OPEC OIL MINISTERS meet today at a jittery time in the oil market. Even before the attack on an oil workers' compound in Saudi Arabia last weekend, the price of crude had reached $40 a barrel, four times the low point of 1998 and way above the range of $22 to $28 in which oil has traded in the past few years. Part of the price spike reflects a spurt of growth in the world economy -- particularly in the United States, India and China, though even Japan has recently shown signs of revival. But about $8 of the per-barrel price is reckoned to reflect the danger that violence in the Persian Gulf would disrupt production. The latest terrorist attack in Saudi Arabia sent oil prices up $2 or so per barrel in trading on Tuesday, though they fell back again yesterday.
Some security experts regard the traders' worries as exaggerated. The fact that terrorists can kill oil workers does not prove that they can disrupt oil production. Saudi Arabia's oil infrastructure is protected by aircraft patrols, high-tech surveillance and a guard force numbering some 30,000. The kingdom's ports, pipelines and other infrastructure are designed with some redundancy, so that oil could keep flowing despite the destruction of a few facilities. There are a small number of choke points, and a successful attack on one of them might indeed be devastating. But the chances that al Qaeda's internally divided Saudi operation will hit one of these bull's-eyes are probably too small to justify the current risk premium in the oil price.
There is no denying, however, that the world is to an alarming extent reliant on Saudi oil. The kingdom accounts for fully a quarter of the world's proven reserves; even more alarmingly, it is the only producer that can ramp up production to a significant extent on short notice. Whereas in 1990 OPEC countries had unused production capacity equivalent to 8 percent of global consumption, today spare capacity has shrunk to about 3 percent, and nearly all of that is in Saudi Arabia. Even if it's right that terrorist strikes on Saudi oil infrastructure are unlikely in the near term, long-term reliance on the stability of an autocratic monarchy is a frightening prospect.
The OPEC meeting today will promise extra production -- meaning, mainly, extra Saudi production -- in an attempt to calm traders' jitters. Meanwhile, the right policy for the United States is twofold. First, the administration must continue restocking the Strategic Petroleum Reserve, ignoring imprudent suggestions from Sen. John F. Kerry, the likely Democratic presidential nominee, to cease this process until oil prices go down. Second, the United States should embrace policies that discourage reliance on oil -- not just foreign oil but all oil, because Saudi Arabia's position as the buffer producer makes the price of oil pumped everywhere from Texas to Central Asia vulnerable to terrorist attacks in the kingdom. The most direct ways to promote the use of other types of energy are a cut in federal subsidies to the oil industry, and a gasoline tax increase.