Monday, March 24, 2003

Oil and Snake Oil

I’ve been invited to speak tomorrow (Tuesday) at a Teach-In/Forum here at CSUN, on the topic, “The U.S. at War: How Did we Get Here?” The organizer asked me to join the panel because she wanted someone who could address the economic aspects of the conflict. I interpreted this to mean, “Is it really about oil?”

Well, I’m not really an expert on the petroleum industry, but far be it from me not to hold forth based on whatever limited knowledge I have. I threw together some thoughts, and I figured I might as well post them here. Note: Since these were intended as notes to myself, they don’t have the links and citations that I would normally include. My apologies for any unintentional plagiarism, as my views have been informed by various articles and blog posts I’ve read over the last few months. I do wish to give credit to this page, though, as it stimulated my thinking on the issue.

Is this war really about oil? This question is usually presented in the form of an accusation: “No blood for oil.” But there seem to be two competing accusations at work here:

• One is that the U.S. is fighting this war to increase the supply of oil for the purpose of fueling our oil-dependent economy. This is seen as bad for environmental reasons.
• The other is that the U.S. is fighting this war because Bush wants to enrich his Texas oil cronies. This is bad because it risks American lives for the benefit of a select few.

But these two accusations are contradictory -- you can’t really have it both ways.

• If the war leads to an increase in the world price of oil, that would indeed benefit Bush’s friends, but it would not increase the availability of oil to the U.S. economy. In any case, this outcome is highly unlikely.
• If the war leads to a decrease in the world price of oil, that will increase the availability of oil to the U.S. economy, but mostly to the detriment of the U.S. oil industry. Middle Eastern oil is high quality and cheap to produce, whereas American oil is much more expensive to produce. When the price of oil falls, the first wells to shut down are the ones most costly to operate.

Iraq would happily have sold plenty of oil without a war, and the only thing preventing that was the sanctions put in place after the first Gulf war, and Bush could easily have persuaded the U.N. to keep the sanctions in place. At least, he would probably have met with greater success than he did in getting U.N. authorization for an invasion. So it seems unlikely that Bush is trying to inflate the price of oil to benefit his friends.

Yes, U.S. oil companies will be contracted to help rebuild the Iraqi oil industry. But that is a short-run gain. Once the contracts are fulfilled, it’s over. If there’s political cronyism going on here, I suspect it’s of the compensatory variety: American oil companies will take a hit from lower world oil prices, but the rebuilding contracts will soften the blow.

How effective will the war be in lowering the price of oil? My best guess is “not very.” The price may fall, but not much. Once the Iraqi oil industry is rebuilt (and it needs to be rebuilt regardless of the war, because it’s old and dilapidated), it could add about 1.3% to the world oil supply. Whether that has any substantial effect on price will depend on whether a post-war Iraq is a member of OPEC, which seems very likely. If so, then increases in Iraqi production might be balanced by reductions in production elsewhere to hold up the price.

Assuming that the goal of the war is indeed to secure access to oil at low prices for the U.S. economy, that outcome would not necessarily be a bad thing (although it might not be sufficient to justify war). It’s true there are externalities from the use of fossil fuels, but that doesn’t mean *any* increase in price is desirable. The price of fossil fuels needs to be enough higher than the private cost of production to account for the external costs imposed by their use. But OPEC has managed to keep oil prices far above the marginal cost of production for a couple of decades now, and that would not change as a result of a free Iraq. Prices will likely remain much, much higher than the marginal cost of production.

Has oil motivated other countries’ positions on Iraq? It’s certainly the case that France and Russia, two very prominent opponents of the war, have long-term contracts with the current Iraqi regime for the development of their oil fields. Those contracts would likely be voided upon the toppling of the Iraqi regime. Iraq also owes Russia a great deal of money which it planned to pay off with oil rights, but that obligation might be voided under the Doctrine of Odious Debts. So, interestingly enough, the accusation of being motivated by oil may stick better on the opponents of war than the supporters. If the war protesters are to be consistent, they should at least mention this.

Bottom line: oil slogans get thrown about as ad hominem arguments. They are typically made by people who are opposed to the war for other reasons, and who feel the need to demonize those who favor it. I think it would be better to focus on the actual reasons given. Were those reasons sufficient? I happen to think not, but I also think the oil-related arguments are mostly red herrings. Even if this war was motivated by oil, it’s possible to do the right thing for the wrong reason.

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