Monday, November 26, 2007

The Myth of the Oil Weapon vs. Reality of Corporate Oil Thieves

Someone at the American Conservative took the time to debunk one of the less embarrassing lies about why we invaded Iraq: to secure "strategic access" to their oil in case some future Iraqi government or other producers threaten to cut us off or dramatically increase prices.

The author points out the obvious problem that if your economy depends on the sale of one product, you can't cut off the customer who uses 25% of it and expect to make money. Likewise, the more one player tries to jack up the price, the more temptation there will be for competitors to produce more to capture those added profits, and the price will go back down as demand increases.

He leaves out the other effect of high prices: it will make alternative fuel and energy sources more attractive to more people.

If we really just wanted "strategic access," we would go after it the way China is doing in Iran, Canada, and Africa: with long term contracts and inducements to friendship not wars, which tend to alienate people and cost more than paying them.

I don't believe those in the White House actually believe they need to seize the oil to prevent a future embargo. They just want to give a $10-30 trillion gift to their friends in big oil, and control of the spigot, so they could control how much is produced and therefore the price.



This is the ultimate in corporate welfare. We pay for the war, and oil companies collect the profits, which they don't have a very good track record of sharing with us.

The Myth of the Oil Weapon
November 5, 2007 Issue
The American Conservative

Our foreign-policy establishment believes the U.S. must intervene to keep oil flowing from the Mideast. In reality, all America needs to do is demand it.

by David R. Henderson

In a recent interview with Charlie Rose to drum up publicity for his book, The Age of Turbulence, former Federal Reserve Chairman Alan Greenspan argued that the reason to make war on Iraq was that an unchecked Saddam Hussein would have threatened the world’s oil supply. Greenspan gave no evidence or argument for his assertion. But in making it, he confirmed the views of many opponents of the war, and even some supporters, that the Iraq War was, or at least should have been, about oil. He also joined a long list of prominent people who have made the case for war for oil ever since the Organization of Petroleum Exporting Countries formed an effective cartel that raised the world price from $3 a barrel to $11 in the fall of 1973.

That’s too bad, because the case for making war for oil is profoundly weak.
The pragmatic case against war for oil, on the other hand, rests on a few simple facts. First, no oil-producing country, no matter what it does to its oil supply, can cause us to line up for gasoline. Second, an oil-producing country cannot impose a selective embargo on a target country, because oil is sold in a world market. Third, the only way one country’s government can hurt another country using the “oil weapon” is by cutting output, which hurts all oil consumers, not just the target country; helps all oil producers, friend and foe alike; and harms the country that cuts its output.

Consider how long the foreign-policy establishment has taken as accepted the idea that the U.S. government needs to use military force to keep the world’s oil supply flowing. In March 1975, Harper’s published an article, “Seizing Arab Oil,” authored by “Miles Ignotus.” The author’s name, Harper’s explained, “is the pseudonym of a Washington-based professor and defense consultant with intimate links to high-level U.S. policy makers.” Many insiders speculated that the piece was written by Edward Luttwak, still a prominent military analyst. In it, the author expressed frustration at the high price of oil and argued that no nonviolent means of breaking the cartel’s back would work. Even massive conservation, he argued, was unlikely to solve the problem. Moreover, he claimed, “there is absolutely no reason to expect major new discoveries.” So what options were left? “Ignotus” wrote, “There remains only force. The only feasible countervailing power to OPEC’s control of oil is power itself—military power.” He argued at the time that military force should be exerted on Saudi Arabia.


When many Americans over age 50 worry about Middle Eastern producers playing havoc with the world oil supply, they think back to the gasoline lines of 1973 and 1979. But those fiascos weren’t forced by a foreign producer. The U.S. government was responsible. President Nixon had imposed a freeze on all prices on Aug. 15, 1971. He gradually decontrolled prices, but when OPEC raised the price in the fall of 1973, Nixon’s price controls prevented the price of oil and gasoline from rising sufficiently. Whatever else economists may argue about, they agree that a price control that keeps the price below what would have otherwise existed in a competitive market will cause a shortage. The reason is that at a price below the competitive price, consumers will demand more and producers will supply less. President Ford and Congress altered the price controls, and President Carter inherited and kept them. When the world oil supply tightened again in 1979, we had another shortage. Simply by refraining from controlling the price, therefore, we can avoid, and have avoided, gas lines.



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