Image: A U.S. Marines vehicle guards the rear of a convoy of supplies trucks heading north on the road to Baghdad.
Laurent Rebours  /  AP file
During World War II, one economist notes, defense spending peaked at nearly 40 percent of gross domestic product. Applying the same accounting to the Iraq war finds the nation spending about 6.2 percent of GDP on defense overall, with Iraq accounting for perhaps half that.
By contributor
updated 3/18/2008 4:17:56 PM ET 2008-03-18T20:17:56

“It’s all about the oil!”

Remember that claim in the run-up to the Iraq war five years ago? In retrospect, “blood for oil,” the siren cry of the prewar left, ranks right up there with Vice President Dick Cheney’s assertion that American forces would be “greeted as liberators” in terms of analytical folly.

Yet, in at least one respect, the Iraq war really is all about oil. The debate raging among economists and academics today over the actual cost American taxpayers ultimately will bear pivots on the oil question.

Specifically, how much of the current record price of a barrel of oil can be attributed to the war? Depending on how that question is answered, the Iraq war can be portrayed either as a relatively inexpensive episode in historical terms, or a conflict of ruinous proportions.

The debate over cost comes with a lot of complications and caveats, as well as accusations of political bias. But on some things, both sides agree. For instance, most projections assume that American troops will remain in Iraq for at least another decade.

They also agree on the easiest figure to peg: the actual budgetary outlay by the U.S. government so far. The Congressional Budget Office (CBO) reported last fall that $368 billion already had been spent on the Iraq war plus another $45 billion in benefits for the wounded and survivors of those killed in action.

Dueling projections
But the two camps diverge quickly on the topic of future spending. Simply put, here’s how the debate breaks down:

On one side are economists, backed by those in the nonpartisan CBO and not surprisingly favored by the White House, who believe the war will cost $1.7 trillion through 2017.

On the other side are economists, led by Nobel laureate and Clinton administration adviser Joseph Stiglitz, who calculate that the real figure is more like $3 trillion and that in some scenarios it could be considerably more.

Stiglitz, co-author with Harvard economist Linda Bilmes of "The Three Trillion Dollar Conflict: The True Cost of the Iraq War," says projections below $2 trillion are not taking into account a number of collateral issues. One cost, known as “resetting” the U.S. military, for instance, will take a decade at least to sort out — replacing the huge amount of equipment and talent worn out or lost in the fighting.

Another large burden recognized by economists on both sides of the debate but not much discussed is homeland security. Iraq was fought on the theory that “the best defense is a good offense,” says Robert Hormats, vice chairman of Goldman Sachs International and author of "Paying for Liberty: The Price of America’s Wars." Because of the Iraq war, he said, the United States has failed to take many needed defensive measures, such as strengthening port security and hardening nuclear plants.

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Over a barrel
But the largest difference between the two camps remains the impact of oil. When the United States led its invasion of Iraq in 2003, the price of a barrel of oil was around $25. Five years later, the price of a barrel of oil is well over $100.

“We believe, and I believe experts will agree, that the war is one of the factors contributing to the increase in the price of oil,” says Stiglitz. “And the increase in the price of oil is one of the factors contributing to the weakening of the economy."

Few would argue with that assumption. But how to judge the impact of rising oil prices over the next 10 years is highly contentious. How important was the loss of Iraqi production in 2003 compared with the steep rise in demand for oil from fast-growing economies in China and India? Or OPEC’s unwillingness to significantly increase output or capacity? What about America’s  unwillingness to seriously address its inefficient consumption habits?

Hormats of Goldman Sachs says he finds some of the Stiglitz data compelling. “I find it more difficult to calculate the actual impact of the war on oil prices, or on forgone productive investment,” he says, referring to useful investments in areas like education or infrastructure that never happened because the country priorities the war instead.

‘Cheap’ in perspective
Aside from the debate over how many trillions ultimately will be expended in Iraq, says Hormats, and leaving aside larger questions of morality, casualties and the damage to American prestige abroad, historically speaking the Iraq war looks quite affordable.

During World War II, he notes, defense spending peaked at nearly 40 percent of U.S. gross domestic product. Applying the same accounting to the Iraq war finds the nation spending about 6.2 percent of GDP on defense overall, with Iraq accounting for perhaps half that figure.

Other critics, too, have taken Stiglitz and Bilmes on. Amity Shlaes, an economic historian and Bloomberg financial columnist, says many of their assumptions appear to be worst-case scenarios. She takes issue, too, with their decision to regard the war as a major cause of oil price hikes.

“The 2003 drop in oil production by Iraq accounted for less than 1 percent of world production,” she writes, noting world oil output actually increased from 2002 to 2006.

Stiglitz insists his numbers are conservative — assuming that oil prices are $5 a barrel higher than they would have been had Iraq’s production not been interrupted. Stiglitz and Bilmes also ran the numbers with what he called a “moderate” estimate that the war caused $10 of the $75 increase in oil prices since 2003.

“In our heart of hearts, we believe it’s far more than $10,” says Stiglitz, and the impact projected out over 10 more years comes to a whopping $5 trillion — or more than half the U.S. national debt. He said he and his associates used the $3 trillion figure to avoid being accused of hyperbole.

Whatever the case in 2017, one fact with long-term implications which neither side can deny: The money funding the Iraq war is borrowed from America’s international creditors.

From at least the days of Louis XIV, accruing long-term debt obligations to fight wars has raised the hair on the back of economists’ heads. For a variety of reasons and in very different circumstances, such debts helped undermine the power of Spain, France and Britain at various points in world history.

At current rates, the Iraq War adds $120 billion a year to the national debt. Those are figures no one shrugs off easily.

Michael Moran is executive editor of, Web site of the Council on Foreign Relations.


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