Paying the Price of War

Democrats are trying hard to make an issue of the cost of the Iraq War. Unlike any war in history, they have said that the White House should have presented an exact accounting prior to the onset of hostilities.

Last week, Senate “moderates??? got $100 billion set aside from President Bush’s proposed tax cut to pay for the war, and it appears that the administration will ask for about that amount in supplemental spending very shortly to deal with war-related expenses.

At some level, it is nonsensical to do this kind of analysis. Who can put a dollar value on liberty, security and peace of mind? Still, there are those who will try. So far, the evidence strongly implies that the benefits greatly exceed the costs of the Iraq operation.

The central issue in terms of economic analysis is oil. Saying so does not imply that the war is about oil. If all we wanted was lower oil prices, all we had to do was lift sanctions on Iraqi production, as well as those on other oil-producing nations, such as Libya.

Had Saddam Hussein only been interested in enriching himself, he would have acceded to United Nations resolutions long ago. Since 1991, Iraq has produced well less than half the oil it is presently capable of producing due to UN sanctions. This means that Saddam Hussein probably lost over $100 billion in revenue by being obstinate.

President Bush has said on many occasions that Iraq’s oil belongs to the people of Iraq and must be made to benefit them, rather than just Saddam Hussein and his henchmen.

Its oil resources are very large-second largest in the world after Saudi Arabia. Analysts put Iraq’s proven reserves at 112 billion barrels of oil, with as much as another 200 billion barrels yet to be discovered. On top of this, Iraq has 110 trillion cubic feet of natural gas reserves.

Yet Iraq’s production is very low, at just 2.4 million barrels per day. This is mainly due to trade sanctions, which limit Iraqi oil exports in order to force compliance with United Nations resolutions.

But it is also the result of low investment in Iraq’s oil industry. This is mainly the result of Iraq’s socialist economic policies, which limited foreign investment in Iraq’s oil industry even before the first Gulf War.

To get an idea of Iraq’s oil production capabilities, it is worth noting that there are only about 2,000 oil wells in the whole country. By contrast, there are about 1 million in Texas alone. Therefore, there is no question that Iraq could greatly increase its oil production once freed from sanctions and once the nation is open to foreign investment and the latest technology.

Fadhi Chalabi, executive director of the Center for Global Energy Studies, says Iraq could become a “supergiant??? oil producer with favorable political and economic conditions.

How much of Iraq’s oil production could increase and how fast will not be known until hostilities end and Western experts can accurately survey the state of the industry. However, Iraq could certainly increase its production somewhat almost immediately. Prior to the first Gulf War, it was producing close to 3 million barrels per day, and experts think that figure could be doubled within a few years.

It is hard to say what impact this might have on oil prices, but markets clearly expect lower prices. On the eve of hostilities, oil was selling for about $37 per barrel. At this price, Americans would be paying $270 billion per year for oil.

But once it became clear that Iraq’s liberation was at hand, the price quickly dropped to about $28 per barrel, cutting our annual oil bill by $70 billion. With full Iraqi production, the price might drop to $20 per barrel or less, giving us the equivalent of an annual tax cut of about $120 billion per year.

Even at lower oil prices, Iraq should be able to earn more than $50 billion per year from oil exports within a few years-more than enough to pay for rebuilding that country without foreign aid. Lower oil prices will also jumpstart the world economy and raise U.S. economic growth, which will increase federal revenues and help pay for the war. In the end, the economic benefits of the Iraq war are likely to greatly exceed the out-of-pocket costs.