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Part 3

Iraq & A Hard Place Part 2 - 

Myths & Legends: Oil

23, 2003 45: AM CST

We’re invading Iraq for cheap oil, right? This idea is an article of faith on the Arab street, and is the first assumption of many westerners as well. It rests firmly on four assumptions: that oil prices would drop if the US controlled Iraq, that we’d save more on the cheap oil than we’d spend on a war, that there’s no other way to ensure this cheap oil, and that the total price would actually be worth the effort.

There is no guarantee that oil prices would drop at all after an invasion. A US controlled Iraq must decline to join OPEC, and it must move quickly to rebuild its infrastructure and dramatically increase its oil output. It seems likely that Iraq will not rejoin OPEC – at least while it is under US occupation – but it’s not guaranteed. That may turn out to be far too high a political cost for the US to pay. Even so, Iraq’s infrastructure is in such a sorry state that it cannot be rebuilt anytime soon without a great deal of money. Finally, oil prices have risen approximately 75% in the past year, from approximately $20 per barrel to $35 per barrel, due in large part to fears of an Iraqi war. Immediately following an invasion, they are likely to return to approximately last year’s prices, but unlikely to drop any further until Iraqi oil infrastructure is improved. Thus, in the short term we actually face higher oil prices for an Iraqi war.

It is very unlikely that we would actually save more from cheap oil than we’d spend to get it, even if oil prices do drop. Based on a one-month conflict and a twelve-month occupation (as I see it, the minimum possible occupation period), Congressional Budget Office estimates would put the cost of a conflict between $32 billion and $77 billion. Other estimates have been as high as $100 billion. Repairs to Iraq’s damaged oil infrastructure have been estimated at $5 billion – assuming that they’re not further damaged by a last-ditch “scorched earth” policy. Estimates for the cost of rebuilding the rest of Iraq’s infrastructure range from $20 billion to as much as $120 billion. In total, we’re looking at $157 billion to $302 billion. Furthermore, it is impossible to estimate the wider economic costs of going to war.

On the other side of the equation, the US imports roughly 8.7 billion barrels of oil per year. Using prices before war fears began as a benchmark (roughly $20 per barrel), this amounts to $174 billion per year. Total reconstruction costs in Iraq are likely to meet or exceed the costs of the war itself. Throw in the last year’s worth of high oil prices and we’ll need an average price drop of at least 25% over the next decade just to break even. Since we can be fairly certain that this drop won’t occur for at least a few years, the actual price drop will have to be even higher to compensate for lost years. This is very possible – perhaps even likely – but far from certain.

What’s more, we could achieve entirely the same results without the costs of a war. If all we wanted were cheap oil, the easiest way to get it would be to lift all of the sanctions against Iraq. Iraq already has deals with France and Russia to rebuild its infrastructure and rebuild its oil capacity once sanctions are lifted. Saddam Hussein would be happy to sell us as much oil as we can buy. I suspect that we could even talk him into leaving OPEC in exchange for lifting sanctions. All of this would do at least as much to ensure a cheap oil supply as a US invasion, with none of the dollar cost.

Finally, the amount of money we’re talking about simply isn’t worth fighting a war over, by any objective measure. Assuming we could cut our $20 per barrel prices in half, we’d save $87 billion dollars per year. This seems like a hefty sum by itself. However, in comparison to other numbers, it loses its punch. $87 billion dollars amounts to 0.8 percent of today’s US economy – enough to register as non-trivial, but certainly not huge. In 2002 (generally considered a recession year), the US economy grew by three times this amount. In the same year, a record low for the Fortune 500, eight American corporations earned higher revenues than that. A ninth, IBM, barely missed the list with $85.7 billion in revenue. Is that worth going to war for?

Part 3