ONE NICE THING about the falling dollar is that it makes oil cheaper for European and other consumers who are complaining that the rise in their own currencies is hurting their competitiveness. When the euro and the dollar were at about parity, and oil was selling for $40 a barrel, it took E40 to buy a barrel of oil. Now, it takes a mere E30 to purchase the dollars needed to buy that same barrel of oil. A reason for a bit of holiday cheer in the otherwise cheerless economies of euroland.

But for the oil producers, who are paid in dollars that buy fewer pounds for use in London's posh shops, and fewer euros to fund vacations in the south of France, a weaker dollar is a disaster. Well, not quite a disaster. Oil producers have been compensated for the dollar's fall with record-high prices, and the OPEC cartel has decided to raise its four-year old target price of $22-$28 per barrel to something like the $32 per barrel that Iran's petroleum minister, Bijan Namdar Zangeneh, has commended to his counterparts. True, Ali Naimi, Saudi Arabia's oil minister, told the press in the run-up to the OPEC meeting in Cairo earlier this month, "Our price band is still $22-$28." And Kuwait's oil minister, Sheikh Ahmad al-Fahad al-Ahmad al-Sabah, is undoubtedly grateful for allowing him and his family a pleasant stay at London's Dorchester hotel while American soldiers drove Saddam Hussein out of his country.

But it is what they do, not what they say or feel, that affects the price of oil. The Kuwaiti minister took the lead in urging his OPEC colleagues to cut output so as to lift the price his American saviors pay for oil. The Saudis quickly obliged, and cut output to keep prices closer to $40 than to the old range they had pledged to maintain.

Here is how the oil markets seem to be shaping up, at least in the view of some major oil companies. The head of one of the world's largest told me that the world is unlikely to see sustained periods of prices above $50 per barrel, or below $30. In appraising the profitability of drilling prospects, he is using $25. That is the middle of the range that Dave O'Reilly, ChevronTexaco's CEO, last week told analysts his company would henceforth use as its planning price. So the major oil companies have decided that the recent growth in demand from America's resurgent economy, China's explosively (perhaps in more ways than one) growing economy, and the economies of other developing countries is no transient phenomenon, and that they can safely raise their former target price of $15-$20 to about $25. That should stimulate exploration and development.

Meanwhile, OPEC is not quite so optimistic, fearful that prices might collapse, as they have in the past. It has decided to protect against such a contingency by managing production to prevent a build-up of inventories in consumers' hands. That means cutting output by about one million barrels per day immediately, and probably another million barrels early in the new year. This policy of keeping inventories low will deny consumers a buffer against any production cutbacks that the cartel decides are necessary should prices weaken.

Of course, the United States has 700 million barrels stored in its Strategic Petroleum Reserve (SPR). But neither we nor our European allies have ever worked out a coherent policy for using these reserves. Successive presidents have proclaimed that the reserve is there to meet supply problems, not price rises--as if supply has nothing to do with price. On the few occasions that oil has been withdrawn from the SPR, the withdrawals have had little or no durable effect on oil prices.

The Saudis say that consumers need not worry about price spikes as they are planning to increase their production capacity in order to remain capable of pumping more oil should prices get out of hand. By remaining the world's supplier of last resort, the Saudi royal family knows it can count on America to protect it should any enemies attempt to unseat it, whether they be the home-grown supporters of Osama bin Laden, or democratic reformers weary of repression and the excesses of the thousands of Saudi princes who treat the public treasury as a private piggy bank.

Should the promise of keeping the oil flowing not provide America with a good enough reason to protect the Saudi regime, the royal family provides another: support for the dollar. Despite the decline in the dollar, the Saudis and their OPEC colleagues have refused to denominate oil prices in any other currency, or in a basket of currencies in which the euro would feature prominently. Moreover, like other producing countries, the Saudis have continued to invest heavily in U.S. securities, offsetting some of China's reduced buying. In the first nine months of this year, eight Middle Eastern producing countries that were net sellers of U.S. securities in the past two years were net buyers to the tune of $15 billion.

One thing the Saudis know they can count on is the inability of America's politicians to fashion a policy that will reduce American dependence on foreign oil. Both president Bush and his challenger, John Kerry, promised to make America independent of foreign oil. So did Richard Nixon, Gerry Ford, Jimmy Carter, and Bush's other predecessors. None could figure out how to accomplish that goal without raising taxes on gas and other oil products, a move considered a sure ticket to early retirement by all save Bill Clinton, who tried but failed to wring a significant increase in gas taxes from a reluctant Congress. Bush, who is unidirectional when it comes to taxes, has no such move in mind. So the increased amounts that Americans are laying out in this new era of higher oil prices will end up, not in the U.S. Treasury, but in the treasuries of Middle Eastern governments, some of which are financing the terrorists whom the president has pledged to defeat.

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.

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