Oil and Economics
The issue of oil is still coming up as one of the issues regarding the war in Iraq, and US relations with the Middle East more generally. To get a bit of perspective on this it’s useful to look at some numbers. Currently world oil production is about 80 million barrels each day, of which the US consumes about 20 million. This is about a third of total energy consumption. (a useful conversion factor, if I have it right is that a million barrels of oil yields about 5 terajoules of energy, which is about the output of 10 1000MW power plants).
Saudi Arabia typically produces about 8 million barrels per day, but has the flexibility to range between about 6 and 10. Prewar Iraq was producing around 3 million barrels per day. An optimistic outlook is that a functional government there could produce up to 6 million barrels per day.
There are various ways of looking at this, which I’ll discuss, but a convenient starting point is to focus on a change of 3 million barrels a day in the supply-demand balance. This is the amount of extra Iraqi oil in the optimistic scenario, and was the amount that Saddam could have cut off at short notice if he’d been left in place and in unfettered control of Iraqi oil. It’s also a pretty good measure of Saudi capacity to swing the oil market around.
3 million barrels a day is equal to 15 per cent of US oil consumption and about 5 per cent of US energy consumption. Over the short run, say a year, it would be easy to meet such a shortfall by drawing on stocks (including the ‘strategic reserve’) and by modest rationing measures like ‘odds and evens’. To look at the longer-term economic impact, it’s best to think what tax change would be required to yield this kind of reduction in use. I’ll assume the medium-term elasticity of demand for oil products is about 0.5, which implies that a 30 per cent tax would be needed. Some more rough calculations, available on request, suggest that the economic welfare cost of such a tax would be around $10 billion per year. (This assumes that the price is right to start with. It seems more likely that gasoline is undertaxed in the US, relative to the social costs of car use, and that a tax would be welfare-improving.)
Clearly the cost of domestic action to reduce US oil demand by 3 million barrels a day is a lot less than the cost of the Iraq war (amortised over any plausible time span) or the continuing cost of an expanded military.
The upshot of all this is that any* analysis of the war that places heavy weight on the role of oil implies that the US has adopted a policy adverse to its own interests. This could be because the Administration doesn’t understand the issues, because it thinks a war would be more popular than a petrol tax or because it is acting at the behest of oil industry interest groups. Alternatively, it might be better to conclude that oil (Iraqi or Saudi) was not one of the primary motives for war.
* I leave aside the idea that Iraq is supposed to serve as a springboard for an invasion of Saudi Arabia. If the US wanted to invade Saudi Arabia, it could do so easily, with no need for a springboard, and 9/11 provided the best pretext that’s ever likely to arise.