Sunday evening, December 15, should go into the history books as the day that Secretary of Defense Donald Rumsfeld emphatically assured Americans that the Administration’s willingness to invade Iraq is in no way connected to the issue of oil. “60 Minutes” ran an interview by Steve Kroft in which Rumsfeld made this statement. Rumsfeld could not have been more emphatic.
Kroft then interviewed other interested parties, all of whom assured him that oil is a factor in America’s foreign policy goals in Iraq. Nobody who appeared on the show believed Rumsfeld. That means that the producers of “60 Minutes” didn’t believe him, either.
Iraq has 130 billion barrels of proven reserves of oil. This is the second-largest national source of oil after Saudi Arabia. Saddam Hussein has cut deals with Russian and French oil companies, leaving traditional Anglo-American oil companies out of the loop. Anglo-American oil companies have been the dominant Western participants in the extraction of Middle Eastern oil ever since oil was discovered there.
If the United States invades Iraq, it will win the war at some price. This nation’s government will then be in charge of establishing control over the sale of oil. It will not do this directly. It will install a puppet regime. The hatred of the United States in Iraq is sufficient so that the United States government will not be able to let democracy work without its intervention.
Once the United States military has established control over the oil fields, which I assume it will do at the beginning of the invasion, Iraq will not be able to feed itself. Control the flow of oil, and you control the only thing worth controlling in Iraq. The government will topple. Even if it doesn’t, who cares if the U.S. government controls the oil?
At that point, the oil-drilling concessions will be handed out by the United States government’s puppet regime. “Y’all come!” This will buy off Europe’s foot-dragging politicians, who will be able to go to their voters and say, “fait accompli.” They will have offered token resistance to the United States, which is all that European voters expect. Now they will reap the rewards, either directly by the participation of their national oil companies or indirectly by enjoying a lower price of oil.
REPLACING OPEC
The United States buys most of its imported oil from Canada (15%), Mexico (12%), and Venezuela (14%). Middle Eastern countries account for 24% of our imports, which is still in the range of half of our consumption.
Oil is priced in terms of supply and demand internationally. An increase in supply that lowers the price of oil in the Middle East also lowers it in Venezuela.
The Western alliance depends on oil. Oil is the most important commodity. To maintain its leadership of this alliance, the United States government must see to it that the price of the central commodity stays low. China and Asia are coming on-stream economically, which means the demand for oil will rise. The CIA has estimated that by 2015, 75% of Persian Gulf oil will go to Asia, with only 10% flowing to the West.
http://www.cia.gov/cia/publications/globaltrends2015/#link8c
The United States must defend the interests of the alliance by bringing new supplies into production. This was what the invasion of Afghanistan was all about: establishing protection over a new pipeline from the Caspian Sea oil fields, either through Afghanistan and Pakistan and into the tankers, or through Turkey. This pipeline is important if Russia is not to control this flow of oil. The Great Game of the 19th century — Russia, Turkey, England, Afghanistan, and India — is still being fought. For a good analysis of the pipeline issues, see the September, 2001 article on Turkey and the pipeline, which is posted on the Web site of the joint Israeli-American organization, the Institute for Advanced Strategic & Political Studies.
http://www.israeleconomy.org/strategic/strat13.pdf
Once the United States government controls the output of the Iraqi oil fields, the world will see whether OPEC has controlled prices to the detriment of the Western alliance and Western oil companies. The critics of big oil have always said that big oil was in cahoots with OPEC. As the price of oil has risen, the oil companies’ profits have risen. The oil companies have denied this. Now we will see who was telling the truth.
Oil’s price, as with every commodity’s price, is established by its price at the margin. The price of the latest barrel of oil sold is imputed to all of the barrels of oil remaining to be sold. It does not take a great increase in supply to lower the price of oil. An extra million barrels of oil a day will drop the price if buyers expect this added output to continue. Iraq’s oil fields are capable of providing far more than an extra million barrels of oil a day. This is why the United States has in effect capped Iraqi wells by its oil-for-food embargo.
As soon as U.S. military control is established, we will see who is really in control: (1) a politically created and politically defended cartel of oil suppliers or (2) consumers. If the price of oil stays above $25/barrel, we will know that OPEC and the Western alliance have been in agreement on the higher price of oil. If we are regaled with explanations about “maintaining orderly oil prices” when the U.S. Army can simply open the spigots, we will know that the interests of politicians and their oil cartel allies are dominant, and the interests of consumers are going to be sacrificed as surely as the interests of taxpayers are. If the windfall profits of the invasion go to consumers through lower energy prices, we will know that OPEC really was the enemy of the powers that be.
Once the spigots are controlled by the United States, OPEC will fall into line. The United States will have the ability to cut the revenues of Saudi Arabia and the rest of the OPEC countries. Because governments always expand expenditures to meet revenues, any drastic restriction of revenues will topple existing oil-exporting governments. Once the United States controls the marginal supply of oil, it will also control the regimes of the Middle East. It can then get regime changes any time it likes. Problem: there will be more than one regime change because there will be only one price of oil.
The problem with regime changes today is that they are likely to produce radical, anti-Western regimes. This is why the United States still has 5,000 troops in Saudi Arabia. These troops can keep the pipelines open if some Al-Qaeda-type regime takes over. When there are 250,000 American troops in the region, most of them stationed in Iraq, geography will be in our favor militarily. Iraq borders on Iran and Saudi Arabia, the two other major oil producers in the region. This means that U.S. troops will be able to guarantee open spigots. It will also mean that revolutionaries will be less likely to establish hostile regimes. They will have to content themselves with assassinations, terrorism, and guerilla actions. But this is their specialty anyway in the international division of labor. They are the disloyal opposition.
The United States government will be able to bust up the OPEC cartel as soon as its military controls Iraq’s oil fields. The United States government will set the price of oil because it will set the output of Iraq. It will be able to drive the price of oil down to $10. If the goal is to serve consumers’ interests, the price of oil will reflect this within six months — or six weeks — after the U.S. Army controls Iraq’s oil fields. On the other hand, if the price stays above $20, let alone $25, then the invasion of Iraq is all about controlling politics in the region, not providing low-cost energy to the world. The quid pro quo will be oil for political influence, not oil for production. That policy will be anti-Palestinian.
ECONOMICS FIRST OR POLITICS FIRST?
Some of you may remember William Seidman. He ran the Federal Deposit Insurance Corporation under Reagan, and he took over the government’s Savings & Loan bail-out program. Earlier this year, he gave an interview to the Grand Rapids, Michigan Peninsula Club. This speech was reported by the Grand Rapids Press and picked up only by the World Socialist Web Site. Seidman emphasized the economic implications of a U.S. military victory in Iraq.
A US war against Iraq is “probably the most bullish thing I can think of,” William Seidman, a senior economic adviser under four US presidents, told his audience at the posh Peninsula Club.
Seidman, a commentator for CNBC, was an adviser to presidents Nixon, Ford, Reagan and Bush senior. He is the former chairman of the Federal Deposit Insurance Corporation and also headed the Resolution Trust Company, the federal agency created to bail out the scandal-ridden savings and loans industry in the 1980s. He served as a consultant on the junior Bush’s transition team, and maintains close ties with top administration officials.
According to the Grand Rapids Press, which was alone in reporting the remarks, Seidman told the meeting that he had just come from a State Department briefing in which US plans for a military occupation of Iraq were outlined.
Removing the Iraqi government and installing a US military regime that would control the country’s oil fields is “at least as important as eliminating weapons of mass destruction,” he said. “Getting control of that oil will make a vast difference in all sorts of things, but particularly the price of oil.”
“We are planning to set up a MacArthur-like” government in Iraq, the ex-official said enthusiastically, referring to the US occupation regime established in Japan at the end of World War II. “If we are in Iraq, nobody can use oil as a weapon.”
Seidman suggested that establishing US military rule over the Arab country would also strengthen Washington’s hand in relation to the other top Middle East oil producer, Saudi Arabia, effectively crippling its ability to set an independent oil policy. “Having two major oil producers not part of any radical Muslim or any other unfriendly government,” he said, would be “a huge additional factor in the world’s economy.”
http://www.wsws.org/articles/2002/oct2002/oil-o16_prn.shtml
All of this is obvious, but none of this is discussed by the media, including “60 Minutes.” The Administration’s goal of invading Iraq is not about destroying weapons of mass destruction. If it were, we would have invaded North Korea long ago, which is the real producer of such weapons, and says so publicly. It’s about gaining control over the weapon of marginal pricing.
If control over Iraq were about consumer sovereignty, there would be no no-fly zones in Iraq and no oil-for-food embargo on Iraq’s oil exports. The world’s consumers would have been enjoying additional oil for a decade, which would have forced down the price of oil. But American policy is not about forcing down the price of oil. It’s about placing in the hands of the United States government the terms of oil’s production at the margin. This is the most important single economic lever in the world economy and the only major economic lever that the United States government does not control.
PERLE’S 1996 REPORT
Richard Perle is the chairman of President Bush’s Defense Policy Board, a civilian advisory group. He co-authored a paper in 1996, “A Clean Break: A New Strategy for Securing the Realm,” which was published by the previously mentioned Institute for Advanced Strategic & Political Studies. The report is still on-line. It calls for the establishment of a new balance-of-power foreign policy in Israel — the same system, it might be added, that twice led England into world war, and which twice required the United States to bail out England. The report made suggestions to the Likud Party, which is Ariel Sharon’s party.
Benjamin Netanyahu’s government comes in with a new set of ideas. While there are those who will counsel continuity, Israel has the opportunity to make a clean break; it can forge a peace process and strategy based on an entirely new intellectual foundation, one that restores strategic initiative and provides the nation the room to engage every possible energy on rebuilding Zionism, the starting point of which must be economic reform. To secure the nation’s streets and borders in the immediate future, Israel can:
Work closely with Turkey and Jordan to contain, destabilize, and roll-back some of its most dangerous threats. This implies clean break from the slogan, “comprehensive peace” to a traditional concept of strategy based on balance of power.
Change the nature of its relations with the Palestinians, including upholding the right of hot pursuit for self defense into all Palestinian areas and nurturing alternatives to Arafat’s exclusive grip on Palestinian society.
We have seen this program adopted by Ariel Sharon’s government. Netanyahu’s government failed.
Then there are security considerations. The report says:
Syria challenges Israel on Lebanese soil. An effective approach, and one with which American can sympathize, would be if Israel seized the strategic initiative along its northern borders by engaging Hizballah, Syria, and Iran, as the principal agents of aggression in Lebanon, . . .
This has not been done yet. Israel’s withdrawal from Lebanon in May, 2000, represented a major break with Israel’s policy since 1982. But that was done before the latest intifada began after Sharon’s visit to the Temple Mount in September of 2000, which soon brought down Barak’s government. Syria remains a problem for Israel. So does Saddam Hussein.
We must distinguish soberly and clearly friend from foe. We must make sure that our friends across the Middle East never doubt the solidity or value of our friendship. Israel can shape its strategic environment, in cooperation with Turkey and Jordan, by weakening, containing, and even rolling back Syria. This effort can focus on removing Saddam Hussein from power in Iraq — an important Israeli strategic objective in its own right — as a means of foiling Syria’s regional ambitions.
Unlike the anti-Syrian policy, the following is now in progress:
Israel has a chance to forge a new relationship between itself and the Palestinians. First and foremost, Israel’s efforts to secure its streets may require hot pursuit into Palestinian-controlled areas, a justifiable practice with which Americans can sympathize.
What is “the clean break”? It is a break with America’s control over Israel.
Israel can make a clean break from the past and establish a new vision for the U.S.-Israeli partnership based on self-reliance, maturity and mutuality — not one focused narrowly on territorial disputes. Israel’s new strategy — based on a shared philosophy of peace through strength — reflects continuity with Western values by stressing that Israel is self-reliant, does not need U.S. troops in any capacity to defend it, including on the Golan Heights, and can manage its own affairs. Such self-reliance will grant Israel greater freedom of action and remove a significant lever of pressure used against it in the past.
http://www.israeleconomy.org/strat1.htm
This is now taking place. The United States government has almost no influence to stop the violence on either side. Under Sharon, Israel is going it alone, not bothering to consult Washington. This is what Perle wanted in 1996, when he was outside of the government. It is what he wants now.
This program explicitly recommended the restoration of a free market economy in the State of Israel. So far, this has not happened. It also called for a cessation of American foreign aid, which has not happened.
To reinforce this point, the Prime Minister can use his forthcoming visit to announce that Israel is now mature enough to cut itself free immediately from at least U.S. economic aid and loan guarantees at least, which prevent economic reform.
What has happened is the creation of a plan for the United States to take over Iraq, which will permanently place United States troops in the Middle East. This plan is generally attributed to Perle.
http://www.salon.com/news/feature/2002/09/05/perle/
http://polyconomics.com/showarticle.asp?articleid=1634
The troops won’t be home for Christmas — ever. Once in the Middle East’s tar baby, nobody gets out except with his tail between its legs and his treasury empty, as Britain got out half a century ago. It was a high price to pay.
This is why I refer to Richard Perle as the Perle of great price.
WILL THE UNITED STATES INVADE?
Today, the United Nations’ weapons investigation team is all that is keeping the U.S. from invading. Hans Blix and his team appear to be working diligently to discover what Saddam Hussein says is not there. The Administration has yet to release documents showing that Iraq has weapons of mass destruction. The inability of Blix’s team to discover any such weapons will force the United States either to back down or else invade without justifying its invasion in terms of WMD. For the U.S. to invade while the team is still conducting its investigation would demonstrate the Administration’s contempt for world public opinion.
I don’t think Blix’s team will find any weapons of mass destruction. Do I think the United States will invade anyway? Yes. I don’t think this planned invasion is really about weapons of mass destruction. It is about the marginal price of oil and the use of this pricing lever to influence politics in the Middle East. It is about cutting off funding to Muslim revolutionaries, including Palestinian resistance groups. It is about the balance of power. The Administration wants to determine which regimes get changed, if any, and by which groups. The oil lever is the lowest-cost foreign policy tool at the government’s disposal. This will require American troops in Iraq on a permanent basis.
This is a deliberate no-exit strategy. The Administration plans to send in troops that will become as permanent as its 5,000 troops in Saudi Arabia. How many troops will this be? As many as it takes to control the marginal price of oil.
The United States government is about to replace OPEC as the pricing agent of world oil. The name of the game is still cartel pricing, but there will be different hands on the spigots.
CONCLUSION
The Great Game continues. The flow of money out of the latest winner’s treasury will also continue. That is the price of victory in this game. That is why nobody ever wins it.
December 17, 2002
Gary North is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North’s twice-weekly economics newsletter, click here.
