Make no mistake about it. If the OPEC cartel succeeds in keeping oil prices artificially high for years, it will have a deleterious effect on growth--for the U.S. and the world. The shift of corporate profits away from high tech, service, and manufacturing and toward the energy sector will curb domestic investment and productivity growth. The shift of financial resources away from the U.S., Europe, Asia, and Latin America and toward the Middle East will have a similar effect. Washington policymakers should be aware that accepting OPEC's actions has enormous economic costs.
Take profits. The capital spending boom that boosted growth in the 1990s was fueled by strong corporate profits. Higher energy prices are now sapping those profits across a wide spectrum of U.S. companies. With reduced cash flow, corporations are cutting back investment in information technologies. Instead, profits are flowing to a narrow handful of energy companies and utilities.
Increased oil company investment can't compensate. Intense competition in high-tech, services, and manufacturing industries guarantees that greater capital spending and higher productivity will ripple through society--lowering prices, promoting innovation, and generating employment. But with the OPEC cartel keeping energy prices artificially high by cutting output, gains go mostly to a handful of energy companies, which employ few people.
Slow-growing OPEC countries make far less efficient use of new capital inflows than fast growing North America, Europe, and Asia. Dictatorial, monarchical--even feudal--in politics, and statist in economics, these countries tend to be anti-market and anti-entrepreneurial. Trillions of dollars have flowed into the Middle East over the past three decades with little sustained growth to show for it. Whether oil prices are high or low, capital inflows generally go to weapons, subsidies, government bureaucracy, and corruption. It makes little difference.
High energy prices that are maintained by monopoly threaten New Economy productivity inside the U.S. and economic growth around the world. The 15-year productivity slowdown following the 1973-74 oil price shocks was due, in part, to companies spending more on energy efficiency and less on innovation-generating technologies and growth. The same could happen again, if OPEC's market manipulations go unchallenged.