Economics of Invading Iraq: A Run-through on the Reasons and Results of the War against Iraq - Essay Example

Economics of Invading Iraq: A Run-through on the Reasons and Results on the War against Iraq Introduction On March 20, 2003, the United s (US)invaded Iraq in alliance with Britain (UK), winning a quick military victory and ousting the government of Saddam Hussein (Global Policy Forum 2003). Before the invasion, the US alleged that Iraq illegally held weapons of mass destruction, a violation of the United Nations Security Council Resolution 1441 and had to be disarmed by force. According to US President George W. Bush, these weapons were a serious and impending threat to the United States and its allies. Although the US and the UK governments have made it clear that the war was directed about Iraqi weapons threats and terror links, oppositionists to the war believe that the invasion of Iraq was driven not by this reason alone. Rather, it was pursued in economic reasons. A War Awakened Scott (2003) cites the internally stated goal of securing the flow of oil in the Middle East. Scott refers to a report from the James A. Baker Institute of Public Policy at Rice University (April, 1997) which stated the problem of "energy security" for the US and noted that US was increasingly exposed to oil shortages in the face of the inability of oil supplies to carry on with world demand. Particularly, particular the report addressed "The Threat of Iraq and Iran" to the free flow of oil out of the Middle East. It concluded that Saddam Hussein was still a threat to Middle Eastern security and still had the military capability to exercise force beyond Iraq's borders. Scott continues that as soon as the Bush administration took office in 2001, it followed the lead of a second report from the same institute, which was co-sponsored by the Council on Foreign Relations in New York, the report representing a consensus of thinking among energy experts of both political parties, and was signed by Democrats as well as Republicans. Entitled Strategic Energy Policy Challenges for the 21st Century, the report concluded: The United States remains a prisoner of its energy dilemma. Iraq remains a de-stabilizing influence to ... the flow of oil to international markets from the Middle East. Saddam Hussein has also demonstrated a willingness to threaten to use the oil weapon and to use his own export program to manipulate oil markets. Therefore the US should conduct an immediate policy review toward Iraq including military, energy, economic and political/ diplomatic assessments. Following this note is the looming phenomenon known as Global "Peak Oil", which is projected to occur around 2010, with Iraq and Saudi Arabia being the final two nations to reach peak oil production. US geophysicist M. King Hubbert, who in 1956 correctly predicted U.S. oil production would peak in 1971, first illustrated this crucial concept of Peak Oil in bell-shaped curves wherein each oil field in the world follows a more or less bell-shaped curve, and the composite view of the world's thousands of oil fields is one gigantic, ragged edged looking bell-shaped curve. According to Clark (2003), once Peak Oil is reached, the supply of oil/energy will begin an irreversible decline, along with a corresponding permanent increase in price despite the presence of increasing demand from industrialized and developing nations alike. Another reason pointed out on the cause of the war was to preserve the dominance of the dollar over the world oil economy. Clark (Revisited: The Real Reasons for the Upcoming War with Iraq, 2003) on the other hand believes that the US media and government failed to report that the war itself is in large part an oil currency war. In Clark's words, "a war intended to prevent oil from being priced in euros". He cites that a core reason for the ongoing war is this US administration's goal of preventing further Organization of the Petroleum Exporting Countries (OPEC) momentum towards the euro as an oil transaction currency standard. However, in order to forestall OPEC, they need to gain geo-strategic control of Iraq along with its 2nd largest proven oil reserves. Clark cites that the US dollar's status of "safe harbor" since 1945 is dependent on it being the international reserve currency. Consequently, it has assumed the role of sole currency for global oil transactions (i.e. petrodollar'). The US prints hundreds of billions of fiat dollars, which in turn US consumers provide to other nations via the purchase of imported goods. As Henry Liu writes (Asian Times, April 11, 2002), "World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil." These dollars become "petrodollars" when are then used by those nation states to purchase oil/energy from OPEC producers (except Iraq, to some degree Venezuela, and perhaps Iran in the near future).1 Scott (2003) affirms Clark's claim in saying that the dollar's current strength is supported by OPEC's requirement [secured by a secret agreement between the US and Saudi Arabia] that all OPEC oil sales be denominated in dollars. This requirement is currently threatened by the desire of some OPEC countries to allow OPEC oil sales to be paid in euros. The Impact of the War The Centro de Economia Internacional [CIE] (March 2003) reports that the greatest fears over the consequences of the war are not focused on the increase of world oil prices but also on the possibility of a large-scale terrorist backlash which would involve mainly American assets (but which could extend to Europe depending on the position taken by the allies). In turn, the war undermined the confidence of American consumers and dampened the eagerness of international investors for real and financial assets denominated in dollars, leading them to divert their interest to other strong currencies (since October 2002, the US dollar has depreciated almost 11% compared to the euro, reaching US$1.089 per unit, the highest value since October 1999) and commodities (mainly gold, with increases of 13% and a peak of 22% in the same period) and a smaller portion in American bonds. Also, due to higher production costs originated in more expensive oil and, even more important, the US would be filled with fear of escalating terrorist attacks against American targets, again, reducing the consumer confidence and making real and financial investments in the US more uncertain, a situation in which capitals will seek other more attractive investment horizons. This also deepened the depreciation of the US dollar in the world market while on the other hand consolidating the position of other strong currencies and commodities which have been the traditional refuge in global recession periods. Aside from the increase in the cost of energy, a very short-term effect would be an increase in the price of non-fuel commodities was also observed owing to: a) fears associated with a shortage of global supply and b) the weakness of the dollar (commodities being dollar-denominated). Despite the fact that weaker dollar aids the euro zone to offset the inflationary effects of the increase in crude oil prices, it also entails difficulties on the side of exports (which means a loss in competitiveness), in a time of domestic demand weakness and low economic growth rates. Also, although the position of the allies (NATO) in the conflict has not been made clear, the threat of war and danger of terrorist retaliation also linger over Europe. Hence, it may be suggested that the combination of all these factors implies that the appreciation of the Euro will not continue indefinitely (Centro de Economia Internacional 2003). As for the emerging countries, the effect of the war is seen to affect their financial and commercial position. For the financial side, there would be a lower flow of capitals [due to lower world growth] and a higher relative demand for risk-free financial assets, as a consequence of which debtor countries would have a lower funding capacity in the international market. The lower offer of funds would raise the risk premium of emerging countries [due to the difficulty in acquiring new financing or simply renewing maturities, particularly so if a high percentage of debt is issued in hard currency], negatively affecting consumption and domestic investment and, consequently, total output in terms of gross domestic product (GDP) [leading to a vicious circle, as tax revenue would also fall and risk would subsequently increase, again affecting consumption and investment]. The contraction rate of GDP would ultimately depend on the greater or lesser flexibility the economy would have to increase its net exports, although the final effect would be an improvement of in the trade and current account balance [due to the lower absorption level associated with the lower inflow of capital]. The Centro de Economia Internacional (2003), however, indicated that the cooling of the global economy that would result from the war would have negative effects on the world trade flows, particularly as regards exports destined for the US (in this case, Asian and Latin American countries generally would suffer most due to their high exposure, particularly Mexico, Ecuador and Venezuela), thereby reducing the capacity of emerging countries to try to avoid an even greater fall in their product through more exports). The combination of the latter and a lower future wealth flow (due to lower GDP performance) would worsen the external solvency ratio of debtor countries, again contributing to an increase in the risk attached to debt instruments. Those who could overcome this contingency a little more easily would be those countries whose exports have greater exposure to the non-dollar zone (taking advantage of the US currency depreciation) and a strong share of commodities (due to the expected short-term price increase). Conclusion What the US and UK governments have made clear regarding the war against Iraq was that it was about security. Economic, political or diplomatic reasons might be used to justify the war but undoubtedly, the war has caused serious impact on the condition of the global economy. Increases in oil and commodity prices, increases in interest rates, reduction in exports and total output, combined with decreased consumer and investor confidence - all combine to formulate a vicious economic cycle of its own. References Bennis, Phyllis. Understanding the US-Iraq Crisis. January 2003. Institute for Policy Studies. 8 April 2006 . Centro de Economia Internacional. Effects on the Global Economy of the War against Iraq. March 2003.World Economic Review Report No. 9. 6 April 2006 . Islam, Faisal, "Iraq nets handsome profit by dumping dollar for euro." 16 February 2003. The Observer. 8 April 2006 < http://politics.guardian.co.uk/print/0,,4606565-102271,00.html>. Liu, Henry C. K. US dollar hegemony has got to go. 11 April 2002. Asia Times (online). 6 April 2006 . Rangwala. Glen. Claims and Evaluations of Iraq's Proscribed Weapons. 5 February 2003. 5 April 2006. < http://middleeastreference.org.uk/iraqweapons.html.> 'Revealing Statements from a Bush Insider about Peak Oil and Natural Gas Depletion'. 12 June 2003. The Wilderness Publications. 7April 2006 < http: //www. fromthewilderness.com/cgi-bin/MasterPFP.cgidoc=http: //www. From the wilderness. Com /free/ww3/061203_simmons.html> Scott, Peter Dale. Bush's Deep Reasons For War On Iraq: Oil, Petrodollars, And The Opec Euro Question. 27 May 2003. 7 April 2006 < http://ist-socrates.berkeley.edu/pdscott/iraq.html> Star Witness on Iraq Said Weapons Were Destroyed. 27 February 2003. Fairness and Accuracy in Reporting. 7 April 2005 < http: //www. fair.org /index . php page=1845>. Study Group on a New Israeli Strategy Toward 2000. 'A Clean Break: A New Strategy for Securing the Realm'.1996. Consequences of the War and Occupation of Iraq. Global Policy Forum. 6April 2006 The Project for the New American Century. Rebuilding America's Defenses. September 2000. Washington, D.C. 8 April 2006 < http://www.newamericancentury. org/ RebuildingAmericasDefenses.pdf. Walsh, Edward. U.S. Sketches Plan for Postwar 'Iraqi Interim Authority'. 15 March 2003. The Washington Post (online). 6 April 2006 < http:// www. washingtonpost.com/ac2/wp-dyn/A27288 2003 Mar14 language = printer Read More