Bryan Caplan  

"No Blood for Oil" - or "No Oil for Blood"?

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How Much Revenue Could the U.S... California is another country...

Stephen Smith makes an argument that seems popular across a wide swath of the political spectrum:

Yeah, and how many billion dollars per year does the United States need to spend even on just the military to make this oil available? How much does it cost just to perpetuate the House of Saud?
The left-wing take on this argument is that it's bad to spend blood for oil; the right-wing take is that it's good (or at least necessary) to spend blood for oil, and we should just face facts. In a recent piece in Public Choice, however, I argue that - whatever else you think about U.S. foreign policy in the Middle East - it's an economically illiterate way to get oil.
[Bin Laden's] second demand is widely seen as expensive due to U.S. reliance on Saudi oil. Presumably bin Laden's hope is that the "oppressive, corrupt and tyrannical" Saudi monarchy would be replaced by rule of people like himself. That might mean an oil embargo against the U.S. However, basic facts and basic economics reveal this fear to be vastly overblown. Fuller and Lesser (1997, p.42) estimated that "The Pentagon pays up to $60 billion a year to protect the import of $30 billion worth of oil that would flow anyway." By 2003, total U.S. expenditure on oil imports was only $99 billion, and Saudi Arabia supplied 15.8% of that. (U.S. Census Bureau 2005; Department of Energy 2004) Since the U.S. imported 56.1% of its oil, the Saudis provided only 8.9% of U.S. consumption. The U.S. gets more oil from Canada, and got more from Venezuela until socialist Hugo Chavez's assumption of power in 1999. (Department of Energy 2004)

Assuming that a Saudi embargo would reduce U.S. oil consumption proportionally, the effect is tiny as a percentage of GDP. And this assumption is extremely economically naive. Domestic production can increase. There are numerous other suppliers. Above all, oil is a fungible commodity. As long as it sells on world markets, it eventually reaches its highest-value destination. In sum, as Fuller and Lesser suggest, ending support for the Saudi regime is not just cheap action; the cost is probably negative.

The popular anti-war slogan "no blood for oil" assumes that blood actually buys oil and appeals to our conscience not to pay the price. I've got a better slogan: "No oil for blood." You could spill an ocean of blood without making it cheaper to fill up your gas tank.


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COMMENTS (14 to date)
TGGP writes:

Iraq was really a war for LESS OIL. We were getting more out under Saddam than after we invaded. Michael Neumann gave a good explanation here in Counterpunch.

Cut off all foreign aid and close down all military bases. Seems the most sensible thing to do with a government of dunces, though that might be my anti-foreign bias speaking.

Paul Walker writes:

I look at it this way. Invasion amounts to a form of vertical integration, a very hostile takeover. That is, one "firm", the US, wants to vertically integrate with another "firm", Iraq, who is a supplier of an input for US production, oil. The question is does integration make sense? In a world of incomplete contracts we know integration makes economic sense when there is a possibility of a hold-up problem due to the relationship specific nature of investments. Given that oil is an more or less homogeneous good and there are a number of different supplies it is not clear what relationship specific investments have to be made and thus its not clear what the danger of hold-up is. Or to put it another way, our two firms should
merge if they have highly complementary assets and not merge if they have independent asserts. Given there are a number of other supplies of oil its not obvious that oil from Iraq is highly complementary to US assets. If you think of this as a "make" - invade Iraq - or "buy" - purchase on the open market - decision, its not clear why a "make" decision is optimal.

Steve Sailer writes:

The reality of the war is "Blood for no oil."

John Thacker writes:

That doesn't remove the entire argument, though it seems to me that the fungible nature of oil cuts another way that the author of the argument did not mention. Saudi oil is exported to other countries; their flow is much more than $30 billion in total. Pentagon support protects the rest of the Saudi flow as well.

It is illogical to note that "above all, oil is a fungible commodity," but claim that the percentage of US oil that comes from Saudi Arabia is so important. Surely not. Surely the relevant number is percentage of world oil that comes from Saudi Arabia. Reduced Saudi flow to the rest of the world certainly does affect the US, since oil is, above all, fungible. Indeed, the following talking point cuts another way too:

We were getting more out under Saddam than after we invaded.

You need to update your talking points on that specific issue, sir. The IEA says that Iraq is now producing more oil than under Saddam, not less. Certainly, however, its total production since the war is lower than it would have been otherwise. However, that argues that a reduction of US support for Saudi Arabia, if it caused a coup, might well indeed reduce Saudi production to the rest of the world. The argument that removing a tyrant reduces oil flows argues in favor of supporting the Saudi tyrants, not against.

However, so long as we're talking about the war, I'm not sure that Fuller and Lesser's comment from 1997 still holds. Most of the Saudi interaction now is purchasing arms from the US, not direct US support. After all, since the recent Iraq war, there are no longer even US troops station on Saudi bases. True, that cost has been shifted to Iraq (plus much higher additional cost), but the arguments are surely different. At the same time, the money spent to protect the Saudis in 1997 was arrayed against Saddam. In that sense, the money was also to defend Kuwait, Bahrain, and other Gulf states as well, even if the troops were based in Saudi Arabia. So again we have unbalanced accounting by focusing only on the Saudi flow.

Now, it is possible that the Saudis would simply have hired protection in other ways, and I take that to be the main thrust of the article. However, that's largely what they're doing now with US arms purchases.

Gary Rogers writes:

The left has always argued "no blood for oil" because it implies that the right believes the opposite.

the right-wing take is that it's good (or at least necessary) to spend blood for oil
Frankly, The only people I know who thinks we are in Iraq to protect our oil supply are on the left.

diz writes:

[Comment deleted for supplying false email address. Email the webmaster at econlib.org to request restoring this comment.--Econlib Ed.]

Stephen Smith writes:

Interesting observation on the waste of military spending. However, you ignored the context of my comment: the government subsidizes pollution/CO2 emissions in a VERY BIG WAY, and I was advocating ending the subsidies before we talked about imposing taxes.

But, even ignoring the other expenditures that you so conveniently ignore (interesting that you went right to tackling the Saudi oil statement while ignoring the roads and the traffic cops), there's much more to military spending than just remitting dollars and DARPA specials to the house of Saud. The American military also serves an important role that few people talk about: protector of the high seas. It's the American navy that implicitly and explicitly protects many shipping lanes throughout the world. This cheapens the cost of sea transport, whereby without the US navy, it might be very, very costly. It's not fair to just isolate US spending on Saudi Arabia, since the military is a package deal – much of American power is predicated on threat (implicit or explicit), and the cost of that power to threaten is essentially the sum total of the US' military expenditure.

Furthermore, one of the reasons that oil has predominated on the world market is because its supply is fairly stable -- while you might argue that losing a meager 8.9% of oil supply (but how elastic is the demand for oil? what sort of political backlash would this provoke?) wouldn't be that big of a hit, what if the entire Middle East erupted in flames (something that's bound to happen once the US gets its hands out of there)? What sort of price spikes would violence in Saudi Arabia, Iraq, AND Iran cause?

Now, get out of the military issues and address the BIGGEST subsidy to the automobile industry: the roads. As an economist, you must know that roads are not a public good (very excludable, very rivalrous). And as a libertarian economist, you (y'all?) are theoretically of the mind that non-public goods are generally best left in private hands. So, how is it consistent with a libertarian philosophy to suggest imposing a tax on pollution without first addressing the subsidies (i.e., roads and traffic cops) that enable a large amount of the pollution?

John Thacker writes:

Now, get out of the military issues and address the BIGGEST subsidy to the automobile industry: the roads. As an economist, you must know that roads are not a public good (very excludable, very rivalrous). And as a libertarian economist, you (y'all?) are theoretically of the mind that non-public goods are generally best left in private hands.

I agree that they would be generally best left in private hands (not least because public hands generally means no congestion charges, which means traffic, which is an unbelievable waste economically and environmentally), but you far overestimate the subsidy effect of roads. Most road spending comes from taxes applied on drivers, especially in gasoline but also in car registration and special car property taxes in many states. It's hard to view that as a subsidy. Now, the taxation could definitely be improved to be more efficient and reduce waste-- taxing congestion is best, followed by miles driven, with a tax on a car only being the worst way that still hits drivers alone. It's still just as much of a subsidy as you seem to imagine. There are exceptions-- the recent Democratic governors of Virginia have had great success with "special" funding towards towards roads out of general revenues, standing for more road spending (and little bits towards non-roads) as against Republican unwillingness to raise any taxes, including and especially gasoline, to pay for roads. Roads paid out of general revenue are much worse.

Stephen Smith writes:

The cost of roads also includes two other costs that are nearly inquantifiable: eminent domain, and the vast federal/state ownership of land that can be built on according to the governments' whims (I believe that west of the Mississippi, the various levels of government own over two-thirds of the land).

Furthermore, even though the cost of the roads might be borne partly by taxes on fuel (though I have yet to hear that at least 100% of it is, meaning that there's still a subsidy there), the money goes into general funds and is not specifically spent on the roads on which it was "earned." There are many roads (i.e., most roads in the suburbs) that are clearly not recouping their costs if you were to apply the fuel tax revenues that were spent by the owners of the cars to drive over them. Given that now a majority of Americans live in the suburbs, and these roads are the ones that would be least likely to be profitable, this seems very troubling.

Of course it's not a 100% subsidy, but the roads themselves are a significant subsidy. Other significant "costs" of the roads borne by the state include police patrols, 40,000 annual deaths, tax breaks to oil refineries and can manufacturers, bailouts of auto makers, and all sorts of nasty peripheral medical problems associated with a society where personal transportation that gets you from point A to point B with minimal physical exertion is an industry heavily favored by the state.

And then the whole thing is put through a nasty loop when you see the lack of research and development towards other forms of transit (mainly mass transit) that happens when you subsidize mass transit's substitute good. Other than bus companies and airlines, which both receive massive government funding as well, is there any privately-operated mass transit in the world, excluding privatized rail in city-states?

John Thacker writes:

The cost of roads also includes two other costs that are nearly inquantifiable: eminent domain, and the vast federal/state ownership of land that can be built on according to the governments' whims (I believe that west of the Mississippi, the various levels of government own over two-thirds of the land).

Surely this applies to mass transit as well, so I'm sorry but I don't see how it's particularly a case of subsidizing roads. Both roads and mass transit can operated with and without eminent domain and government ownership of land. In fact, given the generally large scope of mass transit projects, in my experience they rely on government ownership and eminent domain even more.

There are many roads (i.e., most roads in the suburbs) that are clearly not recouping their costs if you were to apply the fuel tax revenues that were spent by the owners of the cars to drive over them. Given that now a majority of Americans live in the suburbs, and these roads are the ones that would be least likely to be profitable, this seems very troubling.

I'm sorry, but it doesn't seem very troubling to me. Suburban roads are generally paid either by local taxes of people who live in the suburbs, or by the fuel taxes, depending on the state. If they are paid by local suburban taxes, then the distortion is small. If they are paid by fuel taxes, then surely suburban dwellers pay the vast majority of fuel taxes as well, since urban dwellers drive cars less far. (But more wastefully, due to congestion.) I agree that suburban roads would be unlikely to raise money via congestion charges, because they generally are not congested. At the same time, that means that those roads are currently more efficient than roads with lots of congestion, where time and fuel is simply being wasted. You're criticizing suburban roads in part for an efficiency, for a lack of a social cost. I wholeheartedly agree that congestion charges should be imposed because of the social costs of congestion in urban roads, and that that would indeed tip the balance towards more mass transit. However, I don't see a burning need to replace suburban roads that lack congestion with mass transit-- particularly since mass transit would be inefficient given the low population density, and since the suburban roads are largely paid for by people who choose to live in the suburbs.

Other significant "costs" of the roads borne by the state include police patrols, 40,000 annual deaths, tax breaks to oil refineries and can manufacturers, bailouts of auto makers, and all sorts of nasty peripheral medical problems associated with a society where personal transportation that gets you from point A to point B with minimal physical exertion is an industry heavily favored by the state.

The deaths are a fair consequence, though it is hard to see exactly how much they are "borne by the state" since the people dying are mostly those choosing to drive. It seems to me that the logic that supports that as a cost to the state is also logic that would support significant state intervention in food choices. However, all mass transit systems I'm familiar with have police presence, and energy use, and bailouts of manufacturers.

Other than bus companies and airlines, which both receive massive government funding as well, is there any privately-operated mass transit in the world, excluding privatized rail in city-states?

So you're admitting that mass transit is massively subsidized, even in countries that tax gasoline far more than in the US and have greater density? It's hard for me to see how that helps your particular argument, especially since mass transit has a much lower portion of its costs borne in any way by its users. There are network effects that benefit drivers through less congestion, to be sure, but if you count that then you should count the ancillary benefits of roads as well, such as the ability to get "you from point A to point B with minimal physical exertion." It seems to me that you're admitting that roads have a certain superiority; is it not the case that they could be simply preferred for that reason, and not just massively subsidized?

If you mean intracity mass transit, then I can only think of a few joint-owned companies. There are some private medium and long distance rail companies in various countries, such as in Japan. (Keihin, Keio, et al.)

I completely agree on the desirability of raising fuel taxes and implementing congestion charges. However, I feel that you, like many others, greatly overstate the subsidy level of roads to make your point.

John Thacker writes:

Furthermore, even though the cost of the roads might be borne partly by taxes on fuel (though I have yet to hear that at least 100% of it is, meaning that there's still a subsidy there)

Federal money on roads is 100% from fuel taxes. State and local money varies by state, though in the states I'm familiar with gas taxes and other driver and automobile taxes provide the vast majority of the money. The larger the political unit spending the money, the more likely it is to be a subsidy, and the more problematic it is to me. Mass transit projects are generally massively federally subsidized for a project to benefit a small locale, and paid for out of general funds or gas tax revenue. That is inherently suspicious. I'm not convinced automatically by an argument of "we just need more subsidy," especially when you argue that countries that by any measure discourage driving more (through fuel duties and tolls) still subsidize mass transit.

Eminent domain is used for both mass transit and roads. Now, zoning does play a strong role in discouraging mass transit as well, by discouraging density. This is particularly notable in DC.

John Thacker writes:

Further regarding suburban roads: some arterial roads would indeed make a profit through tolls. It is not unlikely that suburban roads connecting to those roads would be paid for by private road companies, since the smaller roads make the arterial roads more valuable. There are obvious externalities there, so it seems likely that a company would try to internalize them. Otherwise, it is also likely that suburban-dwellers would pay for their own roads, as they currently do now in many states with local property taxes.

Morgan writes:

Wow. Another incredibly poor analysis.

Are you at all aware of the market distortions caused by the automobile? By the laws which require minimum parking? The effect those have on the market? By the effective massive subsidy that those who choose not to drive must pay to those who do drive?

It is asinine for people to claim that the automobile is the free market solution to the transportation issue. It is an idiotic inconsistency that psuedo-libertarians make all the time. No true libertarian can support automobile transportation in its present form.
It is simply logically impossible. Yet they do all the time. Free market is great, except when personally inconvenient.

Floccina writes:

BTW compared to vehicle cost, drive cost and fuel costs the cost of roads in small.

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