Economic Fallacies Form Shaky Foundations for U.S. Middle East Policy

Military generals are charged with managing national security which has included protecting access to “needed” natural resources. Military goals have been stretched to securing resources “needed” for economic security. And for the U.S., overseas seizures began with bird guano.

If Peru insisted on getting a lot of money for a valuable product, the only solution was invasion. Seize the guano islands! Spurred by public fury, the U.S. Congress passed the Guano Islands Act in 1856, authorizing Americans to seize any guano deposits they discovered. Over the next half-century, U.S. merchants claimed 94 islands, cays, coral heads and atolls. [“How the Potato Changed the World,” Smithsonian]

Economists have long been skeptical of claims that overseas resources are “needed,” and therefore overseas military interventions were justified. Whether bird guano in the 19th Century or oil in the 20th, prices and markets serve to coordinate the supply and demand of scarce resources within and between countries. Claims that American companies or consumers “need” overseas oil, bird droppings, coffee, or bananas are based on economic misunderstandings promoted by special interests. Yet these claims are still used as political justifications for deployment of U.S. forces overseas, including the Middle East. Today’s policies along with past military interventions have stirred hatred against the U.S. and been a driver of international terrorism.

What resources are “needed” for national security can be hard to identify. Oil and uranium to power U.S. ships, tanks, and jets, along with rare earth minerals needed for military uses seem good examples. But there is now plenty of oil produced and refined in the U.S., and plenty of uranium stockpiled and available worldwide. Rare earth minerals are available in the U.S., though major mines have been closed due in part to environmental regulations.

As shale oil and gas production has surged over the last eight years, claims that Middle East oil is “needed” for U.S. economic security are harder to defend.

This November 2012 NPR segment on oil and U.S. Middle East policy gives a nice overview of the issues. (The claim at the end from the head of the Sierra Club is confused. Environmental groups continue to want more government subsidies of wind and solar power so cast doubt on new fossil fuel supplies.)

In addition to shale, sustained higher oil prices combined with technology advances turned endless and useless Canadian tar sands into vastly valuable oil reserves. Even without federal approval of the XL Pipeline, Canada is the largest source of imported oil, and Saudi oil imports continue to decline.

Advances in hydraulic fracturing and horizontal drilling, also funded by huge investments and continued high prices, opened astonishing new natural gas and oil fields in Texas, North Dakota, Louisiana, Pennsylvania and Ohio. U.S. oil production has surged beyond projections year after year as drilling technology becomes more efficient and new oil pipelines and oil trains direct oil to refineries.

Oil from Canada, the U.S., and other Western Hemisphere locations plus new offshore fields in West Africa, continue to reduce “dependence” on Middle East oil, and therefore further undermine the case for deployment of military resources to defend Mideast oil production and sea lanes.

I put quotes around “dependence” and “need” because economists further argue that the U.S. never “needed” oil from the Middle East nor was the U.S. “dependent” on Mideast oil imports. It would be more accurate to argue Saudi Arabia and other Mideast countries were and are dependent on cash from oil exports to purchase food, clothing, housing, and to fund the opulent lifestyles of their ruling elites. The U.S. has always been able to ramp up alternate supplies of oil and gas, as well as stockpile supplies and develop oil fields elsewhere around the world.

Supply disruptions of mideast oil would cause turmoil, much as hurricane Katrina did when it slammed the Mississippi and Louisiana coast and knocked out major oil production and refineries. Oil and gas prices rose dramatically, and U.S. consumers and industry, guided by high prices and profit opportunities, quickly and adroitly adapted to reduce use in the short term, and then bring in oil and gas from nearby locations.

The U.S. has such a resilient economy that even before the shale oil revolution of the last eight years, there was limited economic or strategic justification for deploying military forces to the Middle East. (This is a debatable claim of course, but one that economists have rigorously researched and documented. This 2007 Independent Institute study (pdf) by economist David Henderson of the Naval Postgraduate School makes the case for markets rather than military forces, as does this 2013 post on the 10th anniversary of the U.S. invasion of Iraq. )

Looking back further, did the United States really “need” oil from the Middle East when President Carter announced what came to be the Carter Doctrine in his 1980 State of the Union Address? President Carter announced:

An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military  force.  [Air Force Magazine, April, 2010]

There is much mixed-up economics in this State of the Union Address (though maybe that’s not unusual). President Carter begins by deploring “terrorism and anarchy” in the Middle East:

At this time in Iran, 50 Americans are still held captive, innocent victims of terrorism and anarchy. Also at this moment, massive Soviet troops are attempting to subjugate the fiercely independent and deeply religious people of Afghanistan. These two acts—one of international terrorism and one of military aggression—present a serious challenge to the United States of America and indeed to all the nations of the world. Together, we will meet these threats to peace. 

For NCFCA students researching reforming Middle East policy it is interesting these same issues front and center in 1980, some 34 years ago.

How did this happen? How did the U.S. become so “dependent” on oil from the Middle East? A significant cause was wage and price controls declared by President Nixon in 1971, and kept in place for domestic oil prices through the decade. Here is the story from The Commanding Heights:

Only one segment of the wage-and-price control system was not abolished — price controls over oil and natural gas. Owing in part to the deep and dark suspicions about conspiracy and monopoly in the energy sector, they were maintained for another several years. But Washington’s effort to run the energy market was a lasting lesson in the perversities that can ensue when government takes over the marketplace. … The oil-price-control system established several tiers of oil prices. The prices for domestic production were also held down, in effect forcing domestic producers to subsidize imported oil and providing additional incentives to import oil into the United States. The whole enterprise was an elaborate and confusing system of price controls, entitlements, and allocations. [Source.]

When the Roosevelt Administration blocked oil exports from the Philippines (then a U.S. territory) to Japan, Japan responded by bombing Pearl Harbor. The U.S. oil embargo was a response to Japan’s military expansion into Indochina which threatened rubber and other raw material exports to the (soon to be) allies in Europe.

Japan’s aggression in China, military alliance with Hitler, and proclamation of a “Greater East Asian Co-Prosperity Sphere” that included resource-rich Southeast Asia were major milestones along the road to war, but the proximate cause was Japan’s occupation of southern French Indochina in July 1941, which placed Japanese forces in a position to grab Malaya, Singapore, and the Dutch East Indies. Japan’s threatened conquest of Southeast Asia, which in turn would threaten Great Britain’s ability to resist Nazi aggression in Europe, prompted the administration of Franklin D. Roosevelt to sanction Japan by imposing an embargo on U.S. oil exports upon which the Japanese economy was critically dependent. Yet the embargo, far from deterring further Japanese aggression, prompted a Tokyo decision to invade Southeast Asia. [Source.]

And… stepping back still further we can review the United States first military involvement in North Africa as President Jefferson refused to continue making payments to the Barbary Pirates and sent the U.S. Navy over instead. That turned out to be an explosive project, as have so many U.S. interventions in the Middle East.

[Image: Edward Moran’s Burning of the Philadelphia.

Oil on canvas, 60″ by 42″, by Edward Moran (1829-1901), signed and dated by the artist, 1897. It depicts USS Philadelphia, previously captured by the Tripolitans, ablaze after she was boarded and set afire by a party from the ketch Intrepid led by Lieutenant Stephen Decatur.]