Oil and War
Clifford Singer

U.S. policymakers still seem to believe that the United States needs to maintain military capability to intervene unilaterally in the Middle East because the oil in that region makes it strategically important for the global economy and U.S. national security. This is simply not true. Yet this idea persists, even though the occupation of Iraq has resulted in reduced oil production and higher oil prices, and oil prices also increased dramatically when the United States intervened to tip the balance in the 1973 Arab-Israeli war. U.S. intervention in Mideast conflicts has clearly had the opposite of any desired effect on oil prices, and policies ought to be changed to reflect this reality.

Moreover, the idea that high oil prices are a strategic problem is a myth. First, the U.S. Department of Defense uses less than 2 percent of U.S. oil consumption, an amount that could be supplied by three U.S. oil rigs in the Gulf of Mexico at an extraction cost of about $30 per barrel. Second, higher prices do not themselves cause overall problems in the global economy. A case in point: When oil prices were high from 1973 to 1986, the global sum of the local purchasing power of gross domestic product (GDP) continued to grow at an annual average rate of 3 percent, because oil exporters’ increased earnings were recycled throughout the global economy. The GDP of the United States and other major oil importers continued to grow from 1998 to 2007, despite a recurrence of high oil prices. High oil prices alone have not been enough to trigger a looming U.S. recession.

U.S. energy strategy currently relies on a combination of subsidies and tax breaks, regulatory mandates and taxes on petroleum end products to reduce the fraction of oil that comes from imports. This policy has three fundamental flaws: It is piecemeal, and thus leaky; its most economically effective components are politically unpalatable; and most importantly, it ducks the need for effective international cooperation in dealing with OPEC.

The piecemeal approach has multiple holes. Regulatory mandates, such as corporate average fuel economy standards for automobiles and light trucks or minimum ethanol content in gasoline, reduce oil use only in part of the economy. The net effect is to encourage the use of more petroleum in those economic sectors that escape that regulation, such as heavy trucking, aviation, heating and petrochemical feedstock. Taxing particular petroleum industry end products like gasoline has a similar effect. Meanwhile, U.S. subsidies and tax breaks for alternatives to oil imports increase energy use, and have only been politically feasible when oil prices are high; they eventually become unsustainable when oil prices temporarily decrease. Conversely, tax breaks for domestic oil production have been popular when oil prices are low but come under political attack as contributing to producers’ “windfall profits” when oil prices rise.

To reduce overall oil consumption rates, the most effective of the piecemeal approaches would be the broadest possible taxes on petroleum end products, not just gasoline. But imposing such taxes is also the most politically unpalatable approach, given that they directly burden middle-class Americans.

A final problem with piecemeal approaches is that they do not promote international cooperation among oil-importing countries. Europe has widespread policies aimed in part at reducing petroleum consumption, but they have not provided the foundation for an effective global cooperative mechanism for dealing with OPEC.

Evidence shows that these piecemeal attempts to reduce oil imports as a way to increase national security have failed. Instead, the United States would do better to impose tariffs on foreign oil and petroleum products when they enter the country. This approach would not only send a signal to the entire world that the United States is serious about influencing the level of oil imported, but it would do so without directly taxing U.S. consumers.

These observations suggest two major policy opportunities, with profound implications for developed and rapidly developing countries: First, U.S. defense and national security strategy should be reshaped so as to uniformly avoid unilateral military interventions in international or internal conflicts solely or primarily for the purpose of influencing who has control over energy resources. Second, major importers of petroleum and petroleum products should impose import tariffs that continue to rise until a mutually acceptable agreement on stabilizing petroleum prices is reached with OPEC. This agreement with OPEC should involve not only the United States but also a broad coalition of major energy users throughout the world, ensuring truly consistent, systemic change in global financial and trade practices.

Ultimately, the United States needs to understand that trying to influence oil supply with military force is counterproductive. This will make it clear to U.S. voters and to U.S. allies that better, universally applied trade and tariff policies offer the best approach to dealing with OPEC. Once this becomes clear, then the fact that the U.S. economy needs to adopt more efficient uses of energy and alternate sources of transportation fuels should become more politically palatable in the long term.

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