Commentary

Oil Denial: An Empty Fear

By Donald Losman
October 13, 2001
In light of the September 11 atrocities against our country, President Bush initiated a war on terrorism, putting the world on notice that the United States will respond. Initially, there was almost unanimous public support. But as time has passed more and more caveats are surfacing, some appropriate and some almost silly. One of the latter springs from America’s oil paranoia, which developed during the 1970s and apparently left permanent psychological scars on our national psyche.

It is alleged that if our counter-terrorism campaign offends oil producing states or involves actions that harm Moslems, even inadvertently, oil suppliers may launch an embargo or raise prices so that our economy is dealt a body blow. But should we fear this alleged threat?

During the 1990s such fears were embodied in our national security documents, which began to embrace generalized economic objectives as well as oil-specific goals. For example, the president’s December 1999 “A National Security Strategy for a New Century,” said that America’s “economic well-being” is a vital national interest, and “we will do what we must to defend these interests…using our military might unilaterally and decisively.” Our December 2000 document highlighted “our ability to use our naval power, if necessary,” to ensure access to oil. This national security embrace of economic objectives is a grave error, for they are imprecise, costly and elusive. On a moral basis, it is questionable, and as a reason to be hesitant in our war against terrorism, it is silly.

Most of the damage from the 1973 oil embargo emanated from our own policy blunders. Pre-embargo, poor U.S. policies made us vulnerable, and post-embargo, continued price controls and misguided regulation magnified the damage. Clearly, the best venue for addressing economic challenges is the economy and sound economic policies, not the national security establishment.

De-control of oil prices in the early 1980s coupled with much greater reliance on market-based resource allocations helped generate a substantial and sustained decline in oil prices, which today, when adjusted for inflation, are lower than in all the years of the 1970s after the 1973 embargo price hikes. Currently, our top crude oil suppliers are Venezuela, Saudi Arabia, Canada, and Mexico, and our economy is less energy dependent than years ago. And while Saddam Hussein does not like us, he — like other suppliers — is desperate to sell his oil. Indeed, in 1998 Iraq was our eighth largest supplier and currently ranks sixth. These countries can neither drink nor eat their oil — they must sell to maintain control and order in their rapid population growth regions. In short, today’s realities are light-years from the 1970s debacle, yet America irrationally clings to baseless doubts, fears so powerful that we are now having second thoughts about our war on terrorism.

Oil prices, trending downward in recent weeks despite the efforts of OPEC to hold them firm, will no doubt continue to rise and fall in future years. But with free market allocations and continuing technological advances, the long-term downward price trend is likely to continue. And if there are intermittent bursts in price, consumer “pain” can be substantially mitigated, if we so choose, via reductions in the combined federal/state average tax of 38 cents per gallon.

An army colonel told me that when he landed in Saudi Arabia in preparation for Desert Storm, as the door to the C-5 aircraft rose, his first sergeant said “Sir, let’s go home. I’ll pay five dollars a gallon!” This frames the moral question embedded in our national security strategy and our national fears: Is it worth spilling American (or foreign) blood to keep import prices “acceptable?” It is one thing to employ military force to defend freedom and human lives, but spilling blood to ensure access to cheap resources is another story. Importantly, oil is only one of many raw materials as well as other imported inputs that significantly contribute to the “economic well-being of our society.” We cannot ensure access to all of these with military might, nor should we try.

It has probably cost $30-$60 billion a year to safeguard Middle East oil supplies. That is outrageously high relative to the total value ($54 billion in 1999) of imported crude, of which only $15 billion came from the Persian Gulf. It is also a huge burden for the Pentagon, aggravating problems of high operations tempos, readiness, and retention.

Clearly, we must re-think the insertion of economic goals into our national security strategy. Economic security is best addressed by the market. Deleting economic objectives from the demands on our military will eliminate costly fiscal drains and remove significant “clutter” from a complex decision-making process. Finally, we cannot hesitate in the fight against global terrorism. While oil prices may rise at times, oil denial is a Middle East mirage and must be recognized as such.

Donald Losman is a professor of economics at the Industrial College of the Armed Forces, National Defense University, Washington, D.C. This article is excerpted from “Economic Security: A National Security Folly?”, published by the Cato Institute. The views expressed are his own.