Remember the warm glow of the dawn of the post-Cold War era, which was still breaking over us only two months ago? Back when the biggest debate in town was over the spending of the peace dividend? When industrial democracies were cruising on a seemingly bottomless pool of $18-a-barrel oil and preparing to welcome the Soviet Union and its former satellites into a global free-market economy?
Events in 1990 will be remembered as pre- or post-Persian Gulf Crisis. Assumptions held on Aug. 1 about the changing nature of economic, military and political power have been called into question by Iraq's invasion of Kuwait on the following day.
In the rosy dawn of the opening of the Berlin Wall, economic power appeared to have eclipsed military power in a world of prolonged nuclear stalemate. West Germany's domination of the Soviet Union in dictating the terms of German unification was Exhibit A. This sentiment also surfaced in the new bit of American folk wisdom that holds, "The Cold War is over. And Japan won."
Scholars constructed theories of national decline on the idea that military power had become a deadly luxury. The economic dynamism of the European Community and the EC's lack of interest in a strong, common military force seemed to prove the point.
In the half-century before World War II, the most powerful nations of Europe firmly believed that economic prosperity depended on the ability to make their military power felt abroad. Colonialism was the overt form this belief took. African and Asian nations were conquered and then harnessed to economic systems that benefited the consumers and industrialists, and therefore the politicians, of Europe.
Hitler's war left Europe too weak materially and psychologically to hold foreign empires. European integration rather than colonialism became the prime economic motor beyond the borders of Britain, France and the others. When communism entered its death throes last year, a global economy free of the distortions of rigid ideology, military conquest and political control started taking shape.
But Saddam Hussein showed the world on Aug. 2 that it would not be that simple. Iraq's grab of its small neighbor for its oil fields and revenues obviously demonstrates that economic power and military power continue to be intertwined beyond the Cold War.
The invasion shows something else: the world's oil-pricing mechanism has become archaic and dangerous. A hybrid of the colonial pricing system and the economic structure of the oil industry, the present cartel arrangement inflicts damage on all economies, in rotation. If the affluent countries of the Northern Hemisphere fail to achieve the benign new order that seemed possible only 60 days ago, it will be in part because they failed to think creatively and act decisively on a global energy supply and consumption policy when they had the opportunity to do so.
Developing oil production requires long lead times and massive capital investments, which are then offset by low fixed operating costs. This creates an industry in which excess capacity is the norm. Production, and prices, can be moved up or down on the basis of political decisions about who should benefit from the law of supply and demand, and when.
Until 1973 this power to bestow or withhold benefits lay in the hands of Western oil companies, which exercised it in colonial fashion. They passed the benefits back to their governments, which could choose low inflation (the United States) or revenues from high gas taxes (Europe). Then came the Arab-Israeli war of 1973, the Arab oil embargo and the shift of control to the OPEC cartel.
The cartel now resembles an inept Mafia mob embroiled in turf warfare. Stripped of its excess rhetoric, Iraq's justification for the invasion is that it had to stop Kuwait from charging $18 a barrel, which undercut Iraq's demand for $25 a barrel. The difference in the two prices, Saddam Hussein says, is the margin of dignity and security for the Iraqi people. He has elected himself OPEC's enforcer.
The temptation to gloat over OPEC's troubles must (alas) be tempered by the soaring oil prices the crisis has produced. The obvious need for a national energy policy continues to elude the Bush administration, but environmental and other activist groups are forcing it back on the American agenda, with proposals for higher gasoline taxes, production incentives and new conservation measures.
But such plans do not go far enough. The post-Kuwait world should adopt consumer-producer agreements that would provide regular but moderate increases in the price of crude oil, pegged to economic growth. These would be the cornerstone of an international energy policy, similar to the arrangements that were proposed unsuccessfully by Saudi Arabia in the mid-1970s to prevent the boom-and-bust cycles the world has endured over the past 15 years.
The special nature of oil as a commodity forced the multinational oil companies to depart from free-market practices before OPEC took over the show. The companies were right in what they did. Once the Kuwait crisis is resolved, it is up to governments to show they can do as well by negotiating agreements that protect the interests of consuming and producing nations. This will help ensure that pre-August 1990 was in fact a dawn of a new era and not just a parenthesis between different types of global conflict.