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'No blood for oil!!'

You will hear this from many anti-war protestors claiming that the war is for oil rights. It seems people think that a war in Iraq will be profitable for the USA, because of the oil supplies in Iraq.

As we speak, the US is importing 1.13 million barrels of oil per day from Iraq. This is in contrast to almost 2 million barrels a day from Canada, 1.5 million from Saudi Arabia, a further 1.5 million from Mexico and 1.3 million barrels from Venezuala. And the list goes on. Iraq has a sustainable oil export rate of 2 million barrels a day; if the USA could secure itself all of Iraq's oil it would find itself just under 1 million barrels a day better off. Lets face it, there is no way that the USA is going to be able to justify actually stealing Iraq's oil. It would be very difficult for the USA to actually gain more oil from Iraq, Europe needs oil too.

So how, exactly does war benefit the US when it comes to oil? Maybe people assume that with an American friendly government, oil prices will drop. Perhaps this is the case. However, we know that last time there was a war in Iraq (The Persian Gulf War), oil prices rose. Commonly, the price of an oil barrel is about $25-$30. During the Persian Gulf War, it rose to just over $40. Perhaps though, after the war, the prices will go down. Maybe so. On the 27th of February the prices rose to just under $40 a barrel. So the price rise has already begun.

"CBO estimated that the incremental costs of deploying a force to the Persian Gulf (the costs that would be incurred above those budgeted for routine operations) would be between $9 billion and $13 billion. Prosecuting a war would cost between $6 billion and $9 billion a month--although CBO cannot estimate how long such a war is likely to last. After hostilities end, the costs to return U.S. forces to their home bases would range between $5 billion and $7 billion. Further, the incremental cost of an occupation following combat operations could vary from about $1 billion to $4 billion a month."

I estimate that a one month war would therefore cost the US 9+6+5=$20billion, and that does not include post-war occupation. If oil prices go up by $15 a barrel during the war, it would cost a furter $15 million a day (or half a billion a month). $20.5 billion dollars. That's a lot of money. Is this an investment that will provide good returns?

If oil prices go down after the war, let's say, by $2 per barrel, the US saves $2 million a day. 20billion divided by 2million is 10,000 days...or 30 years. So if the war only lasts 1 month and that war manages to drive the price of oil down by 7% permanently...it takes 30 years to make a profit.

If the war takes 6 months then we are looking at 9+(6X6)+5=$50 billion (plus the oil price rise makes it $53 billion). If this war drives oil prices down permanently by 10% ($3 per barrel) it would take 48 years to get the benefits.

I realize that my figures are simplified greatly, but they do go to show that the war is going to cost a lot of money, and Iraq really doesn't have enough oil to make it worth it for both the US and Great Britain. It would be cheaper, easier, and make for better PR if they just lifted the Oil for Food sanctions and paid Iraq in cash (and perhaps weapons)...plus, that kind of thing is easier to cover up.

Sources:
http://www.cbo.gov
http://www.ott.doe.gov


Noung points out: 'with Saddam gone, the Iraqi people won't be denied the opportunity to exploit the oil for themselves, and their standard of living can rise accordingly...'

SEoD retorts: noung's comment ignores the situation in nigeria where commercial influence controls oil and the populace suffer severe poverty

Professor Pi says: You're looking at current export figures, but you should look at (1) Available oil reserves. Reports state that Iraq has 10-25% of global oil reserves. (2) This is high quality oil, compared to Mexico/Venezuela. (3) The terrain lends itself well for exploration, so the costs are low. Further reasons are geopolitical. No one knows for sure how much oil there is in the Caspian basin, but it is estimated that this will be the most important source in the future. Now, I am totally opposed to this war, but I understand why Bush et al. are doing this.

Mod says: The figures are: Iraq contains 112 billion barrels of proven oil reserves, with a potential for a further 100 billion barrels. However, Iraq's oil is low quality, and is not distributed evenly. Oil industry experts generally assess Iraq's sustainable production capacity at no higher than about 2.8-2.9 million bbl/d, with net export potential of around 2.3-2.5 million bbl/d (including smuggled oil). Of course Iraqi Oil Minister, Amer Rashid claimed it was higher than that by about a million per day.

Iraq has a problem with increasing this amount because Iraq has a problem with "water cut"...intrusion of water into oil supplies.

Yes, there is a hell of a lot of oil there, but getting it out is far from easy. Its dubious that the export rate would ever go above 4 million per day, which still makes for a long wait before profits are made. This information courtesy of the Energy Information Administration at http://www.eia.doe.gov/

Further, it could cost upwards of $40 billion over 10 years to get the Iraqi oil industry up to scratch (with wells and pipelines needing upgrading desperately) Daniel Yergin says it would cost a further $7 billion to get Iraq's production to 3.5 million barrels a day (and would take 3 years). To get any more would cost upwards of $20 billion and take almost a decade, netting an estimated 5.5 million barrels per day. A war that costs at least $50 billion, an industry that needs a further $70 billion spending on it. And for what? 5.5 million barrels a day? Is it worth 120 billion dollars? tdent says: 7 billion recently went to Halliburton for refurbishment of torched oil wells.

Mod says: Lots of people tell me of this. My question remains unanswered...how does this benefit the US or Mr. Bush? I'm not saying it doesn't, I'm just asking how. The US coffers pay billions upon billions for a war, then the US coffers pay billions on rebuilding Iraq...where are the benefits?


I've recieved a lot of feedback about this w/u. As you'd expect. Some negative, some positive, mostly a combination of the two..."That's all well and good, but what about...". To everyone that has /msg'd me thanks.

As has been revealed, I am not an economist. It would be nice to see a economics major write a write up in here. I have been pointed to a paper written by the Sterling Professor of Economics at Yale University, William Nordhaus, entitled Iraq: The Economic Consequences of War.

He provides a conservative figure, and a worst-case figure. The conservative figure is based on "If the war is short and goes well". The conservative figure is $99 billion, the worst-case figure is $1.9 trillian. In the following list, the figures are in billions and the worst-case figures are in brackets:

  • Direct military spending: $50 ($140)
  • Occupation: $75 ($500)
  • Reconstruction: $30 ($105)
  • Humanitarian aid: $1 ($10)
  • Impact on oil markets -$40 ($778)
  • Economic impact: -$17 ($391)

A quick brief on those figures:
The military spending comes from the CBO, and assumes that there will be 30-60 days of combat followed by 80 days of post-war occupation. The worst case scenario assumes that military spending will be 50% higher and that the war will last 8 months longer. The worst case would involve protracted urban conflict in areas such as Baghdad.


Whew, controversial w/u this. What started off as being a glorified muse, has become quite the hot topic. First off...to date (15th April 2003) the war is going better than most people expected. So that makes it a bit cheaper. That's good. The OPEC/Euro connection is interesting, I suppose we'll see if that one pans out if Iraq switches back to the Dollar. Here's what I found out:

". . . Despite this vast pool of oil, Iraq has never produced at a level proportionate to the reserve base. Since the Gulf War, Iraq¹s production has been limited by sanctions and allowed sales under the oil for food program (by which Iraq has sold 60 billion dollars worth of oil over the last 5 years) and what else can be smuggled out. This amounts to less than 1 billion barrels per year. If Iraq were reintegrated into the world economy, it could allow massive investment in its oil sector and boost output to 2.5 billion barrels per year, or about 7 million barrels a day.

"Total world oil production is about 75 million barrels, and OPEC combined produces about 25 million barrels.

"What would be the consequences of this? There are two obvious things.

"First would be the collapse of OPEC, whose strategy of limiting production to maximize price will have finally reached its limit. An Iraq that can produce that much oil will want to do so, and will not allow OPEC to limit it to 2 million barrels per day. If Iraq busts its quota, then who in OPEC will give up 5 million barrels of production? No one could afford to, and OPEC would die. This would lead to the second major consequence, which is a collapse in the price of oil to the 10-dollar range per barrel. The world currently uses 25 billion barrels per year, so a 15-dollar drop will save oil-consuming nations 375 billion dollars in crude oil costs every year.

". . . The Iraq war is not a moneymaker. But it could be an OPEC breaker. That however is a long-term outcome that will require Iraq to be successfully reconstituted into a functioning state in which massive oil sector investment can take place."

-Nayyer, Dr. Ali, "Iraq and Oil," PakistanLink (December 13, 2002) http://www.pakistanlink.com/nayyer/12132002.html

Interesting stuff. I await to see the results.

Further support that the "no blood for oil" folks left their thinking caps at home. Consider:

  • The value of these profits must be discounted because the return on the up-front cost would not be realized in profits for a great many years -- Even though Iraq's total oil reserves are vast, its output rate is modest. E2 has surprisingly little to say about the theory of the time value of money but you could read http://news.morningstar.com/news/MS/Stocks101/timevalue.html or any economics textbook; The wu above touches on this point, but I wanted to make it clear.
  • War is inherently risky. The value of any potential, future oil profits must be further discounted by an estimation of the risk that the war could fail outright, or succeed but leave the oil inaccessible due to sabotage, including fire, biological or radioactive contamination, etc.
So clearly war for oil isn't a good "investment" for the U.S.

Conspiracy Theories without Evidence (is there any other kind?)

Ah! exclaim the sophomoric. The costs are mostly born by the taxpayers, but the profits belong to the oil companies, so it really is profitable for them to favor the war!

This is one of those inane conspiracy theories that pop up from time to time. Its key presumption is that somehow, oil companies have used their vast, hidden influence to convince President Bush, both houses of Congress, and a substantial portion of the American people to go along with them and shoulder a tremendous cost in lives, funds, and risk. And, they've exercised all this influence without actually making any public statements of their position; its all been behind the scenes. These oil companies must be pretty powerful! But consider:

  • In 1991, this same oil conspiracy was too weak to convince President Bush 41 to move on to Baghdad when his army was practically within spitting distance;
  • In 1998, when President Clinton revealed an Iraqi plot to assassinate Bush 41, the oil conspiracy was even weaker; in spite of a clear casus belli, it was all they could do to get Clinton to drop some guided munitions on empty factories and military buildings in the dead of night, even though a full-scale war would have been quite useful to Clinton at the time;
  • Throughout this period, Saddam and the U.N. security council was receptive to the idea that the oil-for-food program should be dropped and Saddaam be allowed to pump as much oil as he likes. Surely this strategy would be far less costly, less risky, and would show profits much sooner. Surely it would require far less back-room political influence to get this to happen. Yet the oil conspiracy couldn't pull this off;
  • Even as recently as November, 2001, the conspiracy was too weak to save Enron, the (at the time) seven-largest U.S. company. Clearly, after the demise of Enron, the oil industry has even less power and influence than it did before;
And yet in 2002 and 2003, the oil conspiracy, now international in scope, is powerful enough to take the country to the verge of war, and convince 18 democratic governments to sign letters of support, all while maintaining plausible deniability!
Additional Reading

This outstanding article by an oil industry analyst who is neutral on the war question discusses all the other UN Security Council members' oil interests vis-à-vis Iraq:

http://www.rppi.org/isitabouttheoil.html
Some words should also be said about OPEC, the words are: read this excellent WU. Had the so-called Gulf War II happened in the 70's or 80's, I agree a case could be made that it was all a plot to break the back of OPEC and ensure cheap oil. But, as the OPEC w/u amply demonstrates, OPEC's back has already been broken -- when OPEC used its oligopoly pricing power to increase the price of crude, it made it profitable to exploit less accessible crude. More importantly, thanks to the efficiency of global capital markets, OPEC's actions opened the floodgates for billions in R&D to discover new oil fields and develop techniques that would allow hard-to-reach oil to be extracted at lower cost, thus significantly weakening OPEC's pricing power. The fall of the Soviet Union allowed Siberia's immense oil reserves to be exploited with the best Western technology. Also, OPEC member states, which outside of oil had economies that by Western standards, barely functioned, became addicted to the revenues and to Western standards of living, and couldn't resist both increasing the official OPEC quotas, and cheating, er, ah temporarily exceeding their quotas, just to get past the current domestic financial crisis, we promise! etc.

Today OPEC is a joke. As OPEC's oligopoly pricing power is already weakened, the potential long-term benefits for the oil industry conspiracy of finishing off OPEC would be modest. War would be an very risky proposition for Big Oil -- if the war failed, or if it went well but met with widespread opposition in the diplomatic community, it might cause OPEC members to stop being preoccupied with their domestic concerns and re-discover their sense of purpose. It might cause non-OPEC countries, like Russia, to become interested in joining a renewed, stronger OPEC! Clearly, continued Containment of Iraq, and continued R+D investment (which also is a source of profit for the oil industry!) would seem a safer strategy for the big oil "conspiracy" -- a strategy that has been effective based on the decline of OPEC so far.

Is the current war on Iraq really just an attempt to deal OPEC a final death-blow, a spiteful hit-'em-while-they're-down sort of revenge? At least if they made this argument, the conspiracy theorist would have a (barely) plausible rationale for the conspiracy. In support they might cite Iraq's decision (someone told me they did this in 2002 or 3, and that some other OPEC members were considering following suit) to begin quoting oil prices in Euros instead of US Dollars. For this move to have any substance, Iraq would have to go a step further and actually stop accepting payment for oil in Dollars; as far as I can tell they haven't done so. If they did, such a move would, all else being equal, somewhat increase the value of the Euro relative to the Dollar. Of course, it wouldn't then be a conspiracy to control oil, it would be a conspiracy to control currencies. As others have pointed out, the appropriate slogan would be "No Blood for the Almighty Dollar" or something like that. Furthermore, the actual effect on the Euro/Dollar relationship would likely be small, since the value of the currencies are mostly determined by central bank policies, world currency reserves, and ultimately the perceived value of the currency fiat promise.

I suspect the only impact of Iraq's decision to quote oil prices in Euros is purely symbolic, though important: it is a diplomatic message designed to let the world know Iraq supports the European Union's (especially France's) attempt to construct an alternative to the U.S. hegemony. In such a project, Iraq's oil would be only one of many pieces in a multi-generational chess match that is far, far bigger than the oil industry; a struggle which one hardly needs the machinations of conspiracy theory to grasp.

So no, I don't think "its all about oil".

Firstly, a nod to Mod and e-hadj on excellent writeups. As far as the naiive "No blood for oil!" chanting goes, you guys are absolutely correct: a war purely to increase the amount of oil moving from Iraq to the US, or to get that oil at a cheaper price, would barely be a break-even war for the US. But there are deeper issues involved.

We all know of OPEC, the Organization of Petroleum Exporting Companies, a consortium of countries currently consisting of Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, the UAE, Algeria, and Nigeria. They basically get together and decide things together, like what price they'll sell their oil for, who to, how much, and (most importantly for the purposes of this writeup) what currency they'll trade oil on. Now take a guess what currency oil is traded on. You got it: for the most part, the dollar.

Ever wondered why the dollar is so strong? If you want to buy oil, you buy it in dollars. Just about every country on the face of the planet needs to buy oil, which means that every country has to keep dollars in its coffers. Billions of dollars are invested in countries all over the world so that they can purchase oil. This keeps demand for the dollar very high, and so the price stays very high and very stable.

Recently, Iraq switched to the Euro. Venezuela and Iran are strongly considering it, and indeed it is an issue current in all of OPEC. If all of OPEC switches to the Euro, imagine what will happen to the dollar. Demand will plummet, because countries that need to buy oil will no longer find it so necessary to have dollars in their reserves. The price of the dollar will fall drastically, leading to inflation and a pretty hard decline in the US economy.

So this explains a lot of things. It explains why Bush pushed so hard for the war. It explains why France and Germany were so hard against the war. And it explains why Blair joined Bush, because Britain hasn't adopted the Euro.

So the chant should probably be more along the lines of "No blood for the dollar!" but that really doesn't quite have the same ring, now does it?

Blood for oil?

"No blood for oil" was one of the most common slogans used by anti-war protestors during both the original Gulf war and the recent conflict in Iraq. There is quite a compelling case for believing that America may be fighting for control over Iraq's oil if we look at some of the facts.

  • In 2002 Iraq exported around 8 and a half million barrels of crude oil to the USA each month, and half that to Europe. In July 2002 Iraq was the ninth biggest exporter to the US.
  • America imported around twice as much from Britain
  • The USA consumes around 20 million barrels of oil each day, compared to 15 million by the whole of Europe and 5 million by Japan
  • Iraq has the world's second largest oil reserve, with 112 billion barrels waiting to be taken out of the ground.
  • The gulf is the only part of the world where there is a capacity for increased oil production. All the other oil producing countries are extracting less and less each year, and will run out within a few decades.

Now the war is over, discussions are taking place between the US and Israeli governments, as well as potential Iraqi leaders, to build an oil pipeline between Iraq and Israel. This would mean a solution to Israel's energy problems and would allow America easy access to Iraq's oil from an ally other than Saudi Arabia.

This could be important for America given the deterioration in their relations with the Saudis, which was signalled in part in the summer of 2001 when Crown Prince Abdullah said in a letter to George W Bush, "it is time for the United States and Saudi Arabia to look at their separate interests".

Israel, however, is likely to make a more reliable ally given their reliance on American support in the Israel-Palestine conflict.

And the suggestion that Saddam could simply be bribed into supplying the oil to Israel can perhaps be refuted when we consider what the response of the Iraqi people would be to entering into such a relationship with Israel, when Israel is widely hated. Think about the how much money America is spending paying the Colombian government to defend the oil pipeline there, which comes under frequent attack by left-wing guerillas.

There are other issues to look at in relation to the US and control of Iraqi oil. Commentators have suggested that it is not just that America wants access to the oil, but that they want full control of it by US oil companies. This needn't be simply for the benefit of this handful of companies. The American economy would benefit from cheaper oil, as by controlling Iraq, they wouldn't be subject to the pricing decisions of the OPEC cartel.

Rather than trying to beat the price fixers, America may be trying to join them. The Arab states make loads of money out of oil, and perhaps more significantly, by gaining control of the region, America could deny oil to countries they see as global competitors, such as China, whose economy is currently expanding at a massive rate.

The Chinese currency is tied to the dollar, meaning if the dollar goes down in value, the Chinese currency will become cheaper too. The US dollar has indeed been falling in value a great deal recently, which is bad for America as it means less spending power for Americans and more competitively priced Chinese goods when sold in the west.

Iraq recently switched the currency it uses for trading in oil from the dollar to the euro, and other middle eastern countries are considering doing the same thing. Less demand for the dollar would mean more devaluation of the currency, so here we see another reason why America might want control over Iraq.

Those who claim France and Russia opposed the war for selfish economic reasons point out that French petrol company Total and the Russian Lukoil both had contracts to develop Iraqi oil fields. Between them, the contracts give the companies access to 41 billion barrels of oil in reserve. The Iraqis revoked the Lukoil contract in December 2002 after it was revealed that the company had made negotiations with America to keep the oilfield when America was in control of the country. We can see this as a pro-war argument – the Americans were fighting a moral war while those who were against it were only acting out of self-interest. On the other hand, one may think that if oil contracts were so important to those countries in deciding whether or not to back the war, then surely oil must be a significant consideration for the US?


Links:

'Shock. This time is just like last time', The Observer
http://www.observer.co.uk/business/story/0,6903,914964,00.html

'Chinese growth hits six-year high', BBC News Online
http://news.bbc.co.uk/2/hi/business/2955067.stm

'The importance of Iraqi oil to the US', Al Jazeera
http://english.aljazeera.net/topics/article.asp?cu_no=1&item_no=528&version=1&template_id=273&parent_id=258

'The US isn't wedded to Saudi oil', Los Angeles Times
http://www.bens.org/sw_ar041902.html

'Israel seeks pipeline for Iraqi oil', The Observer
http://www.observer.co.uk/international/story/0,6903,940054,00.html

'Oil: The Other Iraq War', MSNBC News
http://www.msnbc.com/news/IRAQOIL_Front.asp

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