The Power of Petroleum

Record-high oil prices have dramatically shifted the balance of global power. At nearly $90 a barrel, oil is more than a crucial energy source, it's a strategic commodity of central importance. The $30 per barrel rise in crude prices since last October raises the daily imported oil bills of the United States and Europe by $300 million each, while Middle East exporters collect an additional $500 million daily. These are sums with huge financial and political implications that are beginning to reverberate.

The windfalls have some important upsides for oil-producing nations and the world at large. Saudi Arabia's oil revenues have surged from $60 billion in 2000 to an estimated $152 billion in 2007. Its budget has moved from deficits to a large surplus. Russia, effectively bankrupt in 1998, has used its vast oil and gas revenues to eliminate most foreign debt and build $434 billion in reserves. Both countries are diversifying beyond energy. A host of other nations, including many small African and Caspian Sea countries, are establishing sovereign-wealth funds to better manage their billions, injecting much-needed capital into markets in the midst of a credit crunch.

Yet even as oil has greased the wheels of global capitalism, it has hindered democracy. Governments with large oil receipts need less consent from the governed to stay in power. They can reward their friends and buy off their opposition, or pay to have it crushed. They discourage free markets and favor state enterprises. In countries like Nigeria and Azerbaijan, the result is repressive and corrupt political institutions and bloated bureaucracies sustained by oil money.

Certain producers, notably Russia, are asserting their influence through energy politics rather than military might, using their resource wealth to strong-arm neighbors and build new empires. All the producing countries now feel more confident and less dependent on the traditional powers. Roles are suddenly reversed. It is the energy importers who are now the supplicants. When President Hu Jintao of China left Washington in spring 2006, his destination was Nigeria. Likewise, the Japanese prime minister, Shinzo Abe, flew to Saudi Arabia after his recent U.S. visit.

These Chinese and Japanese leaders understand that global oil supplies are a looming challenge. The U.S. appetite for gasoline and surging Chinese oil and gas demand have proved surprisingly resistant to high prices. The world currently consumes about 83 million barrels a day, up from 71 million a decade ago, and will need ever more oil in the future.

National oil companies now control nearly 80 percent of worldwide reserves, leaving major Western multinationals with full access to only 6 percent. Some state companies, like Malaysia's Petronas, are world-class and highly efficient, but many are simply bureaucracies in the oil business. One downside of today's record prices is that ineffective state firms can satisfy the revenue demands of their political masters without investing to sustain production levels. In Iran and Venezuela, where high prices are concealing production declines, short-term political expenditures and subsidies are taking precedence over longer-term investment. Iran, with the world's second largest combined oil and gas reserves, is an importer of natural gas and will depend on imported petroleum products within a few years.