The Blog

The Two Markets

The American economy is now relying on two markets which don't play by the normal rules.

11:00 PM, Feb 28, 2005 • By IRWIN M. STELZER
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The more difficult problem relates to oil prices. OPEC has decided to adjust output to prevent consuming nations from accumulating inventories to dampen price run-ups. The cartel will henceforth aim to maintain prices in the $40-$50 per barrel range, Saudi Arabia announced late last week, finally officially abandoning it previous target of around $25.

The higher price confers political--in addition to economic--advantages on producing countries. Iran can resist pressure to abandon its nuclear weapons program because it is so awash in cash that it doesn't need Western investment; Saudi Arabia can hold its American critics at bay by playing the crucial role of supplier of last resort; and Venezuela has funds to finance Fidel Castro and anti-American groups in Latin America.

The disadvantages to America are obvious. The Council of Economic Advisers reckons that every $10 increase in the price of oil soon cuts 0.4 percent off real GDP. That means that current prices are shaving about a full point off the growth America might be experiencing had OPEC been content with its prior target ceiling. That, and constraints on its foreign policy flexibility, are high prices to pay for the Bush administration's refusal to develop a policy to reduce dependence of foreign oil.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.