Writing

Note: my intended audience is the informed public, from both sides of the political spectrum. I assume a moderate level of existing analysis – not university professors, but also not Fox News enthusiasts. As my own level of economic analysis is fairly straightforward, I have not included any further notes. My goal is to synthesize concepts for a politically diverse audience in hopes of facilitating dialogue. I write from an American perspective, specifically trying to help other Americans understand the systems of which they are a part.

Why Did We Go To War?

Everyone knows the Iraq war is about oil. Liberals argue that Bush wants to steal the Iraqis’ oil to benefit his friends; conservatives argue that the oil will pay to build democratic infrastructures and stabilize the Middle East. Both sides congratulate themselves on being more reasonable than the other, but in reality, both sides are equally misinformed. Often, we spend so much time arguing about the morality and details of this war, we miss the underlying economic reasons that would allow us to have a useful debate. I seek to get past the emotionally-charged half-truths that plague both sides of the political spectrum and untangle the complex issues at stake. Things are not as they seem, and the implications of this war affect all of us.
The Role of Oil in the U.S. Economy

The U.S. Department of Energy describes oil as “the lifeblood of America’s economy. Currently, it supplies more than 40% of [America’s] total energy demands and more than 99% of the fuel used in [American] cars and trucks.” Additionally, oil is a fundamental raw material in manufacturing everything from textiles to asphalt to chemicals used in agriculture. Over 60% of America’s oil supply is imported from foreign countries , and even more crucial than the availability of oil itself is the availability of oil at a low price. Political historian Stephen Pelletière points out that “business leaders… have incorporated the low price of oil into their strategizing,” so there is enormous pressure to keep the cost of oil as low as possible.


The United States and OPEC

The Organization of Petroleum Exporting Countries was founded in 1970 for oil producers to jointly set prices and production rates for worldwide oil supplies. The exports of its eleven members account for 55% of the oil traded internationally , so as a coalition OPEC is the single most powerful producer in the world oil trade. America imports oil from non-OPEC countries, but because OPEC oil supplies have not yet peaked while non-OPEC supplies are in decline , OPEC’s decisions ultimately determine the prices. Indeed, OPEC states on its website that one of its “primary missions is to achieve stable oil prices, which are fair and reasonable for oil producers and consumers.”

The formation of OPEC led to a dramatic rise in oil profits, in which U.S. oil companies took part, but at a high price. “The companies locked in the fantastic profits, but forever after their relation to the producers had changed – the producers ruled, so to speak, because the latter now had control of the pricing mechanism.” Political geographer Richard Muir wrote that prior to the 1970s, “the destinies of most oil-exporting states were in the hands of American oil companies, but it is evident that the destiny of the USA may now be controlled by the governments of the oil-exporting states to a considerable degree.”

Still, over the last 30 years the United States has consistently paid lower prices than other countries for its oil. As the largest consumer of oil in world, oil exporters compete for U.S. favor, and our strong military discourages exporters from falling into disfavor. American companies handle the infrastructure for oil extraction, so part of the price is reinvested back into these companies . Actual oil sales are denominated in dollars, the dynamics of which I will go into later. Additionally, the sale of weapons in the Middle East provides a huge discount for Americans, and keeps the Gulf nations dependent on the U.S. for their military equipment.


The Weapons Industry

Shortly after its formation in the early 1970s, “OPEC suddenly was choking on dollars it could not use.” Middle Eastern countries wanted to use this newfound wealth to buy the most up-to-date weapons, and Nixon, looking for ways to “finance America’s defense establishment” obliged them. In addition to cutting prices on oil for America, selling weapons to the Middle East (particularly in Saudi Arabia and Iran) was a way to avoid negotiating formal alliances while still maintaining long-term relationships. Inevitably, when one country has weapons, its neighbors want to be similarly equipped, so sales increased. “The Gulf, then, in the mid-to-late 1970s, became the vortex of an arms blizzard; the whole area was awash with guns.” One outcome was the eight-year war between Iran and Iraq (1980-88), precursor to Iraq’s invasion of Kuwait (1990) and the first Gulf War (1991) – which, of course, led to further arms sales.

In 1982, the United States began giving weapons to Israel as part of its foreign aid package, so Israel’s military would remain comparable to other Middle Eastern countries. This intensified the arms race in the area, motivating Israel’s neighbors to continually increase their weapons purchases from the United States. Seen through the lens of the Cold War, this arms buildup did not seem problematic: as long as all the players were anti-Communist, they should not quarrel. Besides, the arms trade was extremely profitable. However, “in the frantic pursuit of markets, arms dealers did not think in geopolitical terms – how will this affect the interests of the United States?… All that was important was to move the weapons.”

If, instead of offering weapons, the United States encouraged Gulf nations to improve oil infrastructure and improve domestic infrastructure for their people, a peaceful Middle East is not so unimaginable. Looking purely at American economic interests, better extraction technology would reduce oil prices, and prosperous populations could provide markets for American products. Instead, the U.S. short-sightedly sells military technology that keeps the area in a state of constant upheaval, leading to fluctuating oil prices, political instability, polarization of wealth, and severe anti-American sentiment (which leads to terrorism).

However, this is the system as it stands now, and the current administration clearly sees it as useful for American interests. While the arms trade is an important element in understanding our relationship to oil and its producers, and the “War on Terror” has certainly stimulated the defense industry, a more direct cause of the war is currency.


Oil and Dollars

In 1971, Nixon removed the dollar from the gold standard and allowed its exchange rate to “float” in relation to other currencies. “Instead of gold, currencies would be anchored by interest rates.” Shortly after, OPEC agreed to sell oil exclusively for dollars, and thus began the process Henry Kissinger called “recycling petrodollars.”

The petrodollar system works in this way: all oil is priced in dollars through markets in New York and London. In order to get dollars, countries must provide exports to the United States. We have no great need for foreign currencies, so we can run a trade deficit (exporting far less than we import). “Because oil is an essential commodity for every nation, [all countries must] buildup huge trade surpluses in order to accumulate dollar surpluses.” The result is that “almost 70% of world trade is done in dollars.” This role as reserve currency keeps the dollar at an artificially high value. In addition to stockpiling dollars in their own central banks, most countries invest in U.S. Treasury Bonds and Wall Street stocks, or keep their dollars in American banks because the interest rates are more favorable, due to the dollar’s strength.

When a country or a company buys oil, their dollars are transferred to the supplier, who also has accounts and investments in America. The banks (or the U.S. government) would have to pay interest on both producers’ and consumers’ accounts, but that they lend the money out to collect even more interest on loans. This is the basis for much of the third-world debt problem. Developing countries borrow dollars for oil to build industrial infrastructure, and must repay those loans by providing cheap exports to the U.S. In this way, “hundreds of billions of dollars are recycled between OPEC, the London and New York banks and back to Third World borrowing countries.”

The neo-conservative think tank Project for a New American Century accuses OPEC of “collusion against a vital U.S. interest,” but fails to recognize that nearly every dollar spent on OPEC oil is immediately recycled back into the U.S. economy.

The U.S. benefits in several ways: cheap oil, cheap imports, and confidence that with so much invested here, most countries would not dare upset the U.S. economy. However, the inverse is that with so much of our economy built on foreign investment, the United States holds an extremely vulnerable position. A major drop in demand for oil or dollars would be catastrophic. Our dependence on imported goods takes away our self-sufficiency as a nation, encourages “outsourcing,” and makes us more vulnerable to fluctuations in the global economy. The wars in Afghanistan and Iraq were funded in large part by loans from other countries, which we eventually must repay, with interest. In the fiscal year 2004, “three quarters of all the current year borrowing [was] spent paying interest on past borrowing.” In addition to actual loans, our reliance on the petrodollar system essentially amounts to even more widespread borrowing. As international public finance consultant Kenneth Torp puts it, America is “mortgaging a substantial share of our sovereignty to foreign creditors.”


Imminent Threat: Petroeuros

Flaws aside, the petrodollar system was essentially unchallenged for thirty years. But “with creation of the euro [in 1999], an entirely new element has been added to the global system.” “From a purely monetary perspective, a petroeuro system is a logical development given that the European Union imports more oil from OPEC producers than does the U.S., and the E.U. accounts for 45% of imports into the Middle East.” However, with its fundamental dependence on the petrodollar system, any change to that system would be seen as a threat to the American economy. When the euro was weak compared to the dollar, such a change was economically foolish and therefore unlikely.

In November 2000, Saddam Hussein made the politically-motivated move of changing Iraq’s Oil-For-Food account from “the enemy currency” into the new European currency, and began selling Iraqi oil for euros. Taken alone, this was “insignificant. Yet, if it were to spread, especially at a point where the dollar was already weakening, it could create a panic selloff of dollars by foreign central banks and OPEC oil producers.” George Soros suggests that “global oil supplies were becoming increasingly tight, and the spigot on Iraq oil had to be reopened sooner or later. But to lift the embargo with Saddam Hussein still in power might have made him too dangerous.” I would argue that this “danger” was economic rather than military: Saddam Hussein was committed to selling oil for euros, and if Iraq was able to improve its infrastructure and increase production, the euro would gain even more against the dollar.

One irony in the buildup to the war is that in the eyes of Washington economists, Saddam Hussein did indeed pose an “imminent threat” to the United States – but the weapon of mass-destruction was indirect, and arguably more effective. The threat was “that others would follow Iraq and shift to euros out of dollars,” causing a crash in the American economy. But this information was kept quiet in efforts to keep Americans confidently consuming, and to keep foreigners confidently buying dollars.

It is important to note that even after switching the currency of sale, Iraq’s oil prices were still set in dollars, as determined in the New York and London markets (i.e. the price in dollars was converted to euros via the exchange rate at the time). Indeed, “one of the more difficult technical obstacles concerning a euro-based oil transaction system is the lack of a euro-denominated oil pricing standard.” It should come as no surprise, then, that the next target on Bush’s “Axis of Evil” is guilty of developing just such a standard. Iran “has been talking publicly about possible conversion to the euro since 1999” with plans to establish a euro-denominated Iranian Oil Bourse (market) early in 2006. This comes at a time when oil exporters and importers worldwide are quietly selling parts of their dollar reserves and buying euros, causing the dollar’s value to slowly sink.

It seems that military intervention in Iraq may be close to backfiring, in economic terms: “America's willingness to use violence to defend its economic interests does not seem to have reduced the number of oil exporters considering switching to the euro as they recognize that their use of the dollar enables the US to build up its military strength.” Still, wherever you may place yourself on the political spectrum, whether you see this war as reckless or wise, it is clear that Bush was indeed acting in what he perceived as the economic best interest of America. Whether Americans consider it their best interest, whether economism is the highest measure of value, and whether it’s ultimately successful are areas open to interpretation.


Liberal Misconceptions

Many liberals believe that the war in Iraq is simply the immoral action of a greedy administration, out of touch with the general population. Therefore, public pressure alone is enough to end this war and avoid future wars. We talk about world peace like it’s something we can achieve by clicking our heels together and really, really wishing for it. But as activist and Special Operations veteran Stan Goff puts it, “while we can mount moral resistance to the war, if we fail to critically engage the real causes of it, we cannot mount an effective political resistance, which has to be an effective response to the motive forces behind the war.” In other words, we can challenge the moral implications of the war until we’re blue in the face; we can feel ourselves superior to those who condone the bombings – but if we truly want to change things, we must go beneath the surface and confront the underlying causes for that which we morally oppose. This war is about much more than “blood for oil” – it is “a game for the very continuance of American power.”


Conservative Misconceptions

Many conservatives believe that the Iraq war is unfortunate but necessary to stabilize the turmoil in the Middle East. As we have seen, stability in the Middle East is almost structurally impossible due to the cycles of weapons trading and more recently, currency conflict. Many would argue that the war is nonetheless justified because we have successfully removed a brutal dictator from power. This does not examine the underlying reasons why such a dictator could come to power. Brutal regimes do not just appear out of thin air, and to avoid them we must understand the historical circumstances in which they’ve arisen, and ensure that those conditions cannot prevail again. Similarly, many assume that invading Iraq will somehow improve the lives of the Iraqi people. This does not examine how and why conditions were so deplorable before: if we don’t know what was broken, how can we begin to fix it? By taking a stance that the ends justify the means, we fail to question whether the means have in fact contributed to the situation we’re trying to resolve. Terrorism is a prime example. By failing to examine the reasons why terrorists would attack the U.S., we have no way of knowing whether our current behavior will encourage future attacks.


Multipartisan Misconceptions

One thing that liberals and conservatives have in common is the sense that this war is largely disconnected from our daily lives. It’s true that families are sending their sons and daughters to Iraq, that we’re supposed to be preventing terrorism, that we see daily images of carnage on television. It’s even widely known that our economy is somehow impacted by fluctuating oil prices – but for the most part, we’re led to believe that our day-to-day choices, habits, purchases, and activities have nothing to do with the war. Opposing it is treated as a weekend hobby, and supporting the troops means tying a yellow ribbon around a tree.

The truth is, we are all contributing to the underlying causes of this war, whether we like it or not. Every time we burn gasoline, use plastic, buy imports, and even eat food, we are taking part both in the “lopsided system” and the wars waged to uphold it. This is not necessarily grounds for despair, however. As active participants in the system, we have the right to understand it, analyze it, and determine whether it is indeed serving our best interests. If we determine that it is, then we can support the system wholeheartedly with full knowledge of its benefits. If we determine that it is not, we can begin to devise alternatives.


Weaving it all Together

According to Stephen Pelletière, the war in Iraq is “quite an elegant solution to problems which only a short while ago seemed insoluble.” It has inflated demand for American weapons in the Middle East, maintained the dollar as global reserve currency, legitimized our trade deficit, and kept oil prices low for Americans. But for how long? And at what cost? As we have seen, the intersection between financial and political policy is full of complex issues. The growing strength of the euro, combined with increasing global discontent of America’s trade policies means that America’s place in the world is changing. At the moment, we’re distracted by the short-term struggle to maintain our old place; however, we must consider the long-term viability of this struggle, and how much we are willing to sacrifice to it.