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What Fraction Of America's $4+/Gallon Gasoline Is Due To The War In Iraq?

by a siegel Sat Jul 12th, 2008 at 09:02:26 AM EST

383359478_3dd94a0fdf_m.jpgJust how much of the pump price of gasoline is attributable to the war in Iraq? A dollar? Three dollars? None. That conversation recently swirled around me and, one one point, someone commented that well over half (or more than $2) of America's $4.10 gallon of gas is due to the war. Another person asked "Is that right?" And, after pulling out some hair from my head, my response was both short and then long.

The short:

Two dollars a gallon is, perhaps, as good a swag as anyone's. ... I think.

And, the long after the fold.

This is really a tough analytical (ANALyst) question, without a pure answer. How much did invading Iraq add to the price of gasoline? It really depends on who the hell you ask, what assumptions are, etc ..

  1. For most who follow energy issues, the two prime drivers are mounting demand combined with constrained supply (Peak Oil hits ... and the news is NOT GOOD re Peak Oil).

  2. There is the seriously debated role of speculation. I have tended to see this as exaggerating the reality, that the situation is is profiting off oil prices not driving them, but people are providing me information/data that at least makes question my viewpoint.

  3. There is, however, a major risk factor in the market due to tensions in the Persian Gulf/etc. (The war, threats to Iran, etc ...)

  4. What about "what if" questions? Without Operation Iraqi Freedom and with better relationships with Iran, would there be global investments in Iraq / Iran such that they would be producing more oil for the world market?

  5. To what extent is the Iraq War responsible for the devaluation of the dollar over the past five years and the role this has had on oil price increases?

  6. And, this question doesn't deal with the most interesting question: What is the true total cost of a gallon of gasoline? Because, when we add in security, infrastructure, health, pollution, lost and damaged lives (LIVES!! cost in blood) and other costs, some analysts put the "price" of a gallon of gasoline well above $10 (and even $15) per gallon. But 'the true cost of gasoline' wasn't the question and conversation ... thus we will leave this aside.

  7. To complicate the picture even more, we could ask "what if" questions. What if the United States hadn't committed so much in resources (people's lives, people's time and intellectual/other capacity, money) to the conflict? What might dead, disabled, and wounded Americans, Iraqis, and others have achieved? Would (could?) some portion of that been used to help move the nation (the globe) toward an Energy Smart future? Might we have made steps to Energize America toward a more prosperous, climate friendly society? What were the "opportunity costs" and how do those relate to gas prices at the pump? This is an incredible sensible, but complex, set of questions and issues which we will also leave aside for the moment, even if you can count me intrigued by the 'what if' question.

Let's look around at some of the discussion of the issues related to the Iraq War and gasoline prices.

From the Enegy Information Administration's gasoline price primer:

Crude oil supply and prices - Crude oil prices are determined by worldwide supply and demand. Events in crude oil markets that caused spikes in crude oil prices were a major factor in all but one of the five major run-ups in gasoline prices between 1992 and 1997, according to the National Petroleum Council's study "U.S. Petroleum Supply - Inventory Dynamics." Rapid gasoline price increases occurred in response to crude oil shortages caused by the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990. The cost of crude oil has been the main contributor to recent increases in gasoline prices. World crude oil prices reached record levels in 2007 due mainly to high worldwide oil demand relative to supply. Other factors contributing to higher crude oil prices include political events and conflicts in some major oil producing regions, as well as other factors such as the declining value of the U.S. dollar (the currency at which crude oil is traded globally).

Okay, for EIA, the prime cause: supply / demand curves, but note "political events and conflicts".

Chris at Daily Liberty Research did a nice post on driving factors of oil prices with an interesting collection of articles, including the late June reporting that "OPEC President Chakib Khelil predicted that the price of oil will climb to $170 a barrel before the end of the year, citing the dollar's decline and political conflicts..." Chris comes to this key conclusion:

[T]he main reasons for high gas prices are the weak dollar/inflation (aka the Federal Reserve), the current wars we are in, and the likelihood of the U.S. starting more wars in the near future.

National Security Network took a look at the issue as well, with a focus on the risk premium. They comment that "some experts estimate" a risk premium of $30 to $40 barrel due to tensions with Iran/etc. That is what my 'off the top of the head' figure would have been for risk premium. But, guess what: even the best analysts, when pushed away from reporters, seem call this a guess, a swag or, at best, an "educated" or "informed" estimate. And, of course, the risk premium doesn't address the question of whether there would be more oil produced absent the US invasion and occupation of Iraq and sanctions against Iran. Nor does it address the question of how much of dollar's fall is due to conflict in Iraq and tension with Iran.

A version of this discussion first appeared at The Oil Drum. And, as always, the comments (okay, most comments there) were thoughtful and (often extremely) well informed. There were (just a few) comments that Iraq was irrelevant to gas prices. Others who focused on supply / demand, with one suggesting that about $1.50 of price premium is increased demand/tight supply with about $0.75 being Iraq. Some who tried to calculate what the market implications would be if Iraq and Iranian oil had been maximized, suggesting a major impact on gasoline prices. And, others who queried some of the 'what if scenarios'.

Many focused on the extent to which Iraq and federal borrowing to pay for it has undermined the US dollar and thus contributed to gasoline price increases. One commenter took the approach of simply attributing 100% of US military operations to the cost of Iraqi oil production, placing it far more expensive per barrel produced than any conceived production project in the world. Another asserted that we sacrificed $0.99 gallon gasoline by the invasion, suggesting $3 increase at the pump, due to lost opportunities for significant increases in supply.

A modified version went up at FireDogLake, where the informed comments and education continued.  Amid the comments, Hugh very strongly asserted that the price is driven by speculation above all.

Hugh's 3 Iron Laws of Energy

  1. The price of crude oil and the price of gasoline are not directy coupled.

  2. The price of gasoline is always manipulated.

  3. The price of crude oil in the short term is excessively high and in the long term absurdly low.

Sort of as a corollary of 3. The major driver in the price of crude since 2004 has been excessive speculation.

If you would like a more detailed explanation of this last, go to my [list of Bush] scandals list item 365.

Have to say that that list is terrifyingly impressive. And, item 365 is a strong statement, with data, of Hugh's assertion that speculative activity is a major driver behind mounting oil prices.  Hugh has me thinking. Not convinced, but thinking.  But ... For a (very) strong counter perspective, see Dave Cohen, Association for the Study of Peak Oil & Natural Gas, "Beware Those Evil Speculators":  

If you think speculators are responsible for 50% of the oil price rise over the last 5 years, nothing I could say will persuade you otherwise. I believe future events will bear out the view that an irreversible historical shift has occurred in the oil markets. If the NYMEX and other exchanges require further regulation, these actions should be carried out immediately so the world has a clearer picture of what's actually going on. Once that has been done, the "speculators" craze of 2008 will wither away as all insignificant twists and turns eventually do. Much of this talk just distracts us from the important energy tasks at hand.

Over at The Oil Drum, Jeffveil's very thoughtful comment, which rejects the very concept of a risk premium, began/ended this way:

Hmmmm... this is a thorny issue. ... the opportunity cost of the Iraq War may justify some of the price at the pump. Exactly how much? I'll stick with you SWAG.

Back to a swag:

To place a little context, America's gasoline at the pump, on average across the country, has gone up from $1.42 / gallon in January 2003 to $4.10 now. It has gone up $2.68. While there was already some 'risk premium' in place at that time (war drums beating), this suggests some form of upper bound on the discussion -- but an upper bound that is well above $2 per gallon.

These, however, don't clearly answer the questions. Is the Iraq war premium $3?$2.30? $2? A buck? Twenty cents? Or, is there no premium at all? I find a $3 per gallon assertion absurd, just as I would find it absurd to assert that there is no premium at all. But, in terms of defensible analysis, in scratching my head, I return to the short answer:

Two dollars a gallon is, perhaps, as good a swag as anyone's.


I think.

But that is why this post is here. To spark a conversation. To be honest, I don't know the answers to these questions. I wonder whether anyone really does. Which is one of the reasons why I'm writing this. I don't know. I am not expert on gasoline prices and all the factors that coalesce to drive prices that are paid at the pump. Many here, however, are ... Are the questions asked above the right ones? Are there major factors missing? And, what might the answers be? What is a 'defensible' statement as to the premium American drivers pay at the pump due to the Iraq War.

Peak Oil

Now, to finish, we must be careful. The Oil Drum published a piece yesterday highlighting that global declines in oil field productivity (core to Peak Oil) seem to be accelerating faster than analysis and reporting had suggested would occur.

The evidence seems to be pointing2516347706_578a9030e9_m.jpg to an overall increase in the global decline rate for existing wells. What this means is that, if world production is around 86 million barrels a day, then to replace existing declines next year, an additional new production of 4.47 mbd at 5.2% decline, instead of the 3.87 mbd required at 4.5% decline, will be needed just to stabilize supply at a fixed level.

If things work well, opening up all of Alaska would add perhaps 900,000 barrels per day to the oil supply in a decade or so. Ignoring growing global demand for oil (Chinese 'consumers' wanting cars like America's soccer moms and McSUV fans), we need to be finding and putting on line new oil the equivalent of 5% of current production year in, year out just to stay even. Ten years from now, that theoretical new US oil production would be less than 1/50th of the requirement to fill in that gap. (I don't want to be in the should we, shouldn't we discussion on that but to make it clear, in yet a different way, that those who are advocating Drill Here! Drill Now! Pay Less! (maybe, a decade from now) are, in the politest words possible, deceitful on a level of nearly criminal negligence in terms of America's and the globe's future.) While it is an interesting intellectual discussion to battle over how much Iraq is responsible for today's gasoline prices and a very sad discussion to have about 'what if' George the W had been a thoughtful President and the opportunity costs of not using these resources in a wiser fashion, the key challenge is to figure out and execute paths to get the US and the Globe on a planned (rather than forced) glide slope off oil (and off coal, Global Warming ...). And, to get on this glide slope NOW.

We must Get Energy Smart! NOW!!!

At the pump and elsewhere, we are suffering the consequences for, as a society and individuals, our energy illiteracy and bad energy choices. The consequences are already dire. They will only get worse ... unless we (as individuals, communities, businesses, governments at all levels, nations, global society) get our act together and start acting. WE have a choice ...

383359478_3dd94a0fdf_m.jpgAsk yourself: Are you doing your part to ENERGIZE AMERICA?

Are you ready to do your part?

Your voice can ... and will make a difference.

So ... SPEAK UP ... NOW!!!

PS: Energize America has a panel Friday morning, 9 am, at Netroots Nation.

Please join Jerome a Paris, Devilstower, Energy Smart candidates Debbie Cook (CA-45) and Mark Begich (AK-Senate), and myself for a conversation about Energizing America: Setting an Agenda for Progress.

Finally, yes this is an Amero-centric discussion. Yes, the United States (and the globe) would be better off if, years ago, the United States had taken a European path and had gasoline taxes -- but used that money to foster a move away from oil.  For example, if there had been a .5 cents per month tax instituted in 1980, the United States (and, likely, the Globe) would be using far less oil, the price of a barrel of oil (a gallon/liter of gasoline) would be far lower (that would be $1.68 in taxes per gallon, but how much lower would the price of oil be on the world market if the US used 1/2 or less of today's levels?), and our Global Warming problems/challenge would be real -- but somewhat less a catastrophic level of challenges.  That what if is the saddest and most distressing of all, with dire consequences for all humanity of America's failure to continue with some form of Carter's energy policies.

I'm sure Jerome and ChrisCook will have more informed ideas than me.

however I remember reading a series of articles about the price of oil frm the chicago Tribune that suggested that the "real" price of oil to the US economy was something like twice the actual recouped price at the pump. Which suggests to me that the direct costs of securing energy supplies has never been factored into the price and so shouldn't be now.

However, an interesting way is to ask how much additional cost the US is paying compared to europe. In 2002 the price of oil in dollars and euros was actually the same, 25. Since then the price in euros has tripled to 75, but the price in dollars has increased over SIX times. So I suggest that this would imply that at least half of the price rise at thep ump is a  direct consequence, even if it is only discerned by the fall of the dollar

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Sat Jul 12th, 2008 at 11:03:01 AM EST
That is a wonderful way to describe this in terms of the foreign exchange, simple and to the point: elegant. Thank you.

Blogging regularly at Get Energy Smart. NOW!!!
by a siegel (siegeadATgmailIGNORETHISdotPLEASEcom) on Sat Jul 12th, 2008 at 11:22:27 AM EST
[ Parent ]
However, one might argue that the crumbling of the $ had little to do with Vietraq. The enormity of the sums dumped into the desert sands is staggering, yes, but my distinct impression is that it utterly pales in comparison to what the Bushies have been doing on the home front.

Of course, one might then point out that the war in Vietraq was likely a vital part of the scare-people-into-voting-for-us strategy very obviously employed in 2002, 2004 and 2006.

Ultimately, my own WAG would be "very little." Demand was (and to some extent still is) exploding (see India, China, SUV) and supply couldn't keep up even if Iran and Iraq were pumping at the fastest rate physically possible. Something Has To Give, and of all the major powers of the world today, the US is structurally the most vulnerable to oil price shocks, I think.

So the war in Vietraq and Bush's Ponzi-economics may or may not have been proximate causes (and certainly played a role in the devaluation of the $), but ultimately, the pain would hit the US anyway. Maybe Bush has fast-forwarded the process by a couple of years, maybe he has increased the pain by a couple of tens of percent. But ultimately, my bottle of beer says "Peak Oil is a rock-meet-hard-place scenario, and any country that insists on suburbanisation and SUVs is gonna find itself between the two."

In part, this stems from a view that Bush is a symptom, not the disease. The fundamental structural weaknesses I talk about go back at least to Nixon, and until and unless they are excised from your body politic, you'll be able to choose not between a party that governs From The People, By The People, Of the People and one that does not, but between one that does not and one that does not and gloats about it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jul 12th, 2008 at 02:46:36 PM EST
[ Parent ]
A President, like Consciousness (the president of the state of mind), is always 'after the fact' that the entire government (and everything that feeds in and out of it) has already acted upon. Just like the CNS.

It is not possible to run a hierarchic organization from the top, on the basis of a one page daily summary of every issue - unless, there is complete reliability of the bottom up analysis of the metrics at every level of the organization.

And when government is staffed by people chosen for their ideology, it is the result of a long process. The Supreme Court is also a 'long game'. However a single appointment to the SC, should a vacancy appear, can have more far-reaching consequences than the election of any president.

You can't be me, I'm taken

by Sven Triloqvist on Sat Jul 12th, 2008 at 03:31:31 PM EST
[ Parent ]
Demand was (and to some extent still is) exploding (see India, China, SUV)

In fact, some of the fastest increases are with the oil producers themselves.

It's an interesting spiral.

Oil prices go up.

Producers get rich.

Producers' energy consumption increases as they spend their wealth for consumption and for development.

They export less.

Prices go up more.

...and so on...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jul 12th, 2008 at 03:38:12 PM EST
[ Parent ]
And money continues to move into the energy futures markets.  It is hard to believe that this large increase in money, even from pension funds, is bringing the price of oil down. More dollars chasing the same amount of oil futures. Repeal of the "Enron exemption" and a significant tightening of margin requirements by the SEC would show what effect these investment flows have had.  Don't hold you breath.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jul 12th, 2008 at 08:47:02 PM EST
[ Parent ]
And money continues to move into the energy futures markets.

I'm not in the 'speculation is a major component of the price rise' camp, but a little here and a little there and pretty soon the billions are noticable.

Granted, this is a number for all commodities, but I can't find the breakout for oil alone.

In the last five years, investments in index funds tied to commodities grew to US$260 billion from US$13 billion.
Pension funds deny speculation on oil

This one is more to the point - that there is serious money taking a bit of profit here and there, as contracts open and close, money that wasn't in the market several years ago, money that is influencing the game through loopholes similar to those that sucked billions from the pockets of California electricity rate payers. The pension companies, in other documents (in the same article above) say that they only have 2-4 % of their assets in this kind of speculation and that the return goes to the little guy's retirement funds. [Tobacco, Blood Diamonds, War Toys profits - where was it that I heard these arguments before?]

Energy Speculation Causes Fuel Price Inflation
June 22, 2008 | Progressive Democrats of America [does this include North and South, one wonders?-ed]

Commodity Index Investment vs. Spot Prices

In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

Commodity Index Purchases Last 5 Years

Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years.

Index Speculator Demand Characteristics

Demand for futures contracts can only come from two sources: Physical Commodity Consumers and Speculators. Speculators include the Traditional Speculators who have always existed in the market, as well as Index Speculators. Five years ago, Index Speculators were a tiny fraction of the commodities futures markets. Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets.

Index Speculator demand is distinctly different from Traditional Speculator demand; it arises purely from portfolio allocation decisions. When an Institutional Investor decides to allocate 2% to commodities futures, for example, they come to the market with a set amount of money. They are not concerned with the price per unit; they will buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been "put to work." Their insensitivity to price multiplies their impact on commodity markets.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Jul 13th, 2008 at 05:09:16 AM EST
[ Parent ]
To equate demand for financial bets on commodities with demand for the commodity itself is a fundamental misconception of how these markets work.

If there is a problem in the oil market - and I for one would not rule it out - it certainly does not manifest itself on the futures market, which is the market tail, not the dog.

This snippet from a recent Henry Liu piece is getting to the heart of it, I think

But now... oil in the ground can be more valuable than oil above ground because
it can serve as a monetizable asset of rising value through asset-backed securities (ABS)
in the wild, wild world of structured finance (derivatives).

So while there is incentive to find more oil reserves to enlarge the asset base, there is
little incentive to pump it out of the ground merely to keep prices low...

If there is a bubble it has been created through the relationship between oil producers and investment bankers.

To the extent that speculative money has made geared forward purchases of oil then the market is exposed to  a rapid downturn.

I have been invited to give evidence to the UK Parliament's Treasury Select Committee next Tuesday (15th) morning (09.45 hrs), alongside a couple of academics (one is Leo Drollas, an oil specialist) and the chief Shell economist.

As far as I know, I'm the only one of the four whose core competence is market regulation.

I guess our role is to give the Committee the ammunition to then ask pertinent questions of the people from ICE Futures Europe (formerly known as IPE, and of which I was once Director of Compliance and Market Supervision), and a couple of people from the FSA.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jul 13th, 2008 at 05:40:04 AM EST
[ Parent ]
Desperate times when they ask someone who actually knows something about the problem.  Is Leo Drollas a willing participant?  Shell vs. BP?

To the extent that speculative money has made geared forward purchases of oil then the market is exposed to  a rapid downturn.

This is another reason for concern about pension fund investment in commodities futures.  Yet I have been reading about it in Barons and elsewhere for five or six months.  I worry that this is partly pressure to show returns on the portfolio.  But even if it is a good bet, it seems to be a bad idea from a regulatory policy viewpoint.

I don't believe that speculation is driving the overall trend in prices, but I don't see how it can help.  I seriously doubt it would be happening absent a perception of a long term shortfall.  A put is a relatively cheap "investment."  Managers who know what their doing, (NOT ME), may have  already made more money on volatility they would lose by having to sell their puts or let them expire unexercised.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 13th, 2008 at 11:47:02 AM EST
[ Parent ]
A put is a relatively cheap "investment."

Should be "puts and calls" are..

My mind is stuck on puts and "leaps" because of the condition of the stock market, but fear freezes action.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 13th, 2008 at 12:15:57 PM EST
[ Parent ]
To equate demand for financial bets on commodities with demand for the commodity itself is a fundamental misconception of how these markets work.

This is really a key point that's been completely ignored in the press, with the exception of Krugman, ever since the "Speculators R Da Devil" horseshit started pouring in.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jul 14th, 2008 at 03:58:28 AM EST
[ Parent ]
... spot market, then its just a small impact to the degree that real buyers have hedged in forward markets.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Jul 13th, 2008 at 06:07:01 PM EST
[ Parent ]
True, but:

1. Iraq has oil - a lot of oil.

Iraq: Oil and Economy

Iraq's Oil Reserves: Untapped Potential
While its proven oil reserves of 112 billion barrels ranks Iraq second in the work behind Saudi Arabia, EIA estimates that up to 90-percent of the county remains unexplored due to years of wars and sanctions. Unexplored regions of Iraq could yield an additional 100 billion barrels. Iraq's oil production costs are among the lowest in the world. However, only about 2,000 wells have been drilled in Iraq, compared to about 1 million wells in Texas alone.

That's only a few years. But consider where gas prices were a few years ago. That's a good first approximation of the difference that would have been possible without sanctions and two insane wars. There are all kinds of maybes hanging off that - e.g. an Iraq/Iran war could have pushed prices up even further, without US involvement. But assuming relatively stability, I'd guess that putting Iraqi oil on the market at full extraction levels would slash the price by at least a third.

  1. The Iran factor. I'm not sure if people are buying just in case, or not buying because it makes no difference. But prices go up every time sabres are rattled. Without Iraq, there would be no credible threat to Iran, so we could lose maybe 20% off the current price just from the Iran factor - which is being played up by both parties, because Iran always profits when prices increase.

  2. Speculation is the great unknown. There's as much evidence for political manipulation as there is for profiteering, but I don't think the difference is going to be more than another 20% or so.

Adding those together gives a no-Iraq price of $2 or less.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jul 12th, 2008 at 07:04:16 PM EST
[ Parent ]
  1. Iraqi oil production now is slightly above pre-war levels (stable since December). Under the status quo, then, supply would not have increased much due to continued sanctions against the regime.

  2. As possible counterpoints: With no war in Iraq, the US would have far greater capacity to mount a war against Iran. The American public would also have learned fewer lessons about the limits of US military power.

I think the major factor you'd have while holding as many conditions constant as possible would be the risk premium in the market related to Iraqi production, and the decline of the dollar. The Iraq war has cost around 540 billion US dollars, to date (ticker 1, ticker 2). The foregone revenue of Bush' tax cuts, by comparison, would be around 1.6 trillion US dollars (cbpp, rough projection on my part).

So, the war has clearly been significant in terms of its requirements for the money press.

by nanne (zwaerdenmaecker@gmail.com) on Sat Jul 12th, 2008 at 08:03:19 PM EST
[ Parent ]
I was assuming free flow without sanctions. A cynic might wonder if the point of limiting Iraqi access to the oil market through sanctions was as much about keeping prices high as punishing Saddam. The Saudis and the Bush family used to have close links, and probably still do, although I suspect the Bin Ladens and other Saudis have always been smart enough to see Clan Bush as useful idiots.

Either way, I doubt the Saudis are desperately unhappy about current price levels. But they were clearly unhappy about sharing power with an independent like Saddam.

I think an all-out invasion of Iran was always going to be less likely than an attack on Iraq, so I'm not convinced that Iran was ever a realistic alternative.

But I think it's worrying that people are arguing as if these wars were inevitable. Perhaps they were eventually, and acceptance of a Gore win in 2000 would only have postponed them. But the alternative was - and is - a crash Green development program, which wouldn't just lower gas prices but make them much less relevant to everyone. Gore might or might not have achieved that in a term. But we'd certainly be much closer to it than we are now.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jul 12th, 2008 at 08:21:58 PM EST
[ Parent ]
... is not the total cost of the war compared to the total cost of all damage done by Bushonomics, but the cost of the war on the external account.

Waging a war overseas means that the government, which rules the roost in terms of commanding and/or creating dollars to be directed as it bids, is in effect deliberately increasing the import share of the economy, to pay for all manner of service renders and goods provided in support of the war effort.

Indeed, given NATO staging for some of the operation, that operates on both side of the €/US$ FXR, since Europe is one of the exporters of those goods and services.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jul 12th, 2008 at 08:47:34 PM EST
[ Parent ]
just a couple other thoughts to add into the mix...

The reality of the cost of the Iraq war must include the future costs of obligations created by that war. The biggest must be the cost of health care for the people returning from the mentally and physically toxic environment. Add another trillion to todays's ongoing tally of war costs.

After a great deal of search and analysis, I have figured out that the US military uses (sorry for using a technical term) 1.75 shitloads of oil every year, and the price is going up astronomically. Any figures that one searches on and finds are never completely inclusive, since military contractors and US contributions to NATO and other factors are not included. (Some statistics say it is 1.5 to 2% of US consumption, even without the exterior add-ons.) Suffice to say that it alone is the major consumer of oil products on the planet.

Marketplace | Oil makes U.S. military shift priorities

Scott Jagow: Oil companies and countries have one single big customer, and that is the U.S. military. And the U.S. military's bill this year will be a lot higher. Here's Jeremy Hobson.

Jeremy Hobson: A pentagon spokesman says the cost hike will mean an extra $400 million a month, and that commanders will have to quote "reprioritize" daily support activities.

Michael Klare is a professor at Hampshire College who's written extensively on the military's use of oil:

    Michael Klare: The military is coming late to an appreciation of their vulnerability to reliance on petroleum.

Just think of all the planes, ships, humvees and helicopters. So what's likely to be sacrificed to make up for soaring costs?

    Klare: Some of the new generation of weapons that they would like, instead of high hundreds, they're going to get few hundreds.

Well, at least we can see that they are being serious about their responsibilities. At a million dollars a crack for a 'smart' bomb (half are below average IQ), if they only get a few hundred instead of several hundred...like what a cost savings~!

My suggestion: Peak Military Responds to Peak Oil: Closing 800 of the 801 foreign bases (keeping one in England for the marching band that plays with the Queen's Guard), dropping back the fleet to 2 (one little one for each coast), and choosing to keep only one of the following: Pentagon, NSA or CIA.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Jul 13th, 2008 at 05:08:49 AM EST
[ Parent ]
I love your formulation of the difference between Republicans and Democrats.  I've been using a different but compatible one:

The US elites practice Aztec Capitalism.  Periodically, the Market God (Huizliopotchtli) demands mass human sacrifice, and the Fed responds by engineering unemployment (and the attendant disease and suicide).  At this point, a debate breaks out among the elites.

The Dems and liberals argue for adminstering anesthesia before marching the poor and the dark-skinned proles up to the sacrificial slabs, e.g. unemployment assistance, minimal health care, additional funds for education.  They are compassionate and prudent.  And they believe that anesthesia will make the sacrifices and the sacrifice system smoother and more sustainable.

The Repubs respond with alarm and, recently, derision.      The Market God is heartless towards Losers, so anesthesia is unnecessary and perhaps offensive to him - quite risky as the sacrifice might be less effective.  Besides, it eliminates some of the fun.  Remember, Aquinas famously argued in Summa Theologica that one of the pleasures of the Saints in Heaven was watching the torment of the damned in Hell.

No one seriously questions the need for cruelty - only whether it should be patent or not.

by cambridgemac on Sun Jul 13th, 2008 at 12:47:24 PM EST
[ Parent ]
put the dollar back at $1.20/Euro and gas drops by $1/gallon (25%).

take out the fear premium on crude and another leg down of crude to maybe half what we are now.  Saudi was just as happy at $60 as they are now at $140, though that may well change now that they see $140 without the world coming to an end.

As for Hughs "three iron laws", I'd say 3 pieces of ossified camel droppings.

Gasoline prices are very highly correlated with crude oil prices with a seasonal overlay of low margins for mogas in winter when distillates rule and higher margins in summer (until this year) when gas is king.  Chinese and Indian demand for mid distillates is changing the equation.

Mogas prices are always manipulated.  Sans proof, this is just left wing bullshit.  Mogas prices at the wholesale level can crap out to crude + $2/bbl in winter.  Most of the differential to pump price is taxes and a bit of distribution and dealer profit.  With country wide prices at fairly similar levels (after backing out taxes) other than places far from supply points or requiring specialty blends like in LA, this is a charge that can't be substantiated though many have tried.

Low in the long run ignores how far crude could collapse is we develop great batteries that make electric cars as flexible as the ICE.  And High in the short run is based on a wish rather than any economic calculation.  Walk 2 miles with a couple of bags of groceries.  Oil is still cheap.

by HiD on Sat Jul 12th, 2008 at 07:43:08 PM EST
... could remove the User Cost of selling an asset expected to appreciate in value, by being on a track to eliminate consumption of crude oil in line with dwindling supplies ... wouldn't that be down to marginal cost of production?

But of we are going to price at marginal cost of production, and are past Peak Oil, then that increases the amount of reduced consumption to get to any given marginal cost, as we burn through the infra-marginal, cheap to produce oil. And then that ensures that if we were pricing at marginal cost, we would expect the price to increase, and therefore its an appreciating asset, and therefore the User Cost of selling an asset expected to appreciate in value doesn't go away once we are on the downhill side of Peak Oil.

However, the User Cost can go up from the underlying floor created by the physical depletion of the cheapest to produce oil, if the expectation of an appreciation in price becomes stronger.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jul 12th, 2008 at 08:55:17 PM EST
[ Parent ]
Saudi's cost of production is $5-10.  Very little of our current production has been brought on stream since oil shot up from $20/bbl.  Even tar sands are profitable at $40-50.  

If we cut most transportation/heating/electricity demand away leaving just lubrication, jet fuel and ship fuel, we'd stretch out the cheap supply for a long long time.

by HiD on Sun Jul 13th, 2008 at 08:19:07 AM EST
[ Parent ]
Yes, so that says that since current output includes oil tar sands, $40-$50 sets a lower limit on the current marginal cost at current output levels. With recovery in existing fields dropping by anywhere from 3.5% to 5%, climbing down below $40-$50 requires ongoing annual reduction in demand of 3.5% to 5%, plus enough additional below that to lead to abandonment of tar sands production.

If there is Gulf of Mexico Oil reserves to be exploited at a cost of $60-$80 / barrel, it would seem that burning through the $5-$10 infra-marginal production will certainly bring $60-$80 / barrel production cost oil onto the margin, and the rate at which it is brought into production will of course be affected by perceived User Cost of lost capital appreciation ... since the capital value stems from the differential between crude oil price and cost of production, obviously the higher the cost of production, the more significant the capital appreciation for the same crude oil price increase.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jul 13th, 2008 at 10:38:33 AM EST
[ Parent ]

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