arab” is mentioned because non-Arab countries like Iran did not participate) oil embargo on the United States. The U.S. imported every bit as much (in truth, more) oil after the embargo was announced as before; the only difference being that Americans purchased the “Arab oil” from those not embargoed. It’s a basic economic truth that there’s no accounting for the final destination of any good.
So what happened in 1973? Why did oil prices spike? The better question would be one of why did commodities across the board spike? The simple truth is that there were no “oil shocks” in the early ‘70s as much as President Nixon’s fateful decision to sever the dollar’s historical link to gold resulted in the greenback plummeting in value. Wheat, meat, soybeans, oil, and every other commodity priced in dollars spiked. Notable here is that per Robert Bartley’s brilliant 1992 book, The Seven Fat Years, OPEC officials sent out an early ‘70s communique that signaled their inability to control the price of oil; their implicit point that a change in the value of the dollar would by definition have a profound impact on a commodity once again priced in dollars. In short, the “oil shocks” of the early ‘70s were not. They were dollar shocks. Nothing more, nothing less.
All of this rates mention in consideration of a recent CNN special hosted by Fareed Zakaria, Saudi Arabia: Kingdom of Secrets. Up front, it’s fascinating to look at as the footage unearthed by Zakaria’s production team is more than impressive. Zakaria’s production was spellbinding all the while exasperating for the simple economics of exchange and currency not factoring into his analysis, nor history. What was more than interesting could have been great had Zakaria sourced commentators with a better understanding of trade. Instead, viewers had to suffer Thomas Friedman’s often wrong but never in doubt certitude from the left versus the unserious rants of the 45th president on the alleged right. Neither Friedman nor Trump comprehends what’s simple; that embargoes are utterly toothless in an economic or real world sense.
As a result, Zakaria promoted the mistaken view that the ’73 embargo caused soaring prices, gasoline lines and recession in the United States, and there was no commentary to question what Zakaria must know not to be true. The reality is that the flow of Arab oil didn’t decline, and rising prices were dollar related. The gas lines were a logical effect of price controls imposed by federal officials, while the economic slowdown was the expected result of reduced investment that always rears its head when currencies are losing value. Investment is what powers growth simply because it boosts productivity, yet the falling dollar worked as a tax on investment. The malaise-filled ‘70s were a consequence of U.S. policy error, not what happened in Riyadh.
That’s what was so nauseating about Friedman’s assertion that our relationship with Saudi Arabia amounts to (a slight paraphrase here) “keep the oil flowing, and we’ll avert our eyes to what’s happening out back.” Implicit there is that there’s some kind of scenario whereby the Saudis would cease bringing oil to market. Except that there isn’t, and we know this based on the history presented to us by Zakaria himself. As he points out, in 1938 a rather poor Saudi Arabia (per Zakaria) desperately needed money, and with an eye on enhancing the Kingdom’s finances, the royals allowed in western know-how and investment. Soon enough the country was awash in oil, and the riches that come with being a size exporter of the world’s primary energy source.
All of the above in mind, there’s yet again no reasonable scenario whereby the Saudis would cease pumping out the oil. They need the money. Realistically there would be a revolution in the country absent the constant outflow of oil in consideration of how much the citizenry, the state and an ever-growing royal family rely on the Kingdom’s oil wealth. Here Zakaria noted how very much a decline in oil prices in 2014 forced difficult cutbacks in Saudi, but didn’t tie the previous truth to how ridiculous was Friedman’s oft-repeated point that the U.S.’s only rule is that the country pump its oil. Well, of course it will. No rules needed. No matter what happens, Saudi oil will flow. Friedman’s alleged insight into U.S./Saudi relations is more than empty.
And then there’s President Trump. Zakaria seems to think Trump has a point in justifying his desire to maintain warm relations with the repressive country. As Trump puts it (not directly to Zakaria, but in a video clip sourced by him), “you want $150 oil?” Trump’s equally empty argument, one not corrected by Zakaria, is that Saudi Arabia could cut us off on the way to nosebleed oil prices stateside. Except that it couldn’t.
Not only is oil a globally priced commodity, not only is it a certainty that the Saudis will never cease selling what produces abundant dollars for the Kingdom, but the dirty little secret is that neither Saudi Arabia nor OPEC controls the price of oil. Zakaria plainly disagrees, but what’s unfortunate is that he didn’t at least give the opposing viewpoint airtime in a documentary presumably produced with an eye on forcing deep thought and conversation about what is in many ways a mysterious country. Instead, viewers were fed what’s easily disprovable.
Indeed, if the Saudis and OPEC truly control the price of oil as Zakaria attests, why was it so cheap in the 1960s when OPEC formed, but nosebleed expensive in the ’70s? Mood swings? Better yet, if they control the oil price are we to assume the Saudis and OPEC were simply feeling generous in the ‘80s and ‘90s when oil fell as low as $10 barrel? Conversely, were the alleged price setters of a global commodity suddenly overtaken by immense greed in the 21st century such that they jacked up the oil price, only to lower it in 2014 in such a way that Saudi Arabia itself was forced to endure difficult cutbacks? Or is there something else at work?
Very basic logic tells us that something not Saudi and something not OPEC dictate oil’s price. Readers can rest assured that it’s not fracking. Missed by cheerleaders of the latter is that before it was much of a thing, meaning the ‘80s and ‘90s once again, the price of oil was four times lower than it is now. Fracking excites mercantilistic conservatives who don’t understand simple economics.
So what’s the biggest factor when it comes to oil? The answer came up early in this piece. It’s the U.S. dollar. It’s very simple, really. When the dollar is strong and stable as it was during the Reagan and Clinton years, oil is cheap. When the greenback is declining as it was during the Nixon/Carter ‘70s, and the Bush/Obama ‘00s, the price of oil (and other commodities) is soaring. Considering fracking, it’s only economic insofar as the dollar is cheap. Considering Saudi power, it’s most evident when the dollar is cheap.
Frustratingly, none of this came up in Zakaria’s analysis. Fascinating as his attempt to make sense of Saudi Arabia was, it was deprived of greatness by an embrace of all too easy-to-discredit economic fallacy. Contrary to what Zakaria reported, there’s nothing that will stop the flow of Saudi sourced oil, there’s no way the Saudis can keep their oil from being consumed stateside, and their supposed ability to control the price of oil is easily belied by history. None of the previous truths made it into the documentary, and that’s unfortunate.
Fareed Zakaria must know better. And if he doesn’t, he should.