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The real costs of Iraqi oil and the 'Security' council's arms exports

By Warwick McKibbin - posted Thursday, 6 March 2003

There is a popular belief that the ever-more-likely war between the United States and its allies with Iraq is about oil. The conspiracy theorists point to the oil past of the American President, Vice President and key members of the Bush Administration as exhibit number one and the evidence that physical oil reserves in Iraq are the second largest in the world outside Saudi Arabia as exhibit number two. However, looking at the facts illustrates how implausible this argument really is.

A number of facts about the world oil markets are very revealing when lined up with the oil theory of the potential Iraq War. According to the Energy Information Agency, International Energy Outlook 2002, world oil production capacity in 2000 was 77 million barrels a day. Iraq production capacity was 2.6 million barrels a day. It is estimated that if Iraq oil sanctions were lifted, it could expand capacity to 6 million barrels a day but at a cost of tens of billions of dollars. In 2000, the United States' consumption of oil was roughly 20 million barrels per day - half of which was imported and 80 per cent of the imported oil was from outside the Persian Gulf. By 2020 the Energy Information Agency projects about 33.4 per cent of global oil production will come from the Persian Gulf, up from 28 per cent in 2000. Thus there is still plenty of oil outside OPEC countries for at least the next few decades. Economically viable Iraqi oil is a tiny share of current oil use in the world and is projected to remain a small share. It is hard to imagine that Iraqi oil would have much impact on the United States' oil security since there are many more reliable suppliers for the United States to focus attention on.

The problem with Iraqi oil is that, as a result of the lack of maintenance of oil wells and the first Gulf War, tens of billions of dollars would need to be spent to get economically viable access to oil supplies in Iraq and much more than this to have a noticeable impact on world oil prices. The reality is that the quantity that could be accessed would add little to the United States' energy security in coming decades. The oil conspiracy theorists would have us believe that the United States is willing to spend enormous resources in taking the oil reserves and then invest enormous amounts of capital in a politically unstable region in the hope that oil prices 20 or 30 years into the future might be somewhat more stable than they are now. Whatever the reason for the proposed war on Iraq, it is hard to argue that oil is anywhere near the top of the list - but that doesn't seem to stop a number of commentators.


Andy Stoeckel and I have recently attempted to estimate the global cost of a war with Iraq in the latest edition of Economic Scenarios. We take into account the fiscal costs, the impacts of a higher oil price (followed perhaps by lower oil prices) and increased global risk. Under a short war scenario, defined as a year of combat and two years of rebuilding, we find that the cumulative cost to the world economy from now until 2010 is more than $US1 trillion. Under a long war scenario, defined as five years of conflict and five years of rebuilding we find a global cumulative cost to 2010 of more than $US 3.5 trillion. Perhaps this is a price worth paying to achieve the objectives of the governments involved. As long as they realise the costs of war (apart from the human costs which we don't attempt to value) are not just the cost to defence budgets. These costs are too large to be weighed against the potential gains to United States energy security from taking over Iraqi oil supplies. However if you believe our estimates of the costs of terrorism to the world economy then this is a more plausible explanation of why countries would wage war in the name of fighting terrorism. Having observed this, it is not clear that war with Iraq will reduce global terrorism.

Another interesting set of facts that is worth injecting into the debate can be found in the data on global arms exports. In a book I co-edited for the United Nations in 1995 with Nobel Laureate Professor Lawrence Klein on "Arms Reduction", we pointed out (using data from the Stockholm International Peace Research Institute) that between 1987 and 1991, 87 per cent of global arms exports were produced by the five permanent members of the UN Security Council (United States, former USSR, France, China and the United Kingdom - in that order). Although the United States is the largest arms exporter, according to the data the largest exporter of weapons to developing countries is France. The Middle East is by far the main destination of French arms exports. By 1999, Germany had overtaken China as the fifth largest arms exporter in the world. These facts are sobering. These arms suppliers to the world are the countries that we rely on to maintain world peace in the name of the United Nations!

Given these facts, it is hard not to be dismayed at the hypocrisy of all the major countries now involved in the debate on the war in Iraq. Something fundamental needs to be done about global arms trade, the role of the UN Security council members in this, and the fundamental causes of terrorism, before we can seriously talk about maintaining world peace.

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About the Author

Professor Warwick McKibbin director of the Centre for Applied Macroeconomic Analysis in the College of Business and Economics at ANU and a professorial fellow at the Lowy Institute for International Policy and a non-Resident Senior Fellow at The Brookings Institution. His website is Sensible Policy.

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