Despite the administration’s repeated denials, “No Blood for Oil” became the rallying cry of anti-war activists worldwide.[2]  Even well-respected news magazines propagated the theory that we were invading Iraq to gain access to her oil fields.[3]  But there are far cheaper ways for the U.S. to get oil, and fighting simply to gain access to Iraq’s oil is not an economically or morally sound reason for war.  To understand these issues, we must first dispel some misconceptions about the world’s oil supply and our dependence on it.

The World Still Has Plenty of Oil

News of impending oil shortages and forecasts of looming energy crises have been reported off and on for more than a century.  In 1874, just twenty-five years after the world’s first oil well was drilled in Pennsylvania, the state’s geologist direly warned, “the U.S. [has] enough petroleum to keep its kerosene lamps burning for only four years.”[4]  But, of course, huge new oil fields were soon discovered in Ohio, Texas, and elsewhere.  After U.S. domestic oil production peaked in 1970 the frequency of “expert” warnings accelerated.[5]  In 1972, a group of experts known as the Club of Rome predicted the world’s oil supply would be exhausted by 1990.[6]  A Carter Administration study in 1980 cautioned that the world was running out of oil and peak production would occur around 1990.[7]  In 1984, the Worldwatch Institute’s State of the World book warned in bold print, “The combination of geological, economic, and psychological factors is likely to place end-of-century oil output well below the current level.[8]”  More recently, a 1998 Scientific American article by geologists Colin Campbell and Jean Laherrere predicted a permanent decline in world oil production beginning in 2004.[9]  Of course, none of these alarming claims have come true.  Following each dire prediction, new oil fields have been discovered, and new technologies are increasing the amount of oil engineers can extract from existing fields. 

During the 1940s, experts placed the total quantity of the world’s recoverable oil at 600 billion barrels, by the 1970s those estimates had been revised to two trillion barrels.[10]  Today, the most recent U.S. Geological Survey (USGS) report forecasts a mean estimate of the world’s recoverable oil to be three trillion barrels – three times the cumulative amount the world consumed in the entire 20^th century!  In November 2000, about the same time USA Today was republishing Mr. Campbell’s warnings of an impending decline,[11] officials of the US Energy Information Administration (EIA) were briefing in more professional, but less public, forums that the peak in world production remains decades away.[12]  Similarly, in March 2000, the project chief of the World Petroleum Assessment stated, “There is still an abundance of oil and gas in the world, . . . Since oil became a major energy source about 100 years ago, about 539 billion barrels of oil have been produced outside of the U.S.   We now estimate the total amount of future technically recoverable oil, outside the U.S., to be about 2,120 billion barrels."[13]

Despite all of the alarming press reports (which make snappy headlines and sell lots of papers) an objective review of the data suggests the world has plenty of oil left to satisfy our energy needs for decades to come.  As the American Petroleum Institute has noted, “normal market processes coordinated by price have never exhausted a non-renewable resource, and there is no reason to expect them to do so in the case of oil.  At this point, there are no market signals suggesting world oil resources are becoming scarcer than they were a half century ago.”[14]  Indeed, the inflation-adjusted price of oil was lower in 1998 than it had been in more than 50 years.   Even at today’s “high” prices, National Defense University economist Don Losman points out that, “a gallon of gasoline sells for less than a gallon of Coca Cola, milk, bottled water, or even discounted mouthwash.”[15]  Oil is cheap because it is surprisingly abundant.  If the world has an oil problem today, it is not a problem of how much oil but rather where the oil is located.

Location . . . Location . . . Location

Only about 3% of the world’s remaining proved oil reserves are found in the U.S.[16]  In contrast, two-thirds of the world’s reserves are located in the Middle East.[17]

Fig. 1: Distribution of Oil Reserves

Middle Eastern oil is also the cheapest in the world.  According to estimates by Cornell University economist Duane Chapman, oil production costs across the Persian Gulf are less than $5 per barrel, compared to $15 per barrel for oil extracted from North Sea fields and Alaska.[18],[19]  Based on these figures, Dr. Chapman estimates the remaining value of the Middle East’s untapped oil at $61 trillion.[20]  This vast treasure, in a sparsely populated and underdeveloped region, proved irresistible to Saddam Hussein on more than one occasion.  In 1980, he invaded and fought an eight-year war with Iran.  In 1990, he conquered Kuwait.  Had he successfully defeated and occupied both nations, he would have controlled a third of the world’s proved oil reserves—enough to replace Saudi Arabia as the dominant player in the world market.[21]  More importantly, he could have used those oil revenues to fund his weapons programs, dominate the region militarily, and transform his image into one of a modern-day Nebuchadnezzar.  It was these dangerous hegemonic aspirations that required a U.S. military response. 

World petroleum consumption has been relatively stable at about 77.5 million barrels per day (MMBD) for the past few years.  As the world’s largest oil consumer, the U.S. burned about 19.7 MMBD last year.[25]  At a market price of $25 per barrel, the direct cost of our nation’s oil habit is about $180 billion annually, roughly equal to about 1.8% of our nation’s $10 trillion GDP.  But the contribution oil makes to our economy is more significant than that small figure suggests.  Oil accounts for 39% of our total energy consumption and is used for 97% of our transportation needs.[26]  So, if there is such a thing as a vital economic interest, oil would have to be near the top of the list.  

But despite our seemingly precarious dependence on oil, it makes little sense economically to invade Iraq to obtain it.  Contrary to popular belief, the Persian Gulf is not even our primary source of imported oil.  The U.S. gets most of its oil imports from closer, western hemisphere nations—Canada, Mexico, and Venezuela.  Historically, the U.S. has obtained less than a quarter of its oil imports from the Persian Gulf.[27]  Since we import a little over half of all the petroleum products we consume, Middle Eastern suppliers account for only about one eighth of our consumption.  The value of oil we purchased from the entire Persian Gulf region last year was about $16 billion, and the value of the oil we obtained directly from Iraq was only about $3 billion.[28]  Given our nation’s exceedingly small reliance on Iraqi oil and the abundant number of alternative sources of oil on the world market, it is difficult to imagine spending $40+ billion on an invasion, and many billions of dollars more occupying and rebuilding Iraq just to gain access to her oil fields.[29]  We could have far more easily, and cheaply, bought the oil from any number of countries.  Even Saddam himself would have sold us all the oil we wanted to bring in more revenues for his cash-starved Baath Party and nation.  

One of the interesting ironies of the West’s growing reliance on Persian Gulf oil supplies is that the economies of the Middle East are far more reliant on our demand than we are on their oil.  Petroleum accounts for more than 85% of the export revenues of Saudi Arabia, Kuwait, Iran, Iraq, and the UAE, and only a tiny fraction of the land in these nations is arable.[30]  If they want to feed their people, they have to sell their oil.  That is why Maryland University professor and Brookings Institution fellow Dr. Shibley Telhami has stated,

“Historically, political alliances have not greatly altered the pattern of trade between oil countries and the rest of the world. . . . A case in point was Libya, which up until 1969, had been a strategic ally of the West and had hosted British and American military bases.  The overthrow of the monarchy in 1969 and rise of President Qadafi shifted Libyan politics in favor of the Soviet Union.  Yet its trade patterns before and after the coup were largely the same.  For example, the share of trade with Soviet Bloc nations stood at 1.9% in 1960 and 1965, 1.8% in 1970, 1.3% in 1975, and 1.0% in 1980.  Moreover, moderate states in the Middle East did not differ radically from pro-Soviet states in their trading:  the oil-exporting nation with the greatest share of trade with the Soviet Bloc was the Shah’s Iran, not Libya, Algeria, or Iraq.  The bottom line was that these states did what was in their economic interest, regardless of their political orientation.[31]”

Oil is a fungible commodity, so even if Saddam had refused to sell Iraq’s oil to the U.S., it would have made little difference so long as he was willing to sell it to someone in the world market.  This is an important point worth repeating – the market for oil is a worldwide market and our nation cannot easily be deprived of oil by an economic embargo, even if the embargo were led by a despot like Saddam Hussein.

By now, readers may be scoffing if they are old enough to remember sitting in long gas lines during the infamous 1973 Arab oil embargo.  But the truth is, the production cuts by Arab nations in 1973 were not the main cause of the gas shortages and economic turmoil we remember so vividly.   First, consider the price increase of the time.  The chart below clearly shows that in absolute terms the magnitude of the world oil price increase in 1973 was about the same as the oil price rise during our first war with Iraq in 1991, and far smaller than the price spike caused by the Iran/Iraq war in the early 1980s.

Fig2: Inflation and Crude Oil Prices

Do you remember gas lines and consumer panics in 1991?  Of course not, because we did not experience gas shortages in 1991.  The U.S. was not cut off from Middle Eastern oil in 1991, nor were we cut off from Middle Eastern oil in 1973.  In the six months prior to the embargo, OPEC’s total production averaged 31.4 million barrels per day (MMBD).  During the three month embargo, OPEC’s production averaged 29.6 MMBD.[32]  So the size of the production cut in 1973, was about the same size as two different disruptions the world recently faced in December 2002 with political unrest in Venezuela and again in April 2003 with the war in Iraq and worker unrest in Nigeria—but I am sure we will not remember these recent disruptions in the same vivid way we remember the oil embargo.[33]  If the world’s oil prices oil did not rise that far, and production was not cut that severely, why was our experience in 1973 during the Arab oil embargo so bad?

One key reason the 1973 embargo had such an impact on our collective American psyche is because the Nixon administration attempted to mitigate the impact of rising oil prices by imposing price controls rather than letting the free market operate.[34]  Price controls, not the actual oil embargo, were the biggest culprit behind the widespread gasoline shortages at the time.  According to Jerry Taylor, natural resources studies director at the Cato Institute,[35]

 “Price controls imposed in August 1971 by the Nixon administration prevented major oil companies from passing on the full cost of imported crude to consumers at the pump.  ‘Big Oil’ did the only sensible thing, it cut back on imports and stopped selling oil to independent service stations in order to keep its own franchises supplied.  By the summer of 1973, gasoline prices were exploding, pumps were running dry, and long lines were commonplace.  And that was before the Arab oil embargo or production cutbacks were announced.”  

Afterwards, even the Saudi oil minister Sheik Yamani admitted, “[the embargo] did not imply that we could reduce imports to the United States . . . the world is really just one market.  So the embargo was more symbolic than anything else.”[36]  Indeed, the 1973 oil crisis was caused as much by the bad economic policies of the Nixon administration as by production cuts in OPEC. 

This is also why economic embargoes have a dismal record of success in changing the behavior of other nations.[37]  Unless all countries are willing to support the embargo, the target nation’s leadership can merely obtain whatever products they want through the countries that choose not to participate.   The only way the U.S. could truly be cut off from oil in the future is if every major oil exporter chose to forbid sales to the U.S., and to forbid sales to the nations we trade with – a highly unlikely event.

Fig 3: Crude Oil Prices

In a free market, oil producers – domestic or foreign – will sell their oil at the world market clearing price.  The alternative is price controls, which ultimately will only lead to economic disaster (remember the Arab oil embargo).  So, as long as we use oil as a primary source of energy in the United States we will never be able to truly claim we are energy independent.[40] Whether our oil is domestically produced or imported from abroad, our economy will be subject to the same oil price shocks whether they are caused by storms in the North Sea, political unrest in Venezuela, or a handshake in OPEC.[41] 

Why would OPEC care to reduce the price of oil?  The OPEC cartel, particularly Saudi Arabia, understands that maintaining too high of a market price for too long of a period is not in their long-term financial interest.  High oil prices create strong incentives for nations and industries to invest in fuel efficiency improvements that ultimately reduce our demand for OPEC oil.  For example, when oil prices rose sharply in the early 1980s during the Iran/Iraq war, the demand for oil in the U.S. contracted by about 18%.  One reason our economy was able to respond with a reduction in demand was because we made improvements in fuel efficiency in the aftermath of the 1973 embargo. 

Prior to 1973, the U.S. enjoyed a long period of low, stable oil prices.  As a result, Americans lived and worked in poorly insulated buildings and drove big, gas-guzzling automobiles.  At the time of the Arab oil embargo the average fuel efficiency of U.S. passenger cars was just 13.4 miles per gallon.  Following the embargo, consumers began demanding more fuel efficient cars and by 1982 our passenger cars averaged 16.9 mpg, so it was easier to reduce demand when prices rose in the early 1980s.[43]  Our lack of energy consciousness prior to the oil embargo exacerbated the pain we felt in gas lines in 1973, but the improvements we made afterwards helped mitigate the burden of the price hikes during the Iran/Iraq war.  In recent years, with the exception of the explosion in SUV sales, we have been doing even better.   By 2001 our passenger cars were getting a respectable 22.1 mpg--a 64% increase in fuel efficiency relative to cars in 1973.[44]  Today, consumers can purchase hybrid cars, such as the Toyota Prius, which gets a whopping 45 mpg city/52 mpg highway.[45] 

Another reason OPEC is reluctant to raise oil prices too far is because high prices create incentives to develop energy substitutes.  An alternative to conventional petroleum that is already being exploited is the production of oil from bitumen (tar sands).  According to the USGS, the world has a trillion barrels of recoverable oil in bitumen deposits, most of which are located in Canada and Venezuela.[46]  Oil can be produced from many of these deposits at a cost of less than $25 per barrel, and Suncor Energy of Alberta, Canada reported production and capital costs of less than $15 per barrel in 2001.[47]  We also are able to convert the hydrocarbons in coal and natural gas to high quality synthetic liquid fuel substitutes for oil.  The Tulsa-based Syntroleum Corporation claims it can produce synthetic crude from natural gas at a cost of about $20 per barrel.[48]^,[49]  Conoco is also building a $75 million gas-to-liquids demonstration facility capable of producing 400 barrels of synthetic diesel per day in Oklahoma.[50]  Synthetic oil can also be produced from coal for about $30 per barrel, and almost a third of the world’s one trillion tons of coal reserves are located in the U.S.[51] 

In addition to these near substitutes for conventional oil, there are many other energy alternatives which can be tapped to reduce our reliance on petroleum.  Biomass (plant matter such as trees and crops) can be converted into clean-burning liquid fuels such as biodiesel, ethanol, and methanol--the fuel of choice in high performance auto races.  Today it only costs about $2 per gallon to produce ethanol from corn.[52],[53]  Biomass is also being used to generate about 37 billion kWh of electricity in the U.S. each year.[54]  Sustained high oil prices could also induce a move away from oil towards a greater usage of electricity produced by nuclear plants, wind turbines and solar power.  High gas prices could shift consumer preferences to newer hybrid electric car technologies, and eventually we could move to fuel cell powered vehicles.  Although improvements are still needed to make hydrogen production and storage more economical, most major auto manufacturers are already investing in fuel cell technologies.  Last summer, Honda’s FCX became the first fuel-cell vehicle to be government certified, making it the first commercially available fuel-cell auto in the U.S.[55]  Though it is hard to predict how our use of these different energy sources will grow in the future, it is certain they will collectively serve to moderate the price of oil.  That is why Saudi Arabia said their oil policy is aimed at creating, “a stable international oil market” where “wide and rapid swings in prices are undesirable.”[56]

About the only plausible scenario for a sustained and catastrophic interruption world oil production and trade would be a major military conflict or terrorist attack in the Persian Gulf.  To have the greatest effect, the conflict or attack would have to shut down the production or distribution capabilities of several nations—most importantly Saudi Arabia.  Saudi Arabia is by far the world’s largest oil producer and, more importantly, it has the greatest excess capacity.  Saudi Arabia’s excess capacity of about 2 million barrels per day (MMBD) is larger than the average daily production of most OPEC members.  This excess capacity enables Saudi Arabia to stabilize the supply of oil to the world market and make up for shortfalls in production from other nations.  For example, in 2002 Saudi Arabia produced an average of 8.7 MMBD, but boosted its output to 9.6 MMBD in April 2003 when oil stopped flowing out of Iraq.  Therefore, key Saudi oil facilities have become important centers of gravity in the world’s oil trade.[58]  The most important center of gravity to the world oil trade, however, is the Strait of Hormuz at the entrance to the Persian Gulf.  Almost 20% of the world’s daily consumption of oil is transported through this key chokepoint. [59]  So, an extended closure of the Strait of Hormuz could have a noticeable impact on the world’s economy.

Nevertheless, the U.S. should be content purchasing all the oil we need now and in the future from the peaceful and sovereign nations engaged in the oil trade throughout the world.  We have been a leading proponent of the principles of free trade since the close of World War II, and we ought not feel threatened by it or by the dependence we have on trade to secure everything from oil to semi-conductors.  Under normal conditions there is no real threat posed to our economy or way of life from the peaceful trade of oil in the world market.  However, that is not to say that we should refrain from engaging despotic regimes who threaten the Middle East region militarily.

Lured by the possibility of attaining great wealth from oil, Saddam Hussein had twice before demonstrated a willingness to attack his neighbors.  He shared borders with Iran, Kuwait, and Saudi Arabia and had arduously sought to develop his own nuclear weapons.  Had he succeeded in developing his own nuclear weapons, he could have posed a dangerous military threat.  But that, of course, points to a political rather than an economic motivation for the war with Iraq.   

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