We need to be absolutely clear about the stakes here. They are not about the immediate prospect of a $5 or $10 increase in the price of a barrel of oil. We could live with that, even though it would be unpleasant. What's really at issue is a shift in the Middle East's balance of power that would transform oil into a strategic weapon and make a major war between the Arab states (led by Iraq) and Israel virtually inevitable.
You can't evade the Persian Gulf's vital statistics. In 1989, it supplied a quarter of the world's 59-million-barrels-a-day thirst for oil. More important, it contains 66 percent of the world's 1 trillion barrels of known oil reserves. If Saddam Hussein remains in Kuwait, he will be in a position to determine how much of this oil is supplied and at what price. Whether he regulates Saudi Arabia's production by occupying the country or by merely intimidating it is a distinction without a difference.
The result will be the same. He could ultimately install himself as an arbiter of economic growth for the industrial world. He could exchange oil for whatever he wants -- advanced military hardware or even components for nuclear weapons. And he could splinter the industrial world by favoring some countries and discriminating against others. This is why we have a crisis.
The implications for Israel are no less fearsome. Saddam's ambition to dominate the Arab world can best be achieved by defeating Israel. Having intimidated his neighbors, he could assemble them into a holy alliance against their common enemy. Israel's relative position would grow weaker as Saddam improved his arsenal (which already includes roughly 5,000 tanks, 500 aircraft and a million troops) and joined it with those of other Arab states. Because Israel must recognize this, the odds of a preemptive Israeli attack would rise sharply if Saddam remains in Kuwait.
It's somewhat ironic, then, that the initial economic effects of the takeover of Kuwait need not be catastrophic. No one knows what will happen to the price of oil in the coming months. Economist Philip Verleger Jr. of the Institute for International Economics in Washington thinks it could reach $30 a barrel by December. This would represent more than a 50 percent increase over the average price in 1989. But it's much less than the quadrupling of prices in 1973 or the tripling in 1979-80.
Even before Iraq's move into Kuwait, the U.S. economy was on the edge of a recession. In July, the civilian unemployment rate rose from 5.2 to 5.5 percent. That's the point. Although higher oil prices hurt the economy, they are not by themselves decisive. Indeed, the combination of the collapse of oil prices in 1986 and greater energy efficiencies (prompted by the 1970s' price increases) mean that Americans are now spending less of their incomes on oil than in the early 1970s. Between 1972 and 1982, consumer spending on oil and gasoline rose from 2.9 to 3.9 percent of disposable personal income. By 1989, that was 2.2 percent.
The truth is that we could adapt to a one-time increase in oil prices, distasteful as it might be. In time, the responses of the market -- more conservation, fuel switching -- might again lower prices. The further truth is that the world is littered with anticompetitive arrangements that hurt U.S. economic interests. The European Community's farm subsidies deprive our farmers of billions in exports. We get mad about these practices, but they don't threaten our national security. Settling these conflicts is what trade negotiations are all about.
Iraq's quest to control the Persian Gulf is of an entirely different character. Saudi Arabia and Kuwait have regarded themselves as members of the wider world economy. They have used their oil power with restraint, because they did not wish to destroy global prosperity. They wanted to invest abroad and be able to import the industrial world's high living standards. They reconciled their commercial interests with the Middle East's radical politics by subsidizing their Arab neighbors, including Iraq.
For Saddam, the prosperity of the industrial nations is mostly an irrelevance. Joining their club is not his ambition. He sees oil like tanks and missiles: they are all weapons to increase Iraq's regional power and to bolster his regime. The more Saddam controls oil, the more he will be tempted to raise its price and ration its supply. In 1989, Europe got 47 percent of its oil from the Persian Gulf and Japan got 63 percent. Their dependence helps explain why they swiftly took tough stands against Saddam. But the same dependence implies that, if he can establish control over the Gulf, there will be intense pressures in Europe and Japan for accommodation.
Even if Israel did not exist, the region's rivalries and the disparities in oil wealth would mean much instability. The eight-year war between Iraq and Iran proved that, if nothing else. But Israel's presence compounds the potential for war. There can be little doubt that Saddam's ultimate target is Israel or that the Israelis think otherwise. The more he dominates the Persian Gulf, the freer he will feel to move West -- and the more compelled Israel will feel to move East.
So the stakes in this crisis are enormous. Everyone should hope that economic sanctions get Saddam out of Kuwait without more killing. This is possible, but improbable. No one should be deluded about the perils of the situation. The United States may be on the verge of a large-scale and permanent military commitment in a dangerous region whose passions and politics are incomprehensible to most Americans.
Still, the real risk is that the industrial world -- the United States, Europe and Japan -- won't have the political will to see this through. The temptation will be to reach out for a settlement that minimizes the immediate economic disruption. This would be a mistake. Allowing Saddam to keep Kuwait won't solve anything. It would not buy peace. It would only postpone war.