Thursday, 2 July 2009

"The Standard" on Iraq and oil

Over at "The Standard" they have a "Guest post" on the US lead invasion of Iraq. It in "Guest post" writes,
It was always about the oil, and the currency in which oil is traded.
If its about oil then its an economically illiterate way to get oil-which may explain why "The Standard" thinks its about oil, you would have to be economically illiterate to think its about oil. Bryan Caplan has written
The left-wing take on this argument is that it's bad to spend blood for oil; the right-wing take is that it's good (or at least necessary) to spend blood for oil, and we should just face facts. In a recent piece in Public Choice, however, I argue that - whatever else you think about U.S. foreign policy in the Middle East - it's an economically illiterate way to get oil.
The popular anti-war slogan "no blood for oil" assumes that blood actually buys oil and appeals to our conscience not to pay the price. I've got a better slogan: "No oil for blood." You could spill an ocean of blood without making it cheaper to fill up your gas tank.
Think about it this way, its just the theory of the firm writ large. Invasion amounts to a form of vertical integration, a very hostile takeover. That is, one "firm", the US, wants to vertically integrate with another "firm", Iraq, who is a supplier of an input for US production, oil. The question is does integration make sense? In a world of incomplete contracts we know integration makes economic sense when there is a possibility of a hold-up problem due to the relationship specific nature of investments. Given that oil is an more or less homogeneous good and there are a number of different supplies it is not clear what relationship specific investments have to be made and thus its not clear what the danger of hold-up is. Or to put it another way, our two firms should merge if they have highly complementary assets and not merge if they have independent asserts. Given there are a number of other supplies of oil its not obvious that oil from Iraq is highly complementary to US assets. If you think of this as a "make" - invade Iraq - or "buy" - purchase on the open market - decision, its not clear why a "make" decision is optimal.


Les Cargill said...

Scott Adams has a Dilbert cartoon you can find by searching for {Dilbert fungible} which said a thing very corollary to this years ago. Oil is highly fungible - it doesn't matter where you got it, what currency it's denominated in....

matt b said...

One of the strongest early impressions of my year living in the US was the depth of concern Americans have about energy dependence. NZers take it as given that they depend on the rest of the world for oil amongst most other things, but for Americans depending on an outside country for the gasoline in their car is a source of considerable anxiety. That makes it a political issue and unfortunately nobody wins votes by saying leave it to the market. Doing something is what gets you elected.

I don't know if oil was an underlying reason for going into Iraq but there are votes in it for anyone who does, regardless of the economic quality of the idea.

Ed Snack said...

Of course it's all about "blood for oil", that's why the USA now completely controls Iraqi oil and pumps what it wants. Oh, wait...

I "like" the Standard's approach sometimes, a new slogan for them "The Standard, for when only the big lies will do"

OT, but what happened to the blog for a few days ?

Paul Walker said...

Matt, I think you're right in that the whole energy dependence issue in the US is a political issue with little or no connection to the economics of the situation. This means that politicians can and do get great mileage out of doing, usually, stupid things to "fix" the problem.

Mark said...

First, War always pushes up the price of oil, not lowers it.

Second, that the current Iraq government set the conditions in an open bidding market for development of oil. They showed it TV.

Third, you can argue that oil was cheaper under Saddam and UN sanactions was the the fact the black market and kick-back existed, which lowered the price. In fact I suspect if you offered the right kickback to the right person they would of sold you oil for sigificantly under market value.

Fourthly, when you think of G W Bush has he promoted more democarcy in the middle east I wouold have to say YES.

And he was right to say the axis of evil include North Korea and Iran. Does anyone now doubt that with Obama in charge? NO!

Finally, prior to 9/11 due G W Bush give a rats arse but the Tailban, the answer would be NO. He was soley focused on domestic not forgien policy.