Global Policy Forum

Now He Will Have to Try Diplomacy

In a dream ending for the chapter of history being written now in Iraq, neo-conservatives fantasised before the war about a privatised, pro-American Iraqi oil industry. This would have access to the world's second largest hydrocarbon reserves and produce so much oil that Saudi Arabia, in charge of Opec, would lose its grip on petrol prices.

The world would then be swimming in inexpensive petrol - the cost of which would be dictated by the market, not by an anti-American price-fixing club run by Riyadh. Low prices would also mean falling revenues for oil-producers, which in the Middle East might precipitate the collapse of regimes hostile to the US. These hopes are now being dissipated like sand before the desert wind.

Oil is dribbling, rather than pumping, from Iraq's bomb-blasted oil industry. Sabotage and theft mean Iraq's oil production remains at a fraction of the levels achieved under Saddam. With reconstruction failing to take off, there is little sign of a post-Ba'athist dividend in the form of low oil prices. The result is that US action in Iraq has not weakened Opec, and hence Saudi Arabia, but strengthened it.

Last week's meeting of Opec ministers confirmed that with supplies being disrupted by political unrest in Venezuela and Nigeria, oil prices would remain where the Saudis want them to be - high. This is bad news for any putative global recovery and the US economy. Ever since Arab nations imposed an embargo on oil exports to America in 1973, the United States has tried, in theory, to wean itself off foreign oil. George Bush declared hydrocarbon independence a priority. But the real issue is not where the oil spurts from, but how much it costs to buy.

If politics is the pursuit of economics by other means, then Mr Bush needs now to display a deftness previously absent. Oil ministers are already talking of cutting production, with the implicit, Exocet-shaped threat of rising petrol costs. Every major economic recession in the past 40 years has been preceded by a jump in the oil price.

The Saudi foreign minister's fury last week over a Congressional report that implicated his nation in terrorism will not have gone unnoticed. The neo-conservatives' project for Opec has been exposed as counterproductive. Instead Washington will have to revert to diplomacy to win over Riyadh.The question is whether they do so by being crude - or by being refined.

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