Oil and the war in Iraq

[JerrySeinfeld]

We need to help Black Dog distinguish between COMPANIES and NATIONS.

Since Daddy has perfectly argued why it wouldn't make logical sense for the NATION of the USA to go to war for oil freely available on the world market, I boils down to this:

It seems Black Dog thinks since US oil companies would profit from EXTRACTING oil in Iraq prior to selling it on the open marketplace, that might be some kind of motivation for war.

But based upon this assumption that the USA goes to war based upon helping the profitability of corporations domiciled in the USA, the next target might be Brazil (Embraer) or France (Airbus), both competitive with BOEING, an american company.

[Black Dog]

We need to help Black Dog distinguish between COMPANIES and NATIONS.

Who says the two are mutually exclusive. Either oil is fungible (in which case no one should have any concerns if, say, China started buying up exclusive contracts for extraction, or if Venzuala nationalized its oil) or its strategic resource that requires an armed force be kept close at hand to safeguard it. Which is it?

But based upon this assumption that the USA goes to war based upon helping the profitability of corporations domiciled in the USA, the next target might be Brazil (Embraer) or France (Airbus), both competitive with BOEING, an american company.

And perhaps if the U.S. had an administration made up of former aerospace executives, that might happen.

But seriously, someon eneeds to explain to ur resident unfuny man the difference between a non-renewable and highly strategic natural resource and airplanes.

[jbg]

Who says the two are mutually exclusive. Either oil is fungible (in which case no one should have any concerns if, say, China started buying up exclusive contracts for extraction, or if Venzuala nationalized its oil) or its strategic resource that requires an armed force be kept close at hand to safeguard it. Which is it?

Even if oil is fungible, a major reduction in the quantity available for export would cause supply and/or price disruptions that would disrupt the economy.

[Toro]

No, the argument of matter of currency is that the US dollar is a house of cards, and if confidence in it is compromised, it could be a long fall.

If that happens, it will not be because of anything that happens in Tehran, Thelonius. Or Baghdad. Or Caracas.

Those places simply don't matter.

What matters is what people think in Beijing and Tokyo and Seoul and Taipei and Frankfurt. They are the people who hold all the dollars.

[Toro]

Toro

Yet the US was going to spend over $200 billion to secure that short term supply.

They weren't going to spend $200 billion, remember? Y'all have amnesia?

Are you being facetious?

Of course they were. They knew it.

Before the war, former Secretary of the Treasury, Lawrence Summers said that it would cost over $200 billion.

[Black Dog]

Are you being facetious?

Of course they were. They knew it.

Before the war, former Secretary of the Treasury, Lawrence Summers said that it would cost over $200 billion.

Again: the figures bandied about were half that. Now, you could try to tell me that they were low-balling for the public, but I would have to point to the many other rosy projections made and eh corresponding lack of preperation for a worst case scenario as an indication that they genuinely beleived they could do it on the cheap.

On September 15th 2002, White House economic advisor Lawrence Lindsay estimated the high limit on the cost to be 1-2% of GNP, or about $100-$200 billion. Mitch Daniels, Director of the Office of Management and Budget subsequently discounted this estimate as “very, very high” and stated that the costs would be between $50-$60 billion

There's more. On the record.

Even if oil is fungible, a major reduction in the quantity available for export would cause supply and/or price disruptions that would disrupt the economy.

So it would, therefore, make sense to have a lock on the supply, wouldn't you say?

[Toro]

Again: the figures bandied about were half that. Now, you could try to tell me that they were low-balling for the public, but I would have to point to the many other rosy projections made and eh corresponding lack of preperation for a worst case scenario as an indication that they genuinely beleived they could do it on the cheap.

They were low-balling the figure. Privately, some in government were saying it would be more than $200 billion. If you ran the numbers, and you made reasonable assumptions, there was no way the US could have done it for that little, unless everything went perfectly, which they never do in war.

The Bush administration has done this elsewhere. They disciplined an analyst who wrote that the medicare prescription bill would cost around $540 billion, not $400 billion the administration was saying. The analyst is probably going to be right in the end.

Here is another shenanigan the White House is pulling off right now.

But that's besides the point. The government knew that they would have to spend a lot of money, regardless what they were telling the public, far more than the net present value that would accrue to the United States.

[Black Dog]

They were low-balling the figure. Privately, some in government were saying it would be more than $200 billion. If you ran the numbers, and you made reasonable assumptions, there was no way the US could have done it for that little, unless everything went perfectly, which they never do in war.

The Bush administration has done this elsewhere. They disciplined an analyst who wrote that the medicare prescription bill would cost around $540 billion, not $400 billion the administration was saying. The analyst is probably going to be right in the end.

Here is another shenanigan the White House is pulling off right now.

But that's besides the point. The government knew that they would have to spend a lot of money, regardless what they were telling the public, far more than the net present value that would accrue to the United States.

Even so. I'm sure there were realists in the government who were aware of the costs, but they weren't the one's making the decisions. In any case, I don't think the fact that the war would cost "far more than the net present value that would accrue to the United States" has much to do with the oil argument (which you are still linking to oil already in the marketplace). If, as I'm saying, this was a good old fashioned grab at a very strategic resource (with the benefits to U.S.corporations being a happy byproduct), then its possible that the calculation was that the long term value of controlling a large startegic reserve of oil would outweigh the short term costs.

[theloniusfleabag]

Dear Toro,

If that happens, it will not be because of anything that happens in Tehran, Thelonius. Or Baghdad. Or Caracas.

What matters is what people think in Beijing and Tokyo and Seoul and Taipei and Frankfurt. They are the people who hold all the dollars

I totally agree. Interests in Asia 'own more of the US' than the US gov't, and will continue to own more, so long as the US continues deficit spending without tax increases, and making up their shortfall solely with foreign investment. So, the US dollar is becoming critically dependent on those Asian investors perceived value (and safety) of the greenback. Should that confidence become jeopardized (or, as I have been hinting at, replaced) then they may just call in those loans, or invest elsewhere. The 'crash of 29' would look like a bounced cheque in comparison.

However, access to supply is often more important than price. $1 or $100/bbl of oil is irrelevant if you can't get any.

http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB82/

The issue was...Iraq has used chemical weapons against Iran, how should the US respond?

The directive reflects the administration's priorities: it calls for heightened regional military cooperation to defend oil facilities, and measures to improve U.S. military capabilities in the Persian Gulf, and directs the secretaries of state and defense and the chairman of the Joint Chiefs of Staff to take appropriate measures to respond to tensions in the area. It states, "Because of the real and psychological impact of a curtailment in the flow of oil from the Persian Gulf on the international economic system, we must assure our readiness to deal promptly with actions aimed at disrupting that traffic."

To that end, the US aided Iraq with intelligence and weaponry, lest it fall to Iran and jeopardize Gulf Oil.

evidence here...

http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB82/iraq61.pdf

While it is true that the US does not receive the bulk of it's oil from Iraq, the other suppliers would have seen the rest of the world clamouring for contracts to ensure supply, regardless of price increases.

[jbg]

So it would, therefore, make sense to have a lock on the supply, wouldn't you say?

And if you were not a self-hating Westerner feeling guilty about your standard of living, that would be just fine with you. It is with me.

[Toro]

I totally agree. Interests in Asia 'own more of the US' than the US gov't, and will continue to own more, so long as the US continues deficit spending without tax increases, and making up their shortfall solely with foreign investment. So, the US dollar is becoming critically dependent on those Asian investors perceived value (and safety) of the greenback. Should that confidence become jeopardized (or, as I have been hinting at, replaced) then they may just call in those loans, or invest elsewhere. The 'crash of 29' would look like a bounced cheque in comparison.

I don't necessarily disagree with this Thelonius. But what I'm saying is that oil traded in euros in Tehran or Riyadh or Oslo or London for that matter will not trigger a flow away from dollars as the world's reserve currency. If that does happen, it will be because the US is deliberately debasing its currency. Besides, 65% of global reserves are in dollars while the US accounts for 30% global GDP. If I were advising a central bank, I would advise the bank on that fact alone to decrease their exposure to dollars. But to what is the other question because the euro is a structurally weak currency.

However, access to supply is often more important than price. $1 or $100/bbl of oil is irrelevant if you can't get any.

http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB82/

The issue was...Iraq has used chemical weapons against Iran, how should the US respond?

The directive reflects the administration's priorities: it calls for heightened regional military cooperation to defend oil facilities, and measures to improve U.S. military capabilities in the Persian Gulf, and directs the secretaries of state and defense and the chairman of the Joint Chiefs of Staff to take appropriate measures to respond to tensions in the area. It states, "Because of the real and psychological impact of a curtailment in the flow of oil from the Persian Gulf on the international economic system, we must assure our readiness to deal promptly with actions aimed at disrupting that traffic."

To that end, the US aided Iraq with intelligence and weaponry, lest it fall to Iran and jeopardize Gulf Oil.

evidence here...

http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB82/iraq61.pdf

While it is true that the US does not receive the bulk of it's oil from Iraq, the other suppliers would have seen the rest of the world clamouring for contracts to ensure supply, regardless of price increases.

The main interest in the United States is the free flow of oil. Thus, it would make sense for the US to ensure that the fields did not fall under the control of a foreign power.

It was in the best interests of the US to ensure that no one country became too powerful in the middle east. That is why the US supported both Iran and Iraq when the two countries were at war. It is why the US lead a coalition to liberate Kuwait.

[Toro]

Even so. I'm sure there were realists in the government who were aware of the costs, but they weren't the one's making the decisions. In any case, I don't think the fact that the war would cost "far more than the net present value that would accrue to the United States" has much to do with the oil argument (which you are still linking to oil already in the marketplace). If, as I'm saying, this was a good old fashioned grab at a very strategic resource (with the benefits to U.S.corporations being a happy byproduct), then its possible that the calculation was that the long term value of controlling a large startegic reserve of oil would outweigh the short term costs.

It is my impression that those making this argument have not thought it through.

In very simple terms, this is an argument about wealth. The US economy needs oil. If oil becomes scarce, wars will break out over oil because it is a "strategic resource," or so the argument goes. The problem with this argument is that if the world is on the verge of war over oil because it is so scarce, the world economy will either be on the verge of collapse or will have already done so.

The world is integrated. America seizing oil and keeping it for itself means that the economies of Europe and Asia cannot be sustained because they will not have, or have much less oil. A collapsing economy in Europe and Asia means a collapsing economy for America. The US economy cannot operate without inflows of international capital. When economies collapse, capital flows back into the country. Because America is a net importer of capital, capital flows out of America and Thelonius's doomsday scenario plays out. Interest rates in America skyrocket as the dollar collapses, leading to a collapse in consumer spending and a collapse of the US economy, not to mention that oil would probably be trading at $1000 a barrel.

The United States does not want to see disruptions in the free flow of oil (which is one reason why the US navy patrols the shipping lanes of the world.) Security of supply is a tactical immediate maneuver. It is not a strategic long-term one. The strategic imperative is a long-term solution focusing on alternative sources of energy. As one energy professional put it, "The age of oil will end before the last drop of oil is consumed."

[Black Dog]

jbg

And if you were not a self-hating Westerner feeling guilty about your standard of living, that would be just fine with you. It is with me.

So you concede the point that the U.S. invaded Iraq in order to secure the oil supply.

In very simple terms, this is an argument about wealth. The US economy needs oil. If oil becomes scarce, wars will break out over oil because it is a "strategic resource," or so the argument goes. The problem with this argument is that if the world is on the verge of war over oil because it is so scarce, the world economy will either be on the verge of collapse or will have already done so.

I disagree. I think you can control the supply and still maintain the economy. I doesn't do U.S. corporations any good to sit on the oil, they still need to make money and that means sharing. IOW don't think the U.S. wants disruptions in the free flow of oil either. But they want a firmer grip on the spigot.

[Toro]

I disagree. I think you can control the supply and still maintain the economy.

I work in capital markets. My institution moves hundreds of millions, sometimes billions, of dollars daily. I see how vital foreign capital is to the functioning of this country. If the US instituted policies that caused significant capital flight, I can tell you with complete confidence that the US economy would collapse.

[Black Dog]

I work in capital markets. My institution moves hundreds of millions, sometimes billions, of dollars daily. I see how vital foreign capital is to the functioning of this country. If the US instituted policies that caused significant capital flight, I can tell you with complete confidence that the US economy would collapse.

I'm not disputing that. You seemt to think I'm saying the U.S. wants to grab and horde all the oil. Not the case. I think they want to ensure better access to reserves for U.S. firms and preempt strategic rivals from doing the same. Otherwise, they are happy keeping the status quo.

[jbg]

I'm not disputing that. You seemt to think I'm saying the U.S. wants to grab and horde all the oil. Not the case. I think they want to ensure better access to reserves for U.S. firms and preempt strategic rivals from doing the same. Otherwise, they are happy keeping the status quo.

To repeat, oil is fungible. One cannot "preempt strategic rivals" from gaining access to oil. One can only preempt attempts to strangle the supply.