Archaeological Economics of the Iraq Invasion

In a recent discussion, someone disputed the claim that Iraq "is all about the oil" by pointing out alternate strategies the US could have followed to either ensure a flow of cheap oil or to control foreign oil. This argument is insufficiently cynical. "It's all about the oil" is not "It's all about securing a flow of cheap oil for the American populace", its "It's all about making money for oil companies". Which means the relevant goal is to *decrease* world supply to drive up prices and profits - which is exactly what has happened.

Here are graphs of Exxon-Mobil and Chevron-Texaco stock prices over the last 5 years. Note that war officially began in March 2003, and things started heating up in late 2002. Clearly the war has been fabulous for oil company profits. In contrast, actions which stabilized the Middle East and its oil supply might well have lost money for these companies.

This does not necessarily mean this is the entire reason for the war, of course. With so many effects, there are surely a number of them which were motivations, and so in that sense "It's all about the oil", like most such sweeping statements, is wrong. But its hard to imagine our Texas oil millionaire leader not considering this result a considerable plus. And while there are other ways to drive up the price of oil, they are unlikely to be as politically viable as attacking a foreign dictator easily associated with hated terrorists.

This result of our invasion is especially troubling because of the incredible cost which high oil prices have on the rest of the economy. Almost everything that the modern global economy does requires energy, and oil is our cheapest source of energy (yes, yes, except for nuclear). It's worse than a mere transfer of resources like taxing and spending, because its transferring at an enormous net loss. These oil profits are not just costing the world the property destroyed and lives lost for the war. They come at the expense of the standard of living of everyone in the world - and that's too high a price.

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Of course, if that were a

Of course, if that were a major motivation, the US armed forces would have focused on saving non-oil-related industries and ministry offices in the aftermath of the destruction of Saddam's regime. They did not, but rather focused all their efforts on protecting the oil infrastructure. They didn't succeed, but the action belies a motivation to deliberately lower world oil supply.

Iraq is important in the world because it has oil. If it had no oil:

(A) Saddam may not have been in power
(B) The Iraqi state would not have had the economic means to muster a huge army that could invade its neighbors
(C) If it did invade the neighbors (who would also have no oil), world history post WW-II has shown that nobody would give a damn because tribalist countries fighting one another over dirt is not strategically important to the 1st world.
(D) and of course, Saddam wouldn't have invaded Kuwait anyway, because.. well, it was all about the oil. :cool:

All of which is to say that the only reason anyone cares about Iraq or the Middle East these days is because it is the lowest cost supplier of the lifeblood of industrial economies. That, and that alone, is required to understand why there are strategic nexii in the region (terrorism, WMD development, etc). It is important because of its potential. One doesn't need to posit nefarious motives or conspiracies on the part of the president.

They did not, but rather

They did not, but rather focused all their efforts on protecting the oil infrastructure. They didnâ??t succeed, but the action belies a motivation to deliberately lower world oil supply.

This is only slight evidence against my claim. Bush may be able to get away with increasing oil prices by invading Iraq, but not invading Iraq and then torching all the wells (which is much harder to spin). And lower level generals and commanders who are *not* Texas oil millionaires are going to have different priorities.

All of which is to say that the only reason anyone cares about Iraq or the Middle East these days is because it is the lowest cost supplier of the lifeblood of industrial economies.

Agreed. And what better way to make more money from your natural resource than to blow up the lowest cost supplier?

In other words, I agree with you that oil is why the Middle East is interesting. The question is, what are we doing to the oil? How are we changing oil's relation to the world? And the graphs answer that question quite clearly - we are making oil more expensive. It's possible that this was not our intention, but it seems like a pretty likely result of our actions.

One doesnâ??t need to posit nefarious motives or conspiracies on the part of the president.

I don't understand what is nefarious or conspiratorial about wanting to make money for yourself and your friends. Isn't it the central tenet of libertarianism and modern economics that this is a fundamental human desire? It seems a bit odd for a libertarian to object to my suggesting that someone is acting out of rational financial self-interest :razz: I guess that makes the Public Choice theorists a bunch of utter conspiracy nuts!

Patri, A goal of driving up

Patri,

A goal of driving up oil prices simply has too much risk to Bush's re-election to be credible. THe government simply has too many ways of rewarding its friends to need to do anything so drastic.

War is about the consolidation, expansion and exercise of political power, home and abroad. It also serves as a distraction from other political issues that may be otherwise intractable and dangerous.

Regards, Don

There are a number of

There are a number of reasons why the price of oil has risen substantially over the last couple years, not the least of which is the sharp rise in demand in China, India, and Signapore. Speculators and futures traders are also thought to be responsible for some of this. I donâ??t think the sudden drop in Iraqâ??s oil production has had as big an effect on the present high price of oil as you seem to think. From what Iâ??ve been reading Iraq is once again producing at near pre-war levels, ~ 2M bbl/day, and yet the price per bbl continues to rise.

Besides, Saudi Arabia, Qatar, and Kuwait could easily have made up the production shortfall in Iraq after the invasion. To some extent I think they did.

Initially (http://www.rknibbe.com/blog/2003/10/23.html) I did not think the invasion was about oil in any sense of the meaning. Now (http://www.rknibbe.com/blog/2004/09/18.html) I'm not so sure. Yet I'm not sooo cynical to think Bush 'n Co. did it with the real intention of propping up the profits of American oil companies and their contractors. That's nothing but liberal agitprop if you ask me. Not even Bush 'n Co. would be have been that stupid.

We can all agree that oil is

We can all agree that oil is a significant factor, but you need to think bigger and longer-term, Patri. With China and India poised to start sucking up a hell of a lot more oil over the next decade or so, oil prices are going to go way up no mater what. In a situation like that, you definitely do not want a maniac like Saddam with his hand on the tap of a pivotal supply. He could more or less fuck with the global price of oil at will, and when you couple that with nuclear inviobility (which he certainly would have attained ASAP as soon as the sanctions came down), he then has the power to exact all sorts of concessions from the developed world and can more or less do whatever he wants (i.e. continuing to aid and abett terrorists without fear of significant reprisal).

That is a recipie for huge trouble down the road. Notice how Kim Jung Il basically has the ability to make neighboring countries do backflips on command? Well picture how much worse it would be if he were sitting on the second-largest oil reserves on the planet in a time when oil is in high demand. In this light, it's not hard to see why Saddam was an important target. There's no need to look for such short-sighted justifications.

I agree with Matt - the

I agree with Matt - the rapid increase in oil demand by the Chinese economy was going to put upward pressure on the price of oil, regardless.

Don is also correct in that there are easier means (politically and otherwise) to reward your friends than through a massively indirect attempt to fuddle with the primal forces of economics (supply and demand). He could reward ExxonMobile et al in the US simply by raising oil tariffs on imported oil (or oil from non-US owned/controlled companies). He could have mandated "more purchases to the Strategic Petroleum Reserve" and, as a bonus, wrapped it in anti-outsourcing terms ("we're only going to buy American, and Domestic!"). Etc, Etc. Hell, he could have just given them no-bid contracts for government work (which has indeed happened). All of these measures directly line the pockets or positively affect the bottom line of US oil companies, while disrupting the 2nd-lowest cost producer's flow doesn't necessarily directly, or immediately, impact US oil companies' bottom lines.

Politically, as well, the massive cost imposed on the US economy due to unexpected fuel price spikes will cause far more pain to regular voters than the gain to the execs of US oil companies, which is extraordinarily bad politics. Unlike with steel tariffs, I can't imagine a scenario where Rove would think he could buy votes with higher oil prices.

Disrupting the 2nd lowest cost producer would tend to give benefits to the 3rd lowest cost producer first, then the 4th, 5th, etc, with diminishing returns up the scale. The US is one of the highest cost producers of oil on the world market today (having used most of our cheap oil up in the 19th/early 20th centuries, and having environmental prohibitions on new discovery offshore, inland, etc). I can't imagine that the long term profit rate for US producers would increase all that much from disruption of Iraq's supply, especially given the nature of the market (extraordinarily fungible world commodity market with cut-throat competition for thin profit margins). Iran & Norway are likely the biggest benefactors, since Iraqi/Gulf oil is primarily shipped to Europe and Japan (the US gets its physical imports from Venezuela & West Africa, primarily, if I'm not mistaken).

The other problem is: how much of a player was Iraq in the world oil market prior to the invasion? Its production was severely curtailed and constrained from sanctions despite the UN corruption. Perhaps the world market was dependent on Iraqi oil on the margin (and thus the removal of the curtailed Iraqi production is the reason for the spike) but I rather doubt that. Extra demand from China combined with short-term supply worries (intermediaries scrambling to cover contract obligations and hedge risk that gulf oil shipments may be delayed for whatever reason) seems to cover the reason for the price spike.

Further, would a full-scale invasion be necessary to achieve the supposed goal of lowering oil supply? We were bombing the country with impunity beforehand; would it not have been easier, politically and diplomatically, to say "the Oil for Food program is a corrupt scam and is being used to support terror and WMD programs. We're blowing up Saddam's oil fields and pipelines." Europeans rising up in objection would look even *more* like they were bought and objecting only for 'crass, commercial' reasons. A slam dunk to screw France and Germany AND raise oil prices for his buddies (and do it all on the cheap, leaving extra money for more tax breaks! woo! a trifecta!).
Instead, they chose to invade, conquer, occupy, and colonize (however briefly), spending billions & destroying foreign goodwill to the US and causing resentment and division at home right before an election.

So if Bush&Co launched the war for the supposed reason, they would have to be monumentally cynical, shortsighted, AND stupid. Granted, they *are*, but I think more mundane stupidity explains better with less (Ockham's razor and all that). Rational, public-choice approved political/financial self interest tries to maximize gain and minimize cost AND risk (short and long term). An actor motivated thusly would NOT choose to invade Iraq in the manner that the US government has.

Finally, as an afterthought, the political climate, and practice, of the US government is to pressure OPEC nations to *INCREASE* production (thus lowering the worldwide price). Keeping oil prices low has been the decade-to-decade proven electoral winner. I imagine Bush is more interested in political/military power than in profits for cronies.

I imagine, too, that the

I imagine, too, that the concurrent woes of Russian Oil giant Yukos (sp?) has caused problems in the market, too. China gets a shload of oil from Russia, and its primary producer is on the verge of bankruptcy and re-nationalization, both of which threaten Chinese supply. It would not surprise me that Chinese state officials are thus pre-emptively buying huge amounts of oil to hedge against supply worries, which of course would spike world oil prices even more.

I should have mentioned this

I should have mentioned this before, but I have had blogger's block for a while because I've been overwhelmed by the overabundance of politics in my life.

I think that a better term than archaeological economics would be forensic economics. Archaelogy is the study of old stuff.

Patri, did you write this

Patri, did you write this article seriously or is this a very subtle troll? The reasoning seems very sloppy to me. Others have made valid points of criticism, but I want to argue from a different perspective. First, the graphs you posted are only 5 years...if you expand the dataset for both companies to the max, you can see that oil company stocks have steadily risen almost monotonicly since 1970, with a slight pause around the turn of the century...BEHAVIOR ALMOST IDENTICAL TO MANY OTHER STOCKS!!! (take a look at alcoa, for example...how is alcoa benefiting from the iraq war? or compare both stocks vs. the dow over the last 5 years...they track VERY well, is the entire US economy benefiting form the war?) This selective portrayal of data is greviously misleading.
Second, if we instead say that oil stocks tend to rise when oil prices rise, (and I'm not even sure that's always true) and that it takes a time lag before you see this happening, then the stock price is explained by the oil price increase...which is explained by the monetary inflation of the last three years!
Okay, I think I've decided that you're trolling. Well, it got a rise out of me! cheers.

I don't see how the points

I don't see how the points about India and China are relevant to the short-term effect on the price of oil, and thus on oil company profits, created by the war. Yes, in the next 15 years, India and China will have a huge effect on the demand for oil an thus its price. But because of clever speculators, the price of oil should already (to some degree) reflect that. Rapid changes must be the result of surprise, of new information - like us invading Iraq, and failing to maintain stability.

As for the points about Bush's re-election, he's trading at at least 60. While he might have been even more of a favorite without the war on Iraq, it is *demonstrably* true that he is a favorite even with high oil prices. Furthermore, its not clear that the Iraq war was a net negative for his election chances. Expensive oil may hurt him, but fervent patriotic belief that we are in an important war and he is the man to run it helps him. If the war netted him votes, then clearly raising the price of oil did not jeopardize his re-election!

The points that the government has many ways of rewarding its friends are good ones. I am not suggesting that oil profits were the sole, or even the primary reason for the war. Merely that "its hard to imagine our Texas oil millionaire leader not considering this result a considerable plus." I'm not saying that he said "Hey, I want to reward my oil friends, how can I do it? Oh, if I invade Iraq, that will drive up the price of oil. Woo-hoo!". I'm merely saying that it was a predictable effect that he and those he listens too are likely to consider positive.

I don't think Patri was

I don't think Patri was trolling (in the internet colloquial sense), that's not his style. It's a legitimate question, one that i believe is answered correctly in the negative due to the points that have been raised in the comments thus far.

And, even if it were trolling, isn't that more like a rhetorical question that gets answered anyway? He's not trolling for insults or flames, but rather what has happened has been good comments addressing the question. I'll take that kind of 'trolling' any day.

But why would Bush want to

But why would Bush want to reward his oil friends at the expense of his other manufacturing friends that are screwed by spikes in oil prices?

The points that the government has many ways of rewarding its friends are good ones. I am not suggesting that oil profits were the sole, or even the primary reason for the war. Merely that â??its hard to imagine our Texas oil millionaire leader not considering this result a considerable plus.â?? Iâ??m not saying that he said â??Hey, I want to reward my oil friends, how can I do it? Oh, if I invade Iraq, that will drive up the price of oil. Woo-hoo!". Iâ??m merely saying that it was a predictable effect that he and those he listens too are likely to consider positive.

This may be true, but it seems to be a much weaker/more prosaic explanation (rather than "oh ho! information!"). If I am going to buy a car for a number of reasons, and it has the side effect of making me more likely to ferry my friends around (and thus they're happy, and I'm happy to do it, so I'm happy they're happy, etc), it would be kind of a stretch to say 'I bought the car to make my friends happy'. Though you could say 'making my friends happy was not the sole or even primary reason for buying the car, but it is a predictable effect that I and the people I listen to (my friends) are likely to consider positive", but that would be filed under 'duh' rather than 'ah-HA!', or rather "this is what we call a positive externality."

Its only news/information if it is posited as a primary or sole reason.

Disrupting the 2nd lowest

Disrupting the 2nd lowest cost producer would tend to give benefits to the 3rd lowest cost producer first, then the 4th, 5th, etc, with diminishing returns up the scale

Huh? I don't understand why this would be true. Doesn't it produce returns proportional to *volume* of production, not cost?

Suppose we increase the price of oil by $5/barrel. Doesn't every oil company, no matter what its cost of production, now make $5 more per barrel? So aren't its increased profits proportional to how many barrels it sells?

Its true that lower cost producers can now increase volume because some sources of oil that were unprofitable at the lower price are now profitable. But that is a second-order effect, and a lagging one at that.

Further, would a full-scale invasion be necessary to achieve the supposed goal of lowering oil supply?

Of course not. But I'm not arguing that it was "the" reason, merely that it may have been "a" reason. I think there are lots of other reasons, and more important ones to Bush at that.

Finally, as an afterthought, the political climate, and practice, of the US government is to pressure OPEC nations to *INCREASE* production (thus lowering the worldwide price). Keeping oil prices low has been the decade-to-decade proven electoral winner. I imagine Bush is more interested in political/military power than in profits for cronies.

Now this is a strong argument.

First, the graphs you posted

First, the graphs you posted are only 5 yearsâ?¦if you expand the dataset for both companies to the max, you can see that oil company stocks have steadily risen almost monotonicly since 1970, with a slight pause around the turn of the centuryâ?¦BEHAVIOR ALMOST IDENTICAL TO MANY OTHER STOCKS!!!

The fact that stock prices steadily rise does not mean that a rise in stock prices is irrelevant. We must compare the *degree* of rising. XOM has gone up by 43% in the past 2 years. Don't you agree that this is a rate of return significantly higher than the market rate of return over the past century?

or compare both stocks vs. the dow over the last 5 yearsâ?¦they track VERY well, is the entire US economy benefiting form the war?)

Huh? Here is XOM vs. the DJIA:

http://finance.yahoo.com/q/bc?t=5y&s=XOM&l=on&z=m&q=l&c=&c=%5EDJI

Look at 2004, where the Dow is flat and XOM is going up, up, up...Doesn't look like good tracking to me. Also note that the DJIA *includes* XOM. So of course there is going to be some correlation! Also the CAPM tells us that there is some large positive correlation between the prices of all the DJIA stocks, including XOM. The interesting thing is not the way they move somewhat together, its the times they don't.

Second, if we instead say that oil stocks tend to rise when oil prices rise, (and Iâ??m not even sure thatâ??s always true)

So you don't think that oil company stock prices are correlated with the price of oil? That seems very strange to me.

and that it takes a time lag before you see this happening,

Why would there be any time lag at all? Any trader can see that the price of oil has gone up, and bump up the price of the stock. Seems to me that it should be practically instantaneous!

explained by the monetary inflation of the last three years!

If this were true, then the prices of other commodities would have gone up by the same amount, right? Same with stocks...and everything else. But as we already saw from the DJIA vs. XOM graph, and we can see from graphing oil against other commodities, this is just not true.

Okay, I think Iâ??ve decided that youâ??re trolling. Well, it got a rise out of me! cheers.

Not trolling. Overstating my point a bit, definitely, but I think it has some truth.

Rapid changes must be the

Rapid changes must be the result of surprise, of new information - like us invading Iraq, and failing to maintain stability.

Oops, I should really add here: "and Venezuelan political disruption, Russian political problems with Yukos, and lots of hurricanes in the Gulf of Mexico".

Heâ??s not trolling for

Heâ??s not trolling for insults or flames, but rather what has happened has been good comments addressing the question.

Yeah, I can second that. I do think that my point was taken too far, and people have made a few excellent criticisms (as well as a number of bad ones :kiss:). But even the bad ones have all been honest and civil, which is great.

If I am going to buy a car

If I am going to buy a car for a number of reasons, and it has the side effect of making me more likely to ferry my friends around (and thus theyâ??re happy, and Iâ??m happy to do it, so Iâ??m happy theyâ??re happy, etc), it would be kind of a stretch to say â??I bought the car to make my friends happyâ??. Though you could say â??making my friends happy was not the sole or even primary reason for buying the car, but it is a predictable effect that I and the people I listen to (my friends) are likely to consider positive", but that would be filed under â??duhâ?? rather than â??ah-HA!â??, or rather â??this is what we call a positive externality.â??

I think that in between "I did A because of B", and "I did A, and its nice that B happened", there is a meaningful "I did A for a number of reasons, including B". It is that category I am claiming. Although not necessarily through direct conscious choice - I am talking about institutional motivations as well as individual ones. ie if Bush's friends all benefit from high oil prices, the opinions he is likely to hear are going to be biased by this fact. Hence it is a relevant factor in the decision without needing to posit a conspiracy.

This may seem like a rather indirect claim, and I can see why you'd consider it a duh. In contrast to the inflammatory left-wing rhetoric of conspiracy, it is certainly unexciting. But I see it as an example of the selfishness of government, of how private interests, not public interest, drive our leaders decisions. That is not news, but it is an important part of how the world works which some people (not you) seem to be in denial of.

At least with regard to

At least with regard to China, they've been undergoing socio-political reforms for several years now, and so it's only been recently that we're seeing the effect of this growth in a substantially increased demand for oil. IOW, they're already in that 10-15 year window you mentioned. The picture is similar for other countries as well -- India to name one.

Plus, as I alluded to, cause and effect works both ways, no? If the rapid increase in the price of oil was mostly due to the sudden drop in Iraq's production, then restoring that production should have caused the price to return (rapidly) to a pre-invasion value. In fact, Iraq's production rate *has* been resoterd to a pre-invasion level, but the price remains high. And my personal opinion is it won't come down significantly anytime soon.

There's a "perfect storm" of factors at work here. OPEC pinching the supply (for their own reasons), storms in the gulf, avarice of futures traders, increased world demand, fears about peak oil production, political instability in other oil producing regions, and probably a bunch of other stuff I don't know about.

"The fact that stock prices

"The fact that stock prices steadily rise does not mean that a rise in stock prices is irrelevant. We must compare the degree of rising. XOM has gone up by 43% in the past 2 years. Donâ??t you agree that this is a rate of return significantly higher than the market rate of return over the past century?"

True, but the last two years have been good for almost all stocks.

"So you donâ??t think that oil company stock prices are correlated with the price of oil? That seems very strange to me."

Sorry, my language was sloppy...I was talking about a lag between a change in the value of the dollar and a change in the dollar price of oil.

"If this were true, then the prices of other commodities would have gone up by the same amount, right? Same with stocksâ?¦and everything else. But as we already saw from the DJIA vs. XOM graph, and we can see from graphing oil against other commodities, this is just not true."

if not, this is my fault...I assumed it would be the case without having done the graph work. If I get time to look at oil vs other commodities I'll report back.

I still think that, with the exception of 2004, oil stock price behaviour has been fairly ho-hum...and I wouldn't at all be surprised if the jump this year turns into a bust the next. Anyway, my $0.02.

http://finance.yahoo.com/q/bc

http://finance.yahoo.com/q/bc?s=XOM&t=2y&l=on&z=m&q=l&c=^GSPC,^IXIC,^DJI

Above is an url where Exxon, S&P, Dow and Nasdaq are compared. The Oil companies are mabye not gaining as much as firs would be apparent at first sight.