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EMF OP 21: The Oil Price Collapse and Growing American Vulnerability

The Saudi decision at the end of 1985 to end its policy of propping up the world price of oil, a policy which required it progressively to reduce its oil production on a path towards zero production, has caused the price to plunge by more than one-half since 1985. This price collapse &ndash; if it persists &ndash; will produce three direct and inevitable effects: (1) over time, there will be a substantial increase in the world demand for oil; (2) there will be a reduction in the supply of oil in the high cost regions of the world, especially North America; (3) these two trends will increasingly shift the supply of oil back to the world&rsquo;s lowest cost supply area, that of the Persian Gulf. This reconcentration of supply in the Gulf area will bring about two further major consequences: (1) at some point, the growth in the world oil market share of the Persian Gulf producers will give them (or rather return to them) enough market power to raise prices substantially; (2) as long as the price remains low (around $15 a barrel in 1985 dollars), growth in the Gulf producers&rsquo; share of the world oil market will steadily increase the exposure of the oil importing nations to supply disruptions in this politically destabilized region. The result could be another major economic shock for the West, on the scale of those of the 1970s or worse. This increased market share would also heighten the danger to Western security if these huge reserves, or any appreciable part of them, were to come under the influence or direct control of the Soviet Union. If Soviet influence grows, there could be not only another great economic shock, but also a security disaster for the West. This paper goes on to: recall and analyze past traumas of the oil market concerning the Persian Gulf; and looks ahead with future projections to ensure past dependence on the Gulf is not repeated. <br /><br />