The oil weapon

I went to a talk recently that put an interesting spin on the oil weapon concept. In the 1970s the Arab states attempted to use the "oil weapon" to punish the US and... the Netherlands, I think? anyway, one or more of the European countries, to try to get them to change their Israel policy.

What we mainly learned from this is that the oil weapon in its classical sense is not very useful. The oil embargo of the 1970s DID cause a lot of economic pain generally, but it was a very blunt instrument. It punished the whole world without inflicting a particularly large share of punishment on the targets, it didn't really succeed in altering US policy much, and it was pretty much as inconvenient for the Arab states as it was for everyone else. Eventually, Saudi Arabia decided to play nice with the US and unilaterally boost production, ending the attempt and beginning a long and beautiful friendship.

What the talk focused on, though, was Iran and how all this affected Iran's relationship to the Arab states. Iran had previously been the US's big partner in the region, but it had been an increasingly recalcitrant one, repeatedly demanding and getting US "permission" to raise oil prices without US opposition. On the strength of high oil prices, Iran ran up a bunch of debt to fund domestic stuff. When the Saudis unilaterally raised production, bringing oil prices down, Iran couldn't pay off those debts, and this helped destabilize the state, ending an era and permanently shifting the balance of power in the area in Saudi Arabia's favor as well as rearranging the alliance structure with the US. In other words, the "oil weapon" worked quite well against Iran. And there seems to be no reason that can't generalize - the states that are always going to be most vulnerable to manipulation of the oil markets aren't consumer states, but rather, producer states that rely on oil wealth but don't control enough of it to set the market rates. Something similar might happen with gas if LNG becomes ubiquitous enough to make natural gas a similar market to oil, rather than a pipeline-based distribution system. (and since Iran has huge LNG resources, that might hold the promise of a second era of fossil fuel power for them).