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Sunday, November 25, 2012

Is the U.S. Military Presence in the Middle East a Subsidy for Big Oil?

 Cross-posted from Consumer Energy Report


Should the cost of maintaining a military presence in the Middle East be viewed as a subsidy to oil companies? This idea has been  repeated often enough to become unchallenged conventional wisdom codified by the “NO WAR FOR OIL” bumper sticker.

It has been argued that the Gulf and Iraq wars were not necessary to keep the global price of oil stable and neither is our continued military presence in the Middle East. There is no way to rerun the experiment to see what the world would look like had we not had the Gulf and Iraq wars. My guess is that the Gulf war was probably a smart move, the Iraq war,  maybe not so smart.

As for the continued military presence, it is money well spent if it is helping to maintain peace in the Middle East. As Steven Pinker effectively argues, one key to reduced levels of violence is an effective police force:
As a young teenager in proudly peaceable Canada during the romantic 1960′s, I was a true believer in Bakunin’s anarchism. I laughed off my parents’ argument that if the government ever laid down its arms all hell would break loose. Our competing predictions were put to the test at 8:00 am on October [7], 1969, when the Montreal police went on strike. By 11:20 A.M. the first bank was robbed. By noon most downtown stores had closed because of looting. Within a few more hours, taxi drivers burned down the garage of a limousine service that had competed with them for airport customers, a rooftop sniper killed a provincial police officer, rioters broke into several hotels and restaurants, and a doctor slew a burglar in his suburban home. By the end of the day, six banks had been robbed, a hundred shops had been looted, twelve fires had been set, forty carloads of storefront glass had been broken, and three million dollars in property damage had been inflicted, before city authorities had to call in the army and, of course, the Mounties to restore order.
In my neck of the woods the “No War for Oil”  bumper stickers are typically found on cars burning biodiesel because most biodiesel stations here give them away to promote their product. So, are these people really more concerned about world peace than the rest of us, or are  they just victims of marketing?  I cede the point that if it were not for oil (and Israel), our elected officials might do nothing to prevent a Middle East version of Darfur, but would that be a good thing?

Those who drive cars that use less liquid fuel have the right idea (TDI diesels, hybrids, and electric cars). Those who drive vehicles that simply replace fossil oil with food oil are IMHO, victims of marketing. Last week I was driving my Leaf in rush hour traffic and on two occasions I put my windows up so I wouldn’t have to breath the soot spewing out of two different vehicles burning biodiesel. Their smell will usually alert you to their presence.
The owners of these bumper stickers seem to think that if we stop importing oil:
  • Our economy will no longer be susceptible to oil price fluctuations.
  • We will no longer strive to maintain peace in the Middle East.
  • Our military budget will shrink.
But is any of that likely to happen if we stopped importing oil? And not to defend big oil, but why has the oil industry been singled out as the sole beneficiary of peace in the Middle East? The whole goal of maintaining that peace is to keep the “global” price of oil (the same price that we have to pay for it) lower, which is not the goal of any oil company I’m aware of.

Domestically Produced Fuel

There are two main reasons commonly cited  for why we would like to have all liquid fuel come from domestic sources:
  1. To keep the supply cost stable
  2. To reduce the trade imbalance
When we talk about supply we really mean supply relative to demand (shortages cause prices to rise and vice versa). In other words, what we are actually seeking is to stabilize cost. But because oil is fungible, domestic production won’t lower the price of oil significantly because those who own it are free to charge as much as the global market will bear:
The secret to making a profit in refining these days is for refiners to source crude oil domestically and then sell the refined products to US consumers at prices based on imported oil.
So scratch item one. Domestically produced oil does not necessarily significantly lower the price of gasoline for consumers.
Item two (reduction of the trade imbalance) is a moot point because we can’t reduce oil imports quite simply because we can’t produce significantly more domestic oil in perpetuity or displace much with agrofuels. The only way to accomplish a long-term reduction in imports is to reduce liquid fuel consumption, period, which has nothing to do with the military budget. And to do that you would have to convince your average American to start driving cars that get mileage similar to a Prius, or diesel Golf  instead of the best selling vehicle, the Ford F150 pickup.

It’s complicated. Earlier this year, along the Gulf coast, most of our imported oil ended up being exported after being converted into higher-priced gasoline and diesel (3.12 million barrels/day exported verses 5 million barrels/day imported), demonstrating how oil imports can actually reduce a trade imbalance.
After seven years of trying,  the idea that we can simply replace a significant (or even a measurable) amount of  imported oil with agrofuels at prices equal to or below the price of oil has proven to be a pipe dream. A few years ago Robert Rapier tried to quantify corn ethanol’s impact on imports but couldn’t find an impact, suggesting it is quite small to insignificant.

Midwest Drought

Food price, wildlife habitat, and water quality issues aside, the Midwest drought is demonstrating another reason why we should not become too dependent on agrofuels — price instability. Many corn ethanol refineries have been operating in the red this year because the price of corn is so high. So far, they can’t charge oil companies enough to cover their costs because each corn ethanol company is competing with the next one and their customers will naturally go for the one with the lowest price. They would have to collude to fix their prices (as the ethanol lobby always claims grocery chains do when the price of food spikes), which is illegal. Eventually, enough refineries will go out of business, and use up enough reserves, to allow the price of ethanol to climb (because its use is mandated, the price is not locked to global oil prices). And we all know who will get stuck with that bill.

We have not bought oil from Iran for decades. That’s mostly a symbolic move after the hostage crisis. They still sell their oil to other customers. We could stop buying oil from the Persian Gulf (16% of imports) or even from OPEC altogether (40% of imports). We don’t do that because it would cost more to buy all of our oil from non-OPEC sources, not to mention that it would be largely meaningless to do so since  oil is fungible (we buy oil at a premium from Canada, they might import for less cost for their own use from OPEC, pocketing the difference).

The Benefit of Protecting Global Markets

Even if we assume for the sake of argument that the military budget actually is a subsidy to oil, we would have to assume that the subsidy applies to the global oil market and not just our own. We have taken on the role of global sheriff  because world peace is good for business. The cargo containers flow from ships to rail and vice verse day and night at our sea ports. Allow the flow of energy to our trading partners to be reduced (a global price hike) and you will cut that flow of cargo containers.

Japan is experiencing some serious economic trouble at the moment largely because they are importing so much fossil fuel energy thanks to having their nuclear off line. We certainly wouldn’t want their supply of energy tripped up (through a global price hike) because, ironically, the technology developed in the Prius and Leaf hold the keys to our own liquid fuel independence.

The computers we type on would be of much lower quality and cost a great deal more were it not for this global market. Cars, tools, bikes, monitors, computers, and much of the food we eat come from trading partners who are also dependent on affordable supplies of energy.

Because we know that not all subsidies are boondoggles, we would have to determine if this hypothetical military budget subsidy pays off. To find that out you would simply divide the part of the budget allocated to protect global oil supplies by the amount of energy contained in that supply. Compare that number to just about any other subsidy you can think of (agrofuels, wind, solar, nuclear) and you would find that it pays off royally. Feel free to run that number for us but the cost per unit of energy won’t have enough impact to give oil any advantage over the likes of corn ethanol.

Another test would be to compare military expenditures to the cost of converting a percentage of our vast coal and natural gas resources into a liquid fuel as Nazi Germany did and as is done in South Africa today. A properly regulated free market doesn’t leave money laying around on tables. If it were cheaper to do that than import, we would be doing it, and as with tar sand oil, environmental ramifications would be brushed aside. I live a short distance from Gas Works Park, which is the remains of a facility that actually converted coal into a gas to be used for heat and lighting in Seattle. The arrival of electricity and natural gas made it economically non-viable.

Militarists who can’t sleep at night worrying about getting enough fuel to fight the next big one can relax. If we should ever find ourselves in a war big enough and long-lived enough that we would need to tap that coal and gas to fight it, we would do so. The idea that we could fight a war with corn ethanol and soy biodiesel, (which account for about 99.9 percent of our liquid biofuels) is ludicrous, which is why the military has been funding research for alternatives.

In summary:
  1. We can only significantly reduce the oil trade imbalance by using less liquid fuel. Corn ethanol and its poor cousin, soy biodiesel,  are incapable of having a significant impact on our oil imports. The increased domestic oil production that we are presently experiencing is a temporary blip.
  2. To claim that the price of peace in the Middle East (benefiting every industry dependent on oil by keeping global costs down) is a subsidy to the oil industry (where the majority of oil companies might actually have bigger profit margins without peace in the Middle East)  is nonsensical.
Photo courtesy of PMillera4 via Flickr

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