By Franz Schurmann

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Prediction #50 for Tuesday, March 7th, 2000

Oil now has already become a big crisis issue and water will soon join it. But these two commodity crises could be the goad needed to halt a downward spiral into global chaos and force peace on greedy corporations and violence-prone fighters.

Gasoline prices are spiraling upwards towards $2 a gallon in the US. In other developed countries it's towards $2 a liter (about four liters to a gallon). The reason for the difference is that the bulk of those prices consist of government taxes. That makes the tax share of the US gasoline price look like a pittance. But pittance or gouge the price spike is enough to create a crisis as bad as that in October 1973. Then the angry Saudis forced a quadrupling of oil prices on the world.

The mainstream US media attribute the crisis to low inventories, high demand and declining OPEC production. But read the Arabic-language Saudi papers and you get a different view of what's causing the crisis. In an editorial on March 4, the authoritative As-Sharq Al-Ausat blamed it on a breakdown of cooperation between the key oil exporting and oil importing countries. No talk of "market forces" in the Saudi media. (This reminds me of the remark made by ARCO CEO Thornton Bancroft during the 1970's that "there never was a free market in oil.").

Saudi Arabia is still the top producer in the world. When it turns the tap higher or lower the rest of OPEC follows. In fact the Saudis are still able to determine world oil prices just by turning their oil tap higher or lower. But the wealthy and powerful descendants of the clan of Ibn Sa'ud long since became shrewd dealers. They know they need to work with everybody in order to survive. In fact if the current Arab-Israeli peace process comes to fruition it won't be long before the royal Saudi Bedouins start working with the Israelis as Israel's Bedouins have long been doing.

Of course the prices are set in consultation with the big Anglo-American oil companies. But because of anti-trust laws this can never be admitted or even hinted at. Indeed the Arabic media are careful not to link oil pricing to political considerations. Nevertheless when the Saudis drastically lowered production on October 20, 1973 it was for power reasons linked to the October war and not for greed. For a brief period the American press kept using the term "oil weapon" ---- weapons, I might add, don't lift oil.

The Saudi oil weapon seems again to be working. Just a week or so after oil prices soared to $31 a barrel on the New York markets the peace process suddenly was resumed. The Israeli cabinet unanimously voted for withdrawal from Israel's southern Lebanon security zone no later than July. And the unexpected Barak-Arafat summit indicates the Oslo peace process finalization stage has been resumed. And it shouldn't be long before Ehud Barak and Hafiz al-Asad meet to conclude the long awaited accord between Israel and Syria.

But this time, unlike late 1973, there is no panic about soaring oil prices. Then Secretary of State Henry Kissinger was saying that this was the most dangerous onslaught against the West since World War II. Now people grumble about higher gasoline prices at the pump but that is about all. The reason is that this time the Saudi oil weapon struck in much the same way as Israeli bomber planes struck in Lebanon. For both it was the last violent tango before the final deals were made.

But the really big crisis has long been lurking in the background. It is the crisis of high living and limited resources. And oil plays a central part in that crisis. Consider the following reality. Last year worldwide oil demand was 74 million barrels a day. Now it has risen to 78 million. And experts are saying that if strong growth in America, Asia and Europe continues demand will hit 80 million much sooner than expected.

It may not be politically correct to say so but global poverty has been going down much more rapidly than expected. Consider Mozambique. In the early 1980's it was considered a basket case caused by a merciless civil war. Then the urban-based left and the rural-based right reached agreement and formed a single democratic government. During the last decade it has had the highest growth rate of any country in the world. Even now as terrible floods have ravaged it the people look healthy, they are well clothed and everywhere there are gasoline-driven vehicles. That, in microcosm, is the reason why global demand for oil is rising so fast. A less microcosmic reason is the fact that super-prosperous Americans are again buying huge numbers of "gas-guzzlers." All anyone has to do to see why oil demand is soaring is to look at the terrible traffic congestion almost anywhere in America ----- and every other country in the world, rich, middling or poor.

During the years of the Jimmy Carter administration the White House took notice of this crisis. It called for a big switch to alternative fuels. And when nothing much happened it issued a gloom-and-doom report on the condition of the world in the year 2000. And we're there now in both calendar and reality terms.

The Reagan and Bush administrations thought they could ease the crisis by making peace with the Russians and bringing peace to the Middle East. The Islamic Middle East is the world's biggest source of oil. The second is the lands of the former Soviet Union, most of which, ironically, also are Muslim. In the 1990's, after the disintegration of the Soviet Union, the American national security establishment thought it could lessen its dependence on Middle Eastern oil by developing oil and natural gas fields in the newly independent ex-Soviet states.

This policy has now failed. US-Russia relations are in a downward spiral and the new Russian leader Vladimir Putin has made it clear he will not tolerate American expansion into former Soviet territory. So America and the developed capitalist countries are back to square one. What is Washington going to do when oil demand gets higher and higher? Suppose flood ravaged Mozambique recovers sooner than expected. Recovery will come with a big leap forward in oil demand.

Oil is a highly important commodity. So is water. Sandra Postel, in her book "Pillar of Sand: Can the Irrigation Miracle Last?," writes global water shortages threaten to reduce global food supply by more than 10 percent.

Consider an Iraq that for a decade has been suffering sanctions and still endures air attacks on "military installations" It has also been suffering the worst drought in a century. A recent report by the Food and Agriculture Organization (FAO) dated May 1999 that a 50-60 decrease in rainfall during the 1998-99 winter season caused complete failure of germination on 70% of the rain fed areas and predicted very low expected yields for the remaining 30%.

That drought also afflicts Jordan and Israel. The Yarmuk river that flows into the Sea of Galilee is at its lowest level since 1908. Last year water supplies were cut to Israeli farmers by 25%. And if the Golan Heights are returned to Syria many springs that flow into the Sea of Galilee will revert to Syrian control. Israel has been talking with Egypt to get a share of Nile River water but no agreement can be reached until an overall peace agreement is reached between Israel and its two northern neighbors, Syria and Lebanon.

The growth of the global economy means more and bigger cities. Half of the world's six billion people already live in urban areas. And the percentage is rapidly rising. That means more consumption of oil, water and food. More and more modern farmers are critically dependent on oil and water: gasoline for fueling vehicles and water for irrigation. In the Middle East most agriculture is irrigation dependent as is the case in California.

Global economic growth means more cars and other vehicles propelled by oil. People seem willing to pay any price so long as they can keep moving in cars to which they are fiercely attached. But the problem is business not drivers. When the price of oil gets too high business raises its own prices even higher. That leads to inflation that threatens to bring down the entire global financial system. But if, instead, business cuts its investments, recession arises.

In 1969 when simultaneous inflation and recession appeared it was called by a neologism, "stagflation" (from stagnation and inflation). According to then prevalent economic theory that wasn't supposed to happen. And by the beginning of 1970 top officials in the new Nixon administration were seriously worried that, left unchecked, the entire American economy could come crashing down as happened in 1932. And with it the then emerging integrated world economy would collapse as well.

If global economy once again crashes as its much smaller predecessor did in 1932 then there'll be plenty of oil and water. Many hundreds of million or even a billion drivers will cut down on gasoline consumption. And people will eat less. That won't mean starvation but a radical slimming down of garbage pails as people eat everything up before going again to market to buy food. One of the great symbols of America, the overflowing garbage pail, could even vanish.

There are other ways out than global crash. In my new-style predictions for 2000 I shall explore some of them.