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Monday, September 29, 2003

Economic Benefits of Iraqi Oil

Update: In this post that I wrote almost 4 years ago, it was recently pointed out that I mistakenly attributed a quote ("retort") to the wrong person. It is now fixed.

On the tscobb email list, there's been a discussion regarding the economic costs and benefits of the Iraq war. It seems to me (but I'm not sure) that it has degraded out of the rational realm with Tom Sullivan retorting:

Another perspective is that those "savings" may just go to enrich
Georgie boy's buddies and not really get passed on to us!

My reply follows...

I'd like to understand the mechanism by which Georgie boy's buddies (herein called "The Buddies") will redirect the economic benefits into their own pockets while totally eliminating all benefits to everybody else in America. I don't like Bush either, and could possibly believe that they would like to steal massively from their fellow citizens, but short of vast conspiracies involving millions of people, I'm at a loss to explain how they would pull something like that off.

The benefit to the US is only partially directly related to lower oil prices. Iraq will not pump even 1 billion barrels this year and at approximately $20 - $25 per barrel the total revenue generated by that oil will be less than $25 billion. So even if we got that oil for free, that'd be nice, but that's not where we'll derive most of the benefit.

The real benefit stems from the additional Iraqi oil increasing the supply and thus putting downward pressure on ALL oil prices worldwide. The lower oil prices stimulate economic growth by increasing consumer demand in non-energy sectors (since less money needs to spent on energy) which significantly increases per capita GDP. It is estimated that the increase in U.S. GDP will be an additional 1% relative to what it would have been had we not freed Iraq from Saddam Hussein. As an example, this Time Magazine article states "lower oil prices would generate 2003 growth of nearly 3%, compared with the 2% currently forecast by many economists."

Since the U.S.'s GDP is approximately $10 trillion, that addition 1% represents an additional $100 billion. Since GDP growth is
cumulative, that is an additional $100 billion every year going forward (and in fact in compounds so it would actually be even more). The Net Present Value of $100 billion using a discount rate of 3% for the next 20 years is about $1.5 trillion.

Even if The Buddies steal all of the Iraqi oil, in order for them to gain any benefit, they will still have to sell it ('cause I don't
think they can eat it). When they sell it, it will still have the GDP related benefit described above. While it would clearly be less than optimal for the Iraqis to have their oil stolen, it will still benefit us. It seems unlikely to me that France and the rest of the world would turn a blind eye to The Buddies stealing Iraqi oil. However, it's still plausible since even though France is dead set against ever deposing horrible dictators, they're much more accommodating to general corruption, especially involving oil, as shown by the recent TotalFinaElf scandal. Again, whether or not the Iraqis benefit from their own oil, we will.

I can also imagine numerous ways that The Buddies will otherwise try to rip America off. However, none of these are particularly related to the Iraq war and could be done even if there had been no Iraq war. Thus, I contend that the Iraq war is still a substantial benefit economically to America.

Bush has just over one year left in his presidency. I am having a hard time thinking of a way that The Buddies will derive the $1.5 trillion dollar benefit in this short period of time. Except, possibly with a really vast conspiracy involving all of Congress (Democrats and Republicans alike), including congressmen and Presidents to be elected in the future. But even if such a conspiracy exists, I can't see why they'd focus exclusively on the spoils of Iraq. There would far easier ways to rip us off.

So please enlighten me to the basis of your perspective.


Tom said...

This Tom Stohlman has never retorted such a thing. Perhaps you meant Tom Sullivan.

Bret said...

You are correct, it was Tom Sullivan, not Tom Stohlman. My deepest apologies for that mistake. I'll issue a correction immediately.