Politics & Policy

Oil Czar & Ally

Putin and Russia are showing the way.

Almost unnoticed in the wave of economic pessimism accompanying the war against terrorism is the precipitous plunge of oil prices. Since shortly after the Sept.11 bombing, oil has dropped about 25% from $30 a barrel to nearly $22. Gasoline prices at the pump have slipped $0.20 to $1.30. Just as negative oil shocks act on the economy like tax hikes, this tax-cut like decline will surely boost next year’s economic growth rate, a big plus for recovery.

Take consumer spending, where it is estimated that each $0.10 drop in gas prices adds $13 billion to disposable income. That means we’ve already experienced the equivalent of a new $26 billion consumer-tax rebate.

Even more help is on the way. Sharp-eyed Wall Street analyst Fred Leuffer expects $18 per barrel oil in the near future. This is a situation totally unlike that of the Persian Gulf War, when oil prices soared in the run-up to the U.S. military invasion of Iraq. Why is now so different from ten years ago? There are many reasons, but none loom larger on the world scene than the cooperative efforts of Russian president Vladimir Putin, who has aligned himself with George W. Bush right from the start of this new war. Make that realigned, since Putin had to override the objections of his top generals in order to cast Russia’s lot with Bush.

Certainly, it was Putin’s influence that led to the military cooperation of Russia’s central-Asian allies Tajikistan and Uzbekistan, which gave the U.S. access to former Soviet air bases. Russia did not even heighten the alert of its air defenses after the U.S. bombing missions were underway. During the Cold War, Soviet air defenses were automatically put on the highest alert following any military activity by the U.S.

Recently, as world oil prices tumbled, hard-line OPEC spokesmen such as Secretary General Ali Rodriquez saber rattled about a big production cutback to shore up prices. This of course would significantly increase war costs. But Putin’s Russia would have none of it. The world’s second largest oil exporter gave OPEC the back of its hand, making it clear that it had no intention of reducing or even slowing the growth of its oil production, whatever the price impact. Indeed, Russian oil shipments are growing faster than any other country outside OPEC, increasing by 530,000 barrels daily — or nearly 10% this year — with another 350,000 barrel increase projected for next year.

Following Russia’s lead, other non-OPEC producers Mexico and Norway refused to play ball with the cartel.

Russia’s prospering oil industry is an integral part of Putin’s free-market economic reform plan. It has become the most decentralized and capitalistic sector in the Russian economy. Even beyond oil, the new Russia under Putin has the second-best, emerging-country stock market performance in an otherwise dismal year for world bourses. The ruble has steadied, inflation has come way down, and economic activity is still expanding at roughly 4% despite a worldwide recession. Earlier this year, Putin introduced a 13% flat-tax rate for its new economy — some even suggest that Russia’s new free-market democracy has more in common with the U.S. than with the bureaucratic central planning of the European Union. Putin covets membership in the World Trade Organization. Perhaps it is now time for Bush to hasten this process.

In truth, OPEC’s production-cutting bark has been bigger than its bite. News reports have suggested that Secretary of State Colin Powell secured a pledge from the Saudis that they would make up for any oil-supply shortfalls, and that OPEC has been rampantly cheating on its production quotas all year long. In addition, the global economic slump has significantly lowered oil demand.

But OPEC producers are worried about the new Russia. Attempts by the cartel to artificially raise prices will lead to significant losses of world oil market share to Russia. This, of course, is exactly what Russian oil entrepreneurs want.

While U.S. energy policymakers dither in their plans for expanded domestic production, Russia is showing the way. Could it be that Russia and the U.S., perhaps joined by Britain’s North Sea oil producers, will work together to finally break OPEC’s stranglehold on oil and the world economy? This could be yet another benefit of the new world order that is standing against terrorism and transforming international relationships in politics and the economy.

Of course the U.S. still has concerns about Russian policies on human rights, freedom of speech, missile defense, and other areas. But President Bush certainly knew what he was doing when he established a personal relationship with Putin in several meetings last spring and summer. Now, at least on terrorism and oil, the two leaders can stand together in pursuit of freedom, democracy, and prosperity.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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