Who Needs War for Oil?

Popular Illusions

By ROBERT P. MURPHY

For decades Americans have endured a steady drumbeat urging the need to wean the U.S. from its “addiction” to oil. The specific reasons differ, depending on the critic: leftists stress the environment and the social joys of a European-style mass transit system, while right-wingers worry about oil from a national-security standpoint. Yet both camps agree: left to its own devices, the laissez-faire American economy would rely too heavily on oil, and therefore there is an important role for federal intervention.

For a specific and recent example, let us turn to the group named SAFE, which stands for “Securing America’s Future Energy.” Its newly released report titled “The New American Oil Boom” explains:

Occurring due to a perfect storm of prices, technology, and opportunity, [the recent surge] in domestic [oil] production is substantial, and has profound positive implications for the domestic economy. … However, these benefits are tempered by the realities of the global oil market, especially in light of continued instability in oil-producing regions, and soaring demand from China, India, and other emerging markets. Most importantly, the paper examines the myth of “energy independence,” underlining that even dramatic increases in domestic production cannot fully insulate the country from the costs of oil dependence, such as high prices and continued volatility, capital flows overseas, and the burden to the military in securing global oil supplies. [Bold added.]

The part I’ve put in bold is a familiar charge. When environmentalists complain about “subsidies to Big Oil,” for example, they take the same approach and claim that the U.S. military budget implicitly keeps oil cheaper for motorists than what it “really costs” to bring to market.

There are several problems with this perspective. In the first place, it is simply not true that military action is necessary to “secure” global oil supplies. Take the worst-case scenario: a foreign, oil-rich regime that is currently a U.S. ally falls into the hands of a group that despises the U.S. government. What happens?

Well, if the hardliners in the new regime want to make a symbolic gesture, they might cut off oil exports to the U.S. (This is what Hugo Chavez threatened to do a few years ago, though note that he didn’t actually follow through.) Yet since oil is a very fungible commodity, all that would end up happening is a rearrangement of global oil shipments. Specifically, the new regime would ship its oil to countries other than the U.S., while other oil producers would shift their own exports away from these neutral destinations, and focus them more heavily on the United States, to make up for the gap. Oil is not perfectly fungible — refineries have to be calibrated to handle different types of crude — but our hypothetical regime wouldn’t be able to inflict too much damage just from embargoing the United States.

If the hypothetical regime really wanted to hurt U.S. motorists, it would have to renounce exports altogether. In this case, the world as a whole would be starved for oil, and crude prices would rise. Yet the pain wouldn’t be isolated in the U.S.; every oil consumer would suffer. More to the point, the most pain would be felt by the unfriendly regime itself. By refusing to sell its oil abroad, the regime would be cutting off its main source of revenue. Think of it this way: what’s the point of taking over the government apparatus in an autocratic oil-rich nation, if not to pocket the oil revenues?

These musings aren’t hypothetical. In the real world, what do the U.S. government and its allies do when they want to punish a Middle Eastern regime? Why, they try to prevent those regimes from selling their oil by imposing sanctions. This proves that, at least from a national-security standpoint, preventing Iran, say, from selling its oil inflicts more harm on the Iranians than it does on Americans.

Don’t misunderstand, I fully concede that multinational oil companies often work hand-in-glove with governments when it comes to military action in the Middle East. But my point is, the “wars over oil” are over who shall pocket the money from oil sales, not whether it should be sold at all. And of course, the direct result of the various bombing campaigns and so forth is to reduce the world output of oil in the short run, raising prices. Whether it was hostilities with Iraq, Libya, or Iran, Western military operations caused temporary interruptions in exports and led to higher prices.

It is silly to worry about hostile regimes hoarding their oil to spite the Yankees. Yet even if this were a valid fear, the standard solutions make little sense. If indeed American oil consumption is currently being subsidized by U.S. military operations, then the solution is to stop those military operations. Let those foreign regimes cut off their supply of oil to the U.S., so that prices rise and American motorists realize they should switch to electric cars, or natural-gas-powered buses, or whatever the efficient response would be.

As it is, the critics of the market are basically saying the following: 

“The U.S. government needs to penalize Americans for using so much oil — perhaps by raising gas taxes, imposing a cap-and-trade system, and spending taxpayer money funding alternative fuels — because otherwise the U.S. government will have no choice but to continue spending billions of taxpayer dollars on the military, keeping oil artificially cheap.”

Does everyone see the contradiction in this position?

The free market has futures and other derivatives markets to help anticipate supply and price volatility. All things considered, if it really makes more economic sense for Americans to begin a rapid shift away from gasoline-powered vehicles, then market forces will produce that result. If one of the “distortions” in this framework is massive U.S. military expenditures, then the most obvious solution is to cut those expenditures, rather than give the feds even more money and power to intervene in the energy sector