U. S. MILITARY EXPENDITURES TO PROTECT THE USE OF
PERSIAN- GULF OIL FOR MOTOR VEHICLES
Report # 15 in the series: The Annualized Social Cost of Motor- Vehicle Use in
the United States, based on 1990- 1991 Data
UCD- ITS- RR- 96- 3 ( 15) rev. 2
Mark A. Delucchi1
James Murphy2
1Institute of Transportation Studies
University of California
Davis, California 95616
madelucchi@ ucdavis. edu
www. its. ucdavis. edu/ people/ faculty/ delucchi/
2Department of Resource Economics and Public Policy
University of Massachusetts
Amherst, Massachusetts 01003
April 1996
Revised October 2004
Revised October 2006
i
ACKNOWLEDGMENTS
This report is one in a series that documents an analysis of the full social- cost of
motor- vehicle use in the United States. The series is entitled The Annualized Social Cost of
Motor- Vehicle Use in the United States, based on 1990- 1991 Data. Support for the social- cost
analysis was provided by Pew Charitable Trusts, the Federal Highway Administration
( through Battelle Columbus Laboratory), the University of California Transportation
Center, the University of California Energy Research Group ( now the University of
California Energy Institute), and the U. S. Congress Office of Technology Assessment.
Many people provided helpful comments and ideas. In particular, we thank
David Greene, Gloria Helfand, Arthur Jacoby, Bob Johnston, Charles Komanoff, Alan
Krupnick, Charles Lave, Douglass Lee, Steve Lockwood, Paul McCarthy, Peter Miller,
Steve Plotkin, Jonathan Rubin, Ken Small, Brandt Stevens, Jim Sweeney, Todd Litman,
and Quanlu Wang for reviewing or discussing parts of the series, although not
necessarily this particular report. Of course, we alone are responsible for the contents of
this report.
ii
REPORTS IN THE UCD SOCIAL- COST SERIES
There are 21 reports in this series. Each report has the publication number UCD- ITS- RR-
96- 3 (#), where the # in parentheses is the report number.
Report 1: The Annualized Social Cost of Motor- Vehicle Use in the U. S., 1990- 1991:
Summary of Theory, Methods, Data, and Results ( M. Delucchi)
Report 2: Some Conceptual and Methodological Issues in the Analysis of the Social
Cost of Motor- Vehicle Use ( M. Delucchi)
Report 3: Review of Some of the Literature on the Social Cost of Motor- Vehicle Use ( J.
Murphy and M. Delucchi)
Report 4: Personal Nonmonetary Costs of Motor- Vehicle Use ( M. Delucchi)
Report 5: Motor- Vehicle Goods and Services Priced in the Private Sector ( M.
Delucchi)
Report 6: Motor- Vehicle Goods and Services Bundled in the Private Sector ( M.
Delucchi, with J. Murphy)
Report 7: Motor- Vehicle Infrastructure and Services Provided by the Public Sector ( M.
Delucchi, with J. Murphy)
Report 8: Monetary Externalities of Motor- Vehicle Use ( M. Delucchi)
Report 9: Summary of the Nonmonetary Externalities of Motor- Vehicle Use ( M.
Delucchi)
Report 10: The Allocation of the Social Costs of Motor- Vehicle Use to Six Classes of
Motor Vehicles ( M. Delucchi)
Report 11: The Cost of the Health Effects of Air Pollution from Motor Vehicles ( D.
McCubbin and M. Delucchi)
Report 12: The Cost of Crop Losses Caused by Ozone Air Pollution from Motor
Vehicles ( M. Delucchi, J. Murphy, J. Kim, and D. McCubbin)
Report 13: The Cost of Reduced Visibility Due to Particulate Air Pollution from Motor
Vehicles ( M. Delucchi, J. Murphy, D. McCubbin, and J. Kim)
Report 14: The External Damage Cost of Direct Noise from Motor Vehicles ( M.
Delucchi and S. Hsu) ( with separate 100- page data Appendix)
Report 15: U. S. Military Expenditures to Protect the Use of Persian- Gulf Oil for Motor
Vehicles ( M. Delucchi and J. Murphy)
iii
Report 16: The Contribution of Motor Vehicles and Other Sources to Ambient Air
Pollution ( M. Delucchi and D. McCubbin)
Report 17: Tax and Fee Payments by Motor- Vehicle Users for the Use of Highways,
Fuels, and Vehicles ( M. Delucchi)
Report 18: Tax Expenditures Related to the Production and Consumption of
Transportation Fuels ( M. Delucchi and J. Murphy)
Report 19: The Cost of Motor- Vehicle Accidents ( M. Delucchi)
Report 20: Some Comments on the Benefits of Motor- Vehicle Use ( M. Delucchi)
Report 21: References and Bibliography ( M. Delucchi)
There are two ways to get copies of the reports.
1). Most reports are posted as pdf files on Delucchi’s faculty page on the UC Davis ITS
web site: www. its. ucdavis. edu/ people/ faculty/ delucchi/
2). You can order hard copies of the reports from ITS:
A. fax: ( 530) 752- 6572
B. e- mail: itspublications@ ucdavis. edu
C. ITS web site: http:// www. its. ucdavis. edu
D. mail: Institute of Transportation Studies, University of California, One Shields
Avenue, Davis, California 95616 attn: publications
For general information about ITS, call ( 530) 752- 6548.
ITS charges for hard copies of the reports. The average cost is $ 10 per report.
You can get a cost list before hand, of course. Or, you can have them send the
reports with an invoice.
iv
LIST OF ACRONYMS AND ABBREVIATIONS AND OTHER NAMES
The following are used throughout all the reports of the series, although not necessarily
in this particular report
AER = Annual Energy Review ( Energy Information Administration)
AHS = American Housing Survey ( Bureau of the Census and others)
ARB = Air Resources Board
BLS = Bureau of Labor Statistics ( U. S. Department of Labor)
BEA = Bureau of Economic Analysis ( U. S. Department of Commerce)
BTS = Bureau of Transportation Statistics ( U. S. Department of Transportation)
CARB = California Air Resources Board
CMB = chemical mass- balance [ model]
CO = carbon monoxide
dB = decibel
DOE = Department of Energy
DOT = Department of Transportation
EIA = Energy Information Administration ( U. S. Department of Energy)
EPA = United States Environmental Protection Agency
EMFAC = California’s emission- factor model
FHWA = Federal Highway Administration ( U. S. Department of Transportation)
FTA = Federal Transit Administration ( U. S. Department of Transportation)
GNP = Gross National Product
GSA = General Services Administration
HC = hydrocarbon
HDDT = heavy- duty diesel truck
HDDV = heavy- duty diesel vehicle
HDGT = heavy- duty gasoline truck
HDGV = heavy- duty gasoline vehicle
HDT = heavy- duty truck
HDV = heavy- duty vehicle
HU = housing unit
IEA = International Energy Agency
IMPC = Institutional and Municipal Parking Congress
LDDT = light- duty diesel truck
LDDV = light- duty diesel vehicle
LDGT = light- duty gasoline truck
LDGV = light- duty gasoline vehicle
LDT = light- duty truck
LDV = light- duty vehicle
MC = marginal cost
MOBILE5 = EPA’s mobile- source emission- factor model.
MSC = marginal social cost
MV = motor vehicle
NIPA = National Income Product Accounts
NOx = nitrogen oxides
NPTS = Nationwide Personal Transportation Survey
OECD = Organization for Economic Cooperation and Development
v
O3 = ozone
OTA = Office of Technology Assessment ( U. S. Congress; now defunct)
PART5 = EPA’s mobile- source particulate emission- factor model
PCE = Personal Consumption Expenditures ( in the National Income Product Accounts)
PM = particulate matter
PM10 = particulate matter of 10 micrometers or less aerodynamic diameter
PM2.5 = particulate matter of 2.5 micrometers or less aerodynamic diameter
PMT = person- miles of travel
RECS = Residential Energy Consumption Survey
SIC = standard industrial classification
SOx = sulfur oxides
TIA = Transportation in America
TSP = total suspended particulate matter
TIUS = Truck Inventory and Use Survey ( U. S. Bureau of the Census)
USDOE = U. S. Department of Energy
USDOL = U. S. Department of Labor
USDOT = U. S. Department of Transportation
VMT = vehicle- miles of travel
VOC = volatile organic compound
WTP = willingness- to- pay
vi
TABLE OF CONTENTS
ACKNOWLEDGMENTS ......................................................................................................... i
REPORTS IN THE SERIES ...................................................................................................... ii
LIST OF ACRONYMS ............................................................................................................ iv
TABLE OF CONTENTS.......................................................................................................... vi
15. U. S. MILITARY EXPENDITURES TO PROTECT THE USE OF
PERSIAN- GULF OIL FOR MOTOR VEHICLES............................................................... 1
15.1 UNITED STATES SECURITY AND PERSIAN- GULF OIL ............................................. 1
15.1.1 Why does the U. S. want to “ protect” U. S. oil interests
in the Persian gulf? ................................................................................. 2
15.1.2 United States military objectives and plans for the
Persian Gulf............................................................................................. 3
15.1.2.1From 1973 to 1989: Protecting oil is a primary
objective........................................................................................ 3
15.1.2.2 From 1990 on: Protecting oil is the “ overall”
objective........................................................................................ 4
15.1.2.3 Counter arguments and summary .................................... 5
15.2. ESTIMATES OF PEACETIME AND WAR- TIME MILITARY
EXPENDITURES IN THE PERSIAN GULF ................................................................... 7
15.2.1 Introduction........................................................................................... 7
15.2.2 Literature review................................................................................... 8
15.2.2.1 Effect of the collapse of the Soviet Union ......................... 11
15.2.2.2 What would the U. S. Congress do?................................... 11
15.2.2.3 Our estimate of the cost...................................................... 13
15.2.3 Expected wartime expenditures related to the Persian
Gulf......................................................................................................... 14
15.2.4 Peacetime plus wartime expenditures............................................... 15
15.3. U. S. ASSISTANCE TO THE MIDDLE EAST: ATTRIBUTABLE TO OIL
INTERESTS IN THE GULF? ( MOSTLY NOT) ............................................................. 15
15.4. FROM THE COST OF DEFENDING ALL U. S. INTERESTS IN THE
PERSIAN GULF, TO THE COST OF DEFENDING OIL CONSUMED FOR
TRANSPORTATION ................................................................................................ 17
15.4.1 The five steps of the estimation.......................................................... 17
15.4.1.2 The cost of defending interests other than oil
in the Persian Gulf....................................................................... 17
15.4.1.3 The cost of defending against the possibility
of a world- wide recession due to the effects of an
oil- price shock related to the use of Persian- Gulf
oil by other countries................................................................... 18
15.4.1.4 The cost of defending the investments of U. S.
oil producers in the Persian Gulf, apart from the
interests of U. S. oil consumers.................................................... 18
15.4.1.5 The cost of defending the use of oil in sectors
other than highway transportation............................................ 20
15.5 RESULTS AND DISCUSSION.................................................................................. 21
15.5.1 Results .................................................................................................. 21
vii
15.5.2 Other issues.......................................................................................... 21
15.5.2.1 The beliefs of policy makers versus the beliefs
of analysts..................................................................................... 21
15.5.2.2 Free riders on U. S. defense................................................. 22
15.5.2.3 Military spending and economic growth. ........................ 22
15.5.2.4 Security costs other than peacetime and
wartime military expenditures for the Persian Gulf................. 24
15.5.2.5 Will Congress reduce defense expenditures in
the future, given the same set of itnerests to
protect? ......................................................................................... 25
15.6 CONCLUSION ...................................................................................................... 25
15.7 REFERENCES ........................................................................................................ 27
TABLES AND FIGURES
TABLE 15- 1. SOURCES OF CRUDE OIL AND PRODUCTS SUPPLIED IN THE
UNITED STATES, 1990- 2004 ( PERCENT OF TOTAL PETROLEUM
PRODUCTS SUPPLIED)............................................................................................ 34
TABLE 15- 2. DEATHS FROM MILITARY CONFLICTS IN THE MIDDLE EAST
SINCE WORLD WAR II, THROUGH 2006 ............................................................... 35
TABLE 15- 3. OIL- PRICE SHOCKS AND RECESSIONS, 1947 - 2005............................................. 36
TABLE 15- 4. U. S. DEPARTMENT OF DEFENSE BUDGET AUTHORITY BY
APPROPRIATION ( BILLION CURRENT DOLLARS)................................................... 37
TABLE 15- 5. ORIGINAL ESTIMATES OF U. S. MILITARY EXPENDITURES IN THE
MIDDLE EAST........................................................................................................ 39
TABLE 15- 6. ESTIMATES OF U. S. MILITARY EXPENDITURES IN THE MIDDLE
EAST: SOURCE UNKNOWN OR LITERATURE REVIEW............................................ 40
TABLE 15- 7. KAUFMANN AND STEINBRUNER’S ( 1991) ESTIMATES OF BUDGET
AUTHORITY ALLOCATED TO U. S. FORCE PLANNING
CONTINGENCIES, FISCAL YEAR 1990 ( BILLIONS OF 1992 $)................................ 42
TABLE 15- 8. GAO ( 1991) ESTIMATES OF COSTS RELATED TO SOUTHWEST
ASIA INTERESTS FISCAL YEARS 1980 TO 1990 ( BILLION $).................................. 43
TABLE 15- 9. UNITED STATES FOREIGN ASSISTANCE TO THE MIDDLE EAST AND
NORTH AFRICA...................................................................................................... 44
TABLE 15- 10. THE VALUE OF THE INTERESTS OF U. S. PETROLEUM
COMPANIES IN THE MIDDLE EAST ....................................................................... 48
TABLE 15- 11. ESTIMATING THE VALUE OF PETROLEUM IMPORTS FROM THE
PERSIAN GULF ....................................................................................................... 52
TABLE 15- 12. OUR ESTIMATE OF THE MILITARY COST OF OIL USE BY MOTOR
VEHICLES ( BILLION DOLLARS PER YEAR).............................................................. 53
TABLE 15- 13. TWO ESTIMATES OF FEASIBLY REDUCED MILITARY
EXPENDITURES IN THE PERSIAN GULF ................................................................. 55
FIGURE 15- 1. MONTHLY CRUDE OIL PRICES 1990- 1991 ($/ barrel) ....................................... 56
FIGURE 15- 2. DEFENSE SPENDING AND THE VALUE OF PERSIAN- GULF OIL
IMPORTS, 1990- 2004.............................................................................................. 57
1
15. U. S. MILITARY EXPENDITURES TO PROTECT THE USE OF
PERSIAN- GULF OIL FOR MOTOR VEHICLES
15.1 UNITED STATES SECURITY AND PERSIAN- GULF OIL
In this Report, we seek to answer the question: “ If the U. S. highway
transportation sector did not use oil, how much would the U. S. Federal government
reduce its military commitment in the Persian Gulf?” The analysis goes in four parts.
First, we explain that the U. S. protects its “ oil interests” in the Persian Gulf
primarily to prevent supply disruptions and sudden price rises and the attendant
macroeconomic problems. We cite evidence ( including statements by the Joint Chiefs of
Staff) that the U. S. Congress and the military do indeed plan and budget military
operations for the Persian Gulf on account of U. S. oil interests there. We review and
rebut arguments that the U. S. has other interests in the region substantially more
important than those related to oil.
Second, we review the best available estimates of the amount that the U. S.
military spends to protect U . S. interests in the Persian Gulf. We present and rebut
arguments that these military expenditures are small.
Third, we consider whether any of the economic assistance granted to countries
of the Middle East is related to U. S. oil interests in the region. We show that most of this
assistance goes to Israel and Egypt, and probably is not motivated by a desire to protect
U. S. oil interests in nearby Arab countries.
Finally, we work from our estimate of the cost of defending all U. S. interests in
the Persian Gulf towards an estimate of the military cost of using oil in highway
transportation. This proceeds in several steps:
i) Estimate how much Congress might reduce military spending were there
no Persian Gulf.
ii) Estimate how much Congress might reduce military spending if there
were no oil in the Persian Gulf.
iii) Estimate how much Congress might reduce spending if the U. S. did not
produce or consume oil from the Persian Gulf, but other countries still
did.
iv) Estimate how much spending might be reduced if U. S. producers had
investments in the Gulf, but the U. S. did not consume Persian- Gulf oil.
v) Lastly, estimate how much spending might be reduced if motor vehicles
in the U. S. did not use oil, but other sectors still did and the U. S. ( and
other countries) still produced and consumed oil from the Gulf.
This last is the bottom line of our analysis. Our analysis of these steps generally is
illustrative, not rigorously quantitative. In the end, we estimate that if U. S. motor
vehicles did not use petroleum, the U. S. would ( or could) reduce its peacetime and
wartime defense expenditures by roughly $ 3 to $ 33 billion per year.
2
15.1.1 Why does the U. S. want to “ protect” U. S. oil interests in the Persian gulf?
Oil is the major source of energy for every industrialized economy in the world.
As a result, the price and quantity of oil in the world market directly affect economic
output in the industrialized world. And apart from the actual price level, the rate of
change of the price and output of oil also affect economic output. If the world oil market
were free and competitive, and if property rights were well- defined and adequately
enforced by property owners, then output and prices generally would be stable, and the
risks of sudden changes in output and prices would be low. If these risks were low,
then arguably there would be no need for international military protection of oil
supplies and markets.
Unfortunately, the world oil market is not always stable and competitive. Most
of the world’s oil is in the Persian Gulf. OPEC, the Organization of Petroleum Exporting
Countries1, has about 70% of the world's proven oil reserves2, and the countries of the
Persian Gulf3 alone have 56% ( EIA, 2006b). Even though the counties of OPEC and the
Persian Gulf produce only a small fraction of their reserves4, and even though the
United States imports only a small fraction of its oil from the Persian Gulf ( see Table 15-
1), the countries of the Persian Gulf can have a considerable influence on the world
price of oil and thus on the economic welfare of the United States and other heavy users
of oil. This influence can be direct and intentional, as when OPEC countries set prices
and abide by output quotas, or unintentional, as the result of a conflict that disrupts
production or flow and thereby increases prices5.
The more expansive conflicts in the Persian Gulf inevitably threaten oil supplies.
For example, during the Iran- Iraq War ( 1980- 1988), the combatants attacked oil tankers
and other commercial vessels from neutral nations, and as a result, Kuwaiti tankers
were reflagged and escorted through the Gulf by the U. S. Military. The Iraqi invasion of
Kuwait and the subsequent Gulf War in 1991 caused a brief panic in oil markets:
immediately following the invasion, the world price of a barrel of oil more than
doubled, from $ 16.19 in July 1990 to $ 30.03 in October 1990 ( Figure 15- 1).
1 The Organization of Petroleum Exporting Countries ( OPEC) was created in 1960 to set world oil prices
by controlling production. The current ( 2006) members of OPEC are: Algeria, Indonesia, Iran, Iraq,
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela
( www. opec. org/ aboutus/).
2 The EIA ( 2006b) projects that through 2025 additions to reserves and undiscovered resources will be
greater in non- OPEC than in OPEC countries, with the result that in 2025 OPEC will have only 57% of the
world’s oil resources, and the Middle East only 43%.
3 Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates.
4While OPEC has 70% of the world’s proven oil reserves it typically has produced only about 40% of the
world’s total output, and while the Persian Gulf has 56% of the world’s proven reserves it typically has
produced only 25% to 30% of the world’s total output ( www. eia. doe. gov/ emeu/ ipsr/ supply. html).
5Since World War II, over 90 military conflicts in the Middle East have claimed about 2.4 million lives
( see Table 15- 2). Most of these regional conflicts have been territorial disputes, religious cleavages, ethnic
dissension, or ideological contests ( Martin, 1987, p. 10). They have ranged in scale from small border
clashes, such as those between Saudi Arabia and the Yemens, to large- scale, high- technology conflicts,
such as the Iran- Iraq War, the 1991 Gulf War, and the 2003 Iraq War, which combined resulted in well
over half a million casualties.
3
Many economists believe that these price shocks hurt Western economies ( Jones
et al., 2004; Hamilton and Herrara, 2004) 6. As McNaugher ( 1985) notes, western
economies have “ structural rigidities...[ which can] hamper rapid adaptation to sharp
changes in factor prices” ( p. 8) and thereby [ perhaps] give rise to inflation, recession
and unemployment in the aftermath. Since 1947 there has been a strong correlation
between oil price shocks and recessions: ten of the eleven recessions between 1947 and
2001 were preceded by oil shocks, and ten of the eleven oil shocks were followed by a
recession ( Table 3). Recent research suggests that the price shocks cause the recessions:
Jones et al. ( 2004) review literature from 1996 to 2004 on the macroeconomic effects of
oil price shocks, and conclude that recessions that followed oil- price shocks were
attributable mainly to oil- price shocks, and could not have been prevented by
alternative monetary policies. Even the mere threat of a disruption in the supply of oil
can wreak havoc with oil prices and world economies
The United States cannot [ easily] prevent OPEC from agreeing to set prices or
restrict output, but it does believe that it can help prevent disruptions in production and
flow due to wars in the region. Indeed, as we show next, the main objective of the U. S.
military as concerns the Persian Gulf is to ensure that the oil flows freely7.
15.1.2 United States military objectives and plans for the Persian Gulf
15.1.2.1From 1973 to 1989: Protecting oil is a primary objective
In the 1970’ s and 1980’ s, the United States’ had three key objectives in the Persian
Gulf: to contain Soviet influence, to keep the region stable, and to guarantee
uninterrupted access to the largest proven oil reserves in the world. For example, in
FYs1988 and 1989, the Joint Chiefs of Staff stated:
The security of the Middle East and Southwest Asia is critical to the economic health of
the free world and, consequently, to the security of the United States. Regional stability,
Free World access to oil resources, and the limitation of Soviet influence remain
important U. S. objectives. ( Joint Chiefs of Staff, FY1988, p. 16; Joint Chiefs of Staff,
FY1989, p. 21).
6 The past twenty- five years has seen the emergence of a very large literature on the macroeconomic
impacts of oil price shocks. Makinen ( 1991), provides a clear discussion of the issues in lay terms. Mork
( 1981), Bohi and Montgomery ( 1982), Plummer ( 1982), the Energy Modeling Forum ( Hickman et al.,
1987), Tsai ( 1989), Walls and Jones ( 1990) and Bohi ( 1991) give more rigorous analyses. Jones et al. ( 2004)
provide an excellent summary of recent research.
Of course, not all economists agree that price shocks have serious macroeconomic effects. For
example, Bohi ( 1991) states that this conclusion is “ far from unanimous in the economics literature” and
that “ there is no evidence to support either the wage rigidity hypothesis or the capital obsolescence
hypothesis as an explanation of the effect of energy price shocks on macroeconomic behavior” ( p. 145).
Bohi proposes instead that monetary policy explains macroeconomic performance following price shocks.
Toman ( 1991) takes a similar position. However, the recent analysis by Hamilton and Herrera ( 2004) and
the review by Jones et al. ( 2004) conclude that monetary policy probably cannot significantly ameliorate
the effects of oil shocks.
7The Strategic Petroleum Reserve ( SPR) also is meant to ameliorate a shortfall in oil supply. We estimate
the cost of the SPR separately, in Report # 7 of this social- cost series ( see the list at the beginning of this
document). For a discussion of filling and dispensing oil from the SPR, see the U. S. Government
Accountability Office ( 2006).
4
But even when the Soviet Union was a threat, it still was more important to
protect the oil than to contain the Soviets ( to the extent, even, that concern about Soviet
expansion or regional stability could be separated from concern about the oil). The Joint
Chiefs of Staff said so explicitly in every issue of the United States Military Posture
Statement from FY1979 to FY19898. For example, in FY1982, the Joint Chiefs of Staff
stated that:
“ Of these interests [ oil security, regional stability and Soviet containment], continued
access to oil on reasonable political and economic terms is the most important to US and
allied security” ( Joint Chiefs of Staff, FY1982, p. 12).
In 1983, they stated that:
“ U. S. interests in the Middle East and Southwest Asia focus largely, but not exclusively,
on the region’s oil reserves” ( Joint Chiefs of Staff, FY1983, p. 6).
Even U. S. efforts to resolve Arab- Israeli conflicts have been related to U. S. oil
interests. Again, according to the Joint Chiefs of Staff:
The United States is determined to preclude disruption or hostile control of the vital
resources and to limit the spread of Soviet influence in the area. Other U. S. interests,
important in their own right but bearing heavily on the security of energy resources,
include peaceful resolution of the Arab- Israeli conflict and increased stability throughout
the region ( Joint Chiefs of Staff, FY1983, p. 6).
According to Kaufmann and Steinbruner ( 1991), the United States began
contingency planning for the Middle East in 1974 – right after the 1973 oil embargo,
which generated fears of an OPEC attempt to strangle the West by restricting oil
supplies. Contingency planning became a more important part of U. S. military planning
after 1980 ( Kaufmann, 1992), as a result of the Iranian revolution and the Soviet
invasion of Afghanistan, which confirmed the instability of the region. Those events
eventually led to the Carter Doctrine which states:
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 ( Carter, 1980, p.
197).
Also in 1980, the United States established the Rapid Deployment Joint Task
Force ( RDJTF), which in 1983 became the U. S. Central Command ( CENTCOM).
CENTCOM has a permanent staff of about 1,000. Its primary responsibility is to protect
U. S. interests in Southwest Asia, including the Persian Gulf ( Joint Chiefs of Staff, 1992,
p. 4- 3). Approximately one- fourth of the U. S. active Army and Marines Divisions,
Aircraft Carriers and Fighter Wings have a first- priority commitment to CENTCOM
( Sabonis- Chafee, 1987).
15.1.2.2 From 1990 on: Protecting oil is the “ overall” objective
The end of the Cold War essentially eliminated any Soviet threats to U. S.
interests, including those in the Middle East, and made the U. S. reformulate its military
8 FY1989 is the last year for which this document is available.
5
strategy to focus on regional, rather than global conflicts. According to the Joint Chiefs
of Staff, “ In the past, force requirements were generated by focusing attention on global
conflict... Today, the probability of such a conflict is greatly reduced. Thus, our focus
has shifted to regional hot spots where the probability of occurrence may now be
greater than in the past” ( Joint Chiefs of Staff, 1992, p. 2- 9) 9.
Now that there no longer is a Soviet threat to contain, protecting free- world
access to oil clearly is the paramount if not virtually sole concern of the U. S. military in
the Persian Gulf. In March, 1992, the New York Times published a story regarding the
February 18, 1992, draft of a classified Pentagon document titled “ Defense Planning
Guidance for the Fiscal Years 1994- 1999” ( U. S. Department of Defense, 1992; in Tyler,
1992). The document states the U. S. military objective in the Persian Gulf
unequivocally:
In the Middle East and Southwest Asia, our overall objective is to remain the
predominant outside power in the region and preserve U. S. and Western access to the
region’s oil ( U. S. Department of Defense, 1992; cited in Tyler, 1992).
Three years later, the Assistant Secretary for Defense for Economic Security
reiterated the DoD’s position to a Senate hearing on U. S. dependence on foreign oil:
“… protecting against military threats to global oil supplies is an important factor for
which we must be prepared” ( cited in Koplow and Martin, 1998, . 4- 2).
Finally, Fuller and Lesser ( 1997), in a discussion of U. S. policy towards the
Persian Gulf, state that “ Gulf policy is founded on the principal that acess to the
region’s oil is critical to Western – indeed global – prosperity” ( p. 42).
15.1.2.3 Counter arguments and summary
We have made the case that the U. S. spends money on defense of the Persian
Gulf mainly because of the oil there. However, not everyone would agree with this. In
an analysis of the external costs of oil use in transportation, the Congressional Research
Service ( CRS) ( 1992) argues that concern about oil has been but one of many reasons
that the U. S. military has cared about the Persian Gulf. The CRS ( 1992) even implies that
oil security is a minor concern. In this section we review and rebut the CRS’ arguments.
First, the CRS ( 1992) claims that throughout the Cold War, the U. S. military was
concerned more with the Soviet threat ( per se) in the Persian Gulf than with U. S. oil
interests. But the CRS does not offer any evidence in support of this claim, which is
directly refuted by statements in the Military Posture documents that we have cited.
Next, the CRS ( 1992) claims that the U. S. military also is concerned with the
security of Israel. But we see no evidence of a serious military concern for Israel per se,
9In 1993, the Joint Chiefs of Staff used a “ scenario- based analysis” in order to evaluate the ability of the
U. S. military to respond to potential crises. One of the scenarios depicted is a crisis in Southwest Asia in
1999. This contingency scenario depicts a situation in which “ an aggressor again threatens U. S. interests
in Southwest Asia, attempting to improve access to ports in the Persian Gulf, increase it oil reserves, and
further its ambitions of regional hegemony” ( Joint Chiefs of Staff, 1992, p. 9- 8). The Joint Chiefs
emphasize that this scenario is neither a prediction of future events nor a description of a military
strategy. However, they note that this scenario was chosen for three reasons: ( 1) it is plausible, ( 2) it is
demanding in the sense that it will challenge the capabilities of the U. S. military, and ( 3) it encompasses
U. S. alliance commitments and vital interests, ( Joint Chiefs of Staff, 1992, p. 9- 2). They also remind us that
“ although the likelihood of another Gulf War is low at the present time, the violent history of the
Southwest Asia region warns us that lasting peace is even less likely” ( Joint Chiefs of Staff, 1992, p. 12- 2).
6
independent of concern about energy security. In the first place, the Military Posture
statements cited above make it clear that the JCS cares about Israel only in the context of
the Arab- Israeli conflict. On account of its oil interests in the Gulf, the U. S. does want
the region to be stable, and to forestall and resolve Arab- Israeli conflicts. As cited above,
the Joint Chiefs of Staff are clear on this. Thus, the U. S. military cares not about Israel
per se, but about regional stability -- because of the oil. And in any event, Israel has
demonstrated that it can take care of itself. We believe that, if the Middle East had
neither oil nor strategic importance, the U. S. would not maintain a significant military
presence in the region solely to help protect Israel. Fuller and Lesser ( 1997) agree,
stating that “ at this point, Israel’s security, however important, does not represent an
extra dimension of U. S. Gulf Policy” ( P. 45).
Third, the CRS suggests that another “ major” interest is the protection of U. S.
citizens. But we are hard pressed to conceive of this as a “ major” interest. In 1992, there
probably were on the order of 20 thousand tourists in the Middle East, including Israel
and Egypt, and fewer than 10 thousand in the oil- rich countries of Saudi Arabia, Iran,
Iraq, Kuwait, and the United Arab Emirates -- out of a total of nearly 7 million U. S.
tourists abroad ( Bureau of the Census, 1992). About 50,000 U. S. citizens were residents
( as opposed to tourists) in the oil- rich countries of the Middle East, but it is likely that
most of them worked for oil companies or related ventures, the U. S. Government, or the
U. S. military. There is little doubt that, were there no oil in the Middle East, there would
be very few U. S. citizens there, and the U. S. would not spend billions of dollars to
protect the few that were there.
Fourth, and in its view most definitively, the CRS ( 1992) claims that the failure of
the U. S. to go to war after the 1973- 74 and 1979 supply disruptions suggests that the
U. S. military really wasn’t concerned with protecting oil supplies until perhaps the Gulf
War. This claim is weak. There is no parallel between the 1973- 74 and 1979 crises and
the situation that led to the 1991 Gulf War, which the CRS does agree was motivated at
least in part by a desire to protect oil interests. The 1973- 74 disruption was the
culmination of a politically motivated series of price increases and a trade embargo
against the U. S. and the Netherlands, which were an Arab retaliation for the U. S.’
support of Israel in the 1973 Arab- Israeli “ Yom Kippur” war . It would have been
outrageous for the U. S. to have attacked the Arab embargoers just because they had
decided that they did not wish to sell oil to the U. S. In fact, it would have been just as
outrageous to have attacked Iraq in 1991 if Iraq had done nothing other than refuse to
sell oil to the U. S. Conversely, the U. S. surely would have attacked Iraq or any other
Gulf state, at any time during the 1980s, had the country done what Iraq actually did in
1990, and had the Soviet Union been out of the equation.
The 1979- 1980 “ disruption” was the result of another major price rise and of the
shutting down of Iranian production due to the Iranian revolution, and it would have
been almost as unreasonable ( and foolish, given the attitude of the Soviet Union at the
time) to have intervened in the internal affairs of Iran as it would have been earlier to
have attacked Arab nations on account of their political stance. In short, it hardly is
reasonable to proffer lack of outrageous and provocative military behavior as evidence
of lack of military interest. Consequently, the CRS’ ( 1992) speculation about military
impassiveness in the face of earlier oil “ disruptions” does not stand against the
unequivocal and steadfast mission statements by the U. S. military cited in this report.
The CRS also implies that the Reagan administration’s refusal to institute
emergency price and supply controls in the aftermath of a severe price shock is
evidence that the military was not charged with protecting oil supplies in the Persian
7
Gulf. We fail to see the connection between pricing policy and military policy.
Somewhat more to the point, the CRS states that the Reagan administration refused to
“ acknowledge” that it had any plan to use military force to prevent a price shock. This
fact, though, has no import. In the first place, the Reagan administration might well
have had such a plan, but have kept it secret. In any event, reluctance to start a war to
keep oil cheap in no way implied that in the Persian Gulf the U. S. military was not
primarily concerned with oil. Most likely, what the administration was
“ acknowledging” was the outrageousness of going to war over any price shock that was
like the two previous ones. Had something like the Iraqi invasion of Kuwait happened,
the Reagan administration most likely would have responded the way that the Bush
administration did.
Summary. It is clear to us that the U. S. military cares ( and always has cared)
about the Middle East mainly because of the oil there. The United States believes that oil
in the Persian Gulf is vital and often at risk, and hence demanding of a considerable
commitment of U. S. military manpower, hardware, and planning. In the next section,
we estimate the magnitude of this commitment.
15.2. ESTIMATES OF PEACETIME AND WAR- TIME MILITARY EXPENDITURES
IN THE PERSIAN GULF
15.2.1 Introduction
The U. S. spends a considerable amount of money protecting what it feels are its
interests in the Persian Gulf. The exact amount is difficult to estimate, because the
Defense budget is itemized not by region or mission, but rather, as shown in Table 15- 4,
by general function or cost area, such as operations and maintenance. Many of the
functional areas cover more than one region or program, and hence one faces the
difficult task of understanding how Congress – which ultimately authorizes defense
spending – views military costs by region.
Before we consider the actual estimates, it is important to understand that there
is only one coherent way to put our question. Namely: “ If the U. S. did not have any
military objectives related to the Persian Gulf, how much might Congress reduce
defense spending?” This phrasing properly identifies the decision- making authority
( Congress) and the practical question that the decision- maker faces ( reducing spending
if a regional problem is eliminated). Importantly, our phrasing makes it clear that the
problem is not the same as the pricing problem of allocating joint production costs,
because Congress would not be trying to price defense output, but rather would be
trying to understand how long- run defense costs actually are related to the magnitude
of a regional threat. Any defense costs that simply are not related in any way to the
magnitude of a regional threat would not be considered for cutting. Hence, our
problem is not how to allocate joint costs, but to figure out exactly how long- run costs
do vary with magnitude of a regional threat.
Of course, different analysts have handled this problem differently ( some within
the improper context of a “ joint- allocation” problem), and as a result estimates of the
peacetime costs of maintaining a military presence in the Middle East range widely,
from as little as $ 0.5 billion to over $ 100 billion per year ( see Tables 15- 5 and 15- 6).
Additional wartime costs, which we estimate separately) may be a substantial fraction
of this.
8
15.2.2 Literature review
Ravenal ( 1991) and Kaufmann and Steinbruner ( 1991) have written book- length
analyses of the U. S military budget, including estimates of the portion attributable to
U. S. interests in the Persian Gulf. Ravenal’s ( 1991) estimate that the U. S. spends $ 50
billion per year to defend the Persian Gulf, and Kaufmann and Steinbruner’s ( 1991)
estimate that the U. S. spends $ 64 billion per year, have been widely cited. Both groups
use what might be called a “ total- cost” approach, in which “ fixed” costs ( i. e., costs that
supposedly don’t vary with the magnitude of regional threats), such as for the
Department of Defense’s ( DoD) overhead, and forces with multiple missions, are
allocated to all of the affected programs and thereby counted as economic costs of the
mission or program.
By contrast, the DoD’s own assessment of what it spends to defend the Persian
Gulf counts only those forces or programs that would be eliminated immediately and
entirely if the U. S. had no interests in the Persian Gulf; it excludes all expenditures for
DoD- wide overhead and for forces and programs that are “ assigned” only partly to the
Persian Gulf ( reported in the U. S. Government Accounting Office [ GAO], 1991).
These and other estimates are reviewed in this section.
Ravenal ( 1991). Ravenal begins by dividing the Defense budget for FY1992 into
two components: strategic nuclear forces and general purpose forces. He estimates that
the budget can be allocated as follows ( Ravenal, 1991, p. 44):
Strategic Nuclear Forces $ 63 Billion
General Purpose Forces $ 215 Billion
Total defense budget $ 278 Billion.
To allocate the cost of general- purpose forces to the various regions of the world,
Ravenal uses the percentage of active land divisions ( Army and Marine) attributable to
each region. He includes “ not just the divisions actually deployed there, but those
procured and maintained primarily for contingencies in the region” ( Ravenal, 1991, p.
50).
The Pentagon usually divides the world into three regions: NATO/ Europe, Asia
( i. e., East Asia and Western Pacific), and “ Other Regions and the Strategic Reserve,”
which encompass Southwest ( SW) Asia. Ravenal bases his distribution of the active
land forces among the various regions through an analysis of “ all rationales and
descriptions in the report of the Secretary of Defense and other sources” ( Ravenal, 1984,
p. 20). He estimates that, at the end of FY1992, the U. S. peacetime forces primarily
attributable to “ Other Regions and Strategic Reserve,” accounted for 6 2
3 of the 17
peacetime active land divisions, 4 of which could be ascribed to the Persian Gulf. Thus,
Ravenal estimates that
4
1 7 ( 23.5 percent), or $ 50 billion, of the $ 215 billion he attributes
to general purpose forces was due to U. S. interests in the Persian Gulf in FY1992.10
Ravenal also estimates the “ admittedly amorphous costs of possible wars of
various types” ( Ravenal, 1991, p. 46): an expected cost of $ 5.3 billion per year due to
conventional wars, and $ 5 billion per year due to a nuclear war. See section 15.2.3 for
more details.
10 Since this figure is based on the peacetime force structure at the end of FY1992, it does include changes
due to the diminished threat of a Soviet invasion. By that time, U. S. military strategy began to focus on
fighting multiple simultaneous regional conflicts, rather than large- scale global confrontations.
9
Note that Cato Institute, where Ravenal is a distinguished senior fellow in
foreign policy studies, periodically includes in its Cato Handbook on Policy and Cato
Handbook for Congress estimates of the military cost of defending the Persian Gulf. ( The
estimates presumably are by Ravenal.) For example, the 6th edition of the Cato Handbook
on Policy, published in 2005, says that “ the deployment of the U. S. military to safeguard
oil supplies from Saudi Arabia and the rest of the Persian Gulf – particularly since the
first Gulf War – costs the United States between $ 30 billion and $ 60 billion a year” ( Cato
Institute, 2005, p. 562). The 1997 Cato Handbook for Congress has an estimate that the cost
of defending the Persian Gulf was $ 82 billion in fiscal year 1997 ( Cato Institute, 1997,
Table 7- 3).
Kaufmann and Steinbruner ( 1991). Kaufmann and Steinbruner estimate that the
U. S. spent $ 64.5 billion ( 1992 dollars) in FY199011 for the non- nuclear defense of the
Middle East. Their estimate is based on a logic similar to that used by Ravenal – they
allocate the budget authority to “ force planning contingencies” in different regions of
the world. These contingencies are scenarios developed by the Pentagon indicating
where U. S. forces may be needed and are used to publicly justify the Defense budget.
Their breakdown of the FY1990 Defense budget is shown in Table 15- 7.
The Soviet invasion of Afghanistan, combined with the presence of a significant
amount of Soviet troops on the Iranian border, represented the primary threats to Gulf
stability in FY1990, according to Kaufmann. Repelling a Soviet attack would require at
least six divisions and nine fighter wings. In order to maintain such a presence, it
would be necessary to preposition three carrier battle groups and one Marine
amphibious force in the Indian Ocean.
Obviously, the military balance has shifted dramatically since FY1990. However,
Kaufmann and Steinbruner ( 1991) note that the collapse of the Soviet Union did not
have a significant effect on the cost of defending the Gulf the following year: “ although
the threat [ to the Gulf] shifted from the USSR to Iran by the time of the fiscal 1991
budget, the forces included in the Persian Gulf contingency package remained the same
as before...” ( p. 14).
General Accounting Office ( GAO) ( 1991). The GAO asked the DoD to estimate
its expenditures related to U. S. interests in SW Asia. In the information it provided to
the GAO, the DoD distinguished four kinds of military expenditures: i) for programs
“ dedicated” to SW Asia; ii) for programs “ oriented” to SW Asia; iii) for general
contingencies and mobility related to SW Asia; and iv) for Operation Earnest Will
( Table 15- 8). The DoD estimated that the United States spent a total of $ 21.4 billion on
military programs “ dedicated” to Southwest Asia between FY1980 and FY1990. This
money funded construction, pre- positioning, operation of CENTCOM, and military
exercises intended mainly for the defense of SW Asia. However, DoD said that two of
these programs ( including the most costly of the group) were not really dedicated to SW
Asia, and would have been funded even if the U. S. had no interests in SW Asia. In fact,
according to the DoD, only $ 4.5 billion worth of “ dedicated” programs -- less than $ 0.5
billion per year -- would not have been funded ( Table 15- 8).
The DoD estimated that the U. S. spent $ 5.8 billion on Southwest Asia- “ oriented”
( as opposed to Southwest Asia- “ dedicated”) programs. These were defined as those
11 The budget authority for fiscal year 1990 was completed prior to the demise of the Soviet Union and
Iraqi invasion of Kuwait. Kaufmann and Steinbruner ( 1991) note that “ the defense budget for that year is
the last in what may be thought of as the long cold war series.” ( p. 6).
10
programs which were motivated by the defense of U. S. interests in Southwest Asia and
in other regions. But even though these programs were partly geared toward SW Asia,
the DoD claimed that all of these programs would have been funded fully, in order to
protect interests outside of SW Asia, regardless of what happened to U. S. interests in
the Gulf.
The DoD also estimated that the United States spent $ 272.6 billion on “ other
contingencies and mobility programs” over the 10- year period ( Table 15- 8). These
programs allowed the U. S. to defend its interests in many regions, including but not
primarily Southwest Asia. The cost of maintaining the forces available to CENTCOM
accounted for $ 220.3 billion of this. The DoD believed that this entire amount would
have been budgeted regardless of U. S. interests in the Middle East.
The DoD/ GAO grand total, including the amount spent to reflag Kuwaiti
tankers during the Iran- Iraq war (“ Operation Earnest Will”), is only $ 4.7 billion over 10
years. This is out of about $ 300 billion worth of programs that nominally were
“ dedicated” or “ oriented” or generally in some way related to SW Asia ( Table 15- 8).
This striking difference is due to the DoD’s claim that virtually all of these programs
would have been funded fully regardless of U. S. interests in SW Asia -- a claim which
we will address momentarily. The GAO also estimated that the U. S. provided $ 66.2
billion in military, economic, and multilateral assistance to countries in SW Asia. We
discuss economic assistance below.
Copulos ( 2003). Copulos estimates the “ hidden costs” of imported oil, which in
his analysis include the cost of defending Persian Gulf oil, the economic impacts of
import dependence, and impacts on the environment and human health. To estimate
the cost of defending Persian Gulf oil, Copulos first distinguishes between “ ongoing
expenditures,” which “ represent outlays for permanent military capabilities that are
maintained to assure the ability to defend Middle East oil supplies” ( p. 27), and “ one-time
expenditures,” such as costs related to the Persian Gulf war. ( Copulos’ “ ongoing
expenditures” is similar to our “ peacetime expenditures”, and his “ one– time
expenditures” is similar to our “ wartime expenditures.”) The one- time costs for pre-positioning
equipment are 9.5$ billion over 10 years, or an average of $ 0.95 billion per
year. The ongoing expenditures are equal to a portion of the outlays for CENTCOM,
plus some relatively minor costs ( such as for Southwest Asia contingencies) that total
$ 1.6 billion per year. Copulos estimates that outlays for Personnel and Operation and
Maintenance for CENTCOM are about $ 86 billion per year. ( Personnel and Operations
and Maintenance are appropriations category in the defense budget; see Table 15- 4.)
Copulos offers an alternative way of estimating the CENTCOM cost that results in an
estimate of about $ 71 billion per year. Later, he states that “ slightly more than 70% of
recent CENTCOM operations have been directed at the Middle East” ( p. 31). The
resulting total on going expenditure, $ 52 to $ 62 billion per year, is shown in Table 15- 5.
Copulos ( 2003) provides a great deal of discussion to support his contention that
the main focus of CENTCOM’s ongoing operations of wars in the Middle East is the
protection of Persian- Gulf oil.
Moreland ( 1985). “ Moreland applies a modified form of the CIA methodology
used for estimating military spending in the Soviet Union. He divides the total budget
of each force by the total active- duty personnel, to come up with a cost per active- duty
soldier, ascribing each soldier to only one ( his primary) mission. Moreland’s analysis
arrives at $ 54 billion per year for the Persian Gulf, or 23% of the conventional forces
budget” ( cited Sabonis- Chafee, 1987, p. 2).
11
Other estimates. Table 15- 6 shows estimates that either are based on a literature
rather than an original analysis or else are not full documented. For example, in an
interview published in Newsweek, Former Secretary of the Navy John Lehman estimates
that the U. S. spends approximately $ 40 billion annually maintaining a military presence
in the Middle East. However, he does not provide any information explaining how this
estimate was developed. ( Newsweek, 1987). Most recently, Plesch et al. ( 2005) claim that
25% of the U. S. military and intelligence budget “ is focused on securing Middle East oil
supplies” ( p. 8), but they do not explain the basis of the 25%.
15.2.2.1 Effect of the collapse of the Soviet Union
Many of the estimates shown in Tables 15- 5 and 15- 6 were done before the
dramatic recent changes in the balance of power globally and in the Gulf. The threat of
a Soviet invasion has vanished, the Iran- Iraq war is over, and Iraq was defeated in the
1991 Gulf war. However, as we argued above, the U. S.’ primary interest in the region
always has been oil, and nothing that has happened in the past few years has made the
oil resource in the Middle East more secure. The risk of a supply disruption and price
shock, and hence the perceived need for military protection, has not diminished. Given
the huge oil reserves and the history of instability in the region, this perceived need will
not diminish for the foreseeable future. If the primary military objective in the region
has not changed, then the estimates cited here -- even those made during or before the
recent shifts in global and regional power -- are reasonable approximations of recent
military expenditures on the Persian Gulf.
15.2.2.2 What would the U. S. Congress do?
As mentioned above, the DoD’s estimate ( GAO, 1991) excludes all of the cost of
any force or program or function -- including DoD- wide “ overhead” -- that supposedly
serves more than just the Persian- Gulf interest. We shall refer to these excluded costs as
multi- purpose costs. In contrast, most other researchers allocate these multi- purpose
costs, including “ fixed” overhead costs, across all of the affected regions. We believe
that neither approach is quite correct conceptually, although as a practical matter the
approach of allocating all costs gives approximately the right answer.
It is helpful to pose the right question, namely: if the U. S. suddenly had no
interests in the Persian Gulf, how much would Congress and the President reduce the
defense budget, year after year, over the long haul? There are three important aspects to
this phrasing of the question. First, it properly acknowledges the role of Congress and
the President in determining expenditures: the President proposes a budget plan, and
Congress ultimately approves a budget and authorizes spending. Since they are the
relevant decision makers, they are the ones whose decisions we should be trying to
understand.
Second, our phrasing recognizes that the President and Congress may adjust the
defense budget over a number of years, rather than all at once in the year of the change
in the threat. It is a mistake to ignore “ long- run” effects. If the DoD, for example, has
ignored some costs only because they would not have been foregone immediately, then
the DoD has made an error.
Third, and most importantly, our phrasing directly implies that the key task for
Congress and the President is to determine just how the deployment of military
resources is related to the kind and magnitude of various regional threats. That is, ours
is not the pricing problem that a producer faces when he has joint products produced in
fixed proportions from a single process, because Congress would not be trying to price
12
military output. Rather, Congress’ situation is that of a producer who is trying to figure
out how a permanent drop in demand for one of the many products that comes out of
his factory would affect his long- run production costs, assuming that output of the
other products remains the same. To do this, the factory owner must understand how
long- run production costs vary with the output of the product in question, holding all
other output constant. Analogously, Congress’ job is to figure out exactly what
resources go to the production of “ protection of the Persian Gulf,” holding other
protective services constant, and thusly to determine how much resources can be saved
when the service is no longer required.
To recap, Congress’ task is neither to allocate truly fixed costs nor to consider
only short- run, directly variable costs, but rather to figure out how changes in threats
affect the use of military resources, in any way, over the long run. This task is
straightforward as regards those costs that are obviously, immediately, specifically and
directly related to a particular threat. The challenge is to figure out how costs that
nominally pertain to more than one region or function are related to changes in a
regional threat. We discuss this challenge next.
To begin, we distinguish two kinds of multi- purpose costs: the cost of non-combat
DoD- wide overhead, and the cost of combat military programs or missions that
serve more than one region. This distinction is pertinent to an analysis of the defense
budget because a nontrivial fraction of the budget comprises overhead, administration,
non- combat units, defense agencies, and other DoD- wide activities that are not attached
to any one mission or program or region ( Table 15- 4).
Let us consider first military programs that nominally protect more than one
regional interest. As noted above, the DoD argues that all of such programs would be
fully funded regardless of U. S. interests in the Persian Gulf. However, this would be
true only if: a) all multi- regional programs were sized to deal with the “ biggest”
regional threat, and the Persian Gulf was not the biggest regional threat; b) forces and
programs were developed to respond to only one regional problem at a time; and c) no
programs had any components specifically for the Persian- Gulf mission.
For the DoD estimates to be correct, all of these conditions must hold. We doubt
that they do, at least to the extent that the DoD avers. Indeed, it is much more likely that
the opposite is true: that the procurement and deployment of military resources ( in the
eyes of military planners as well as the eyes of Congress) depends directly on the nature
and extent of each and every perceived threat to U. S. interests. In fact, we think that the
DoD estimates are disingenuous, and that the GAO ( 1991) is too credulous. If it really
were true that eliminating the Persian- Gulf missions would not save anything, then it
would follow that the DoD would not have to ask for any additional money if a new
Persian- Gulf- like interest were to materialize. In response to Congressional inquiry into
the cost of defending such an important and extensive new regional interest, honest
DoD officials would reply: “ We do not need any additional money to defend this
important new interest, because we merely will add the region to the list of areas
covered by existing forces”. More likely, of course, the DoD would insist that
substantial additional resources would have to be devoted to defending the new
interest.
Next, we consider “ overhead” costs. Because these costs are not assigned to any
one mission or program or region, it is not immediately obvious how Congress and the
President would budget for them if the U. S. no longer was interested in the Persian
Gulf. What is clear, though, is that in the long run there are few if any truly fixed costs.
The number of planners, administrators, policy analysts, managers, and office workers,
13
and the amount of resources devoted to them ( including buildings and bases) is related
to the amount of combat personnel and equipment being planned, administered, and
managed. Indeed, it is not clear if there are any truly fixed costs – those that are the
same regardless of the size of defense forces or the magnitude of a threat – except
perhaps those related to upper- level administration ( e. g., the salaries of senior staff in
the Department of Defense). But these sorts of administrative costs clearly are a small
fraction of total defense costs. We thus believe that Parry and Darmstadter ( 2003) 12, the
GAO, the DoD13, and others who argue that virtually all military costs are fixed are
wrong. Ravenal ( 1991) summarizes our critique of the DoD position well:
“ When attempting to justify its entire defense budget request, or when demonstrating to
our allies that we are paying a disproportionate share of the costs of an alliance, the
Pentagon prefers to state its costs fully. But when defending against proposed cuts, it
claims that deleting this or that unit or program from the force structure or the budget
would save only the tip of its marginal costs” ( p. 19).
We believe, then, that Congress might in fact reduce outlays for general
overhead and support if the U. S. no longer had an interest in the Persian Gulf, and that
it would do so relatively quickly. The Federal budget is so tight, and the potential
“ peace dividend” so large, that it is not unreasonable to believe that Congress would
take the opportunity to reduce DoD overhead. Accordingly, we believe that the
estimates of Ravenal ( 1991) and Kaufmann and Steinbruner ( 1991) are more accurate
than the DoD’s ( GAO, 1991), although we do accept that a very small fraction of DoD
“ overhead” costs would not be affected significantly if the Persian- Gulf mission were
eliminated. We believe that in the long run, nearly all defense costs are variable, and
that Congress would recognize this. In the long- run, the Congress, the President, and
the DoD can close bases, reduce personnel levels, scale back operations, and buy and
deploy less material, equipment, and major weapons systems. This sort of restructuring
happens all the time in the military, and hence it is not unreasonable to expect that there
would be major cost savings across the board were a major military objective, such as
protecting the Persian Gulf, eliminated.
15.2.2.3 Our estimate of the cost.
Therefore, on the basis of the work of Ravenal ( 1991) and Kaufmann and
Steinbruner ( 1991), but without doing a formal analysis, we judge that in 1991, the
United States could have saved at least $ 30 per year, and perhaps as much as $ 60 billion
per year, if it had had no interests in the Persian Gulf. Note that these figures do not
12 Parry and Darmstadter ( 2003) write: “.. military spending is more of a fixed cost than a variable cost. A
policy to moderately reduce imports over time.. would probably have little benefit in terms of cutting
costs of U. S. military involvement in the region” ( p. 20).
13 Ravenal ( 1991) notes that “ Pentagon budgeteers will complain that it makes no sense to allocate certain
categories of support and overhead, such as, in the extreme case, retirement pay, to combat functions” ( p.
18). Presumably, this complaint follows from the thought that how much the military pays in retirement
benefits today has nothing at all to do with current missions or expenditures. This is true, but irrelevant:
the retirement- pay cost associated with current missions is the future retirement pay of those serving
today, not the current pay of those who have already served. Total retirement pay is a function of total
man- years of service; thus, if you eliminate a military mission and thereby reduce expected man- years of
service, you will reduce future retirement payments. These foregone future payments should be
discounted to present dollars, but they should not be ignored.
14
include the expected cost of occasional conventional or ( improbably, we hope) nuclear
wars. ( In the next section we provide a rough estimate of the additional expected cost of
occasional “ conventional” wars.)
Some data and analyses suggest that the cost is higher today than it was in 1991.
In Tables 15- 5 and 15- 6, most of the estimates more recent than 1991 are higher than the
Ravenal ( 1991) and Kaufman and Steinbruner ( 1991) estimates. However, one cannot
make too much of this, because the estimation methods are different, and because
lowest of the recent estimates ( Copulos, 2003) may be the most credible.
Comparisons of defense spending with oil imports or the value of oil imports
also suggest that the cost of protecting the Middle East has increased since 1991. Figure
2 shows defense spending and the value of Persian- Gulf oil imports from 1990 to 2004.
The two curves fall and rise together. This positive correlation is consistent with the
hypothesis that defense expenditures are related to the amount and cost of oil imported
from the Persian Gulf. ( Of course, the value of imports increased after 1999 because of
increases in the price of oil, and defense expenditures increased after 2001 because of
the Iraq War, and the two factors might or might not be related.)
Hall ( 1992) has a similar finding for the period 1968 to 1989. He estimates a
single- variate autoregressive moving- average model in which total defense spending in
year t depends on imports of crude oil and petroleum products in year t- 2 ( the 2- year
lag accounts for lags in the political, legislative, and budgetary processes), and finds
that for every million barrels of daily oil imports, defense spending increased by $ 2.67
billion ( in 1982 dollars) 14.
With these considerations, we assume cost of defending the Perisan Gulf
increased by 0.5% ( low cost case) to 1.5% ( high cost case) per year, from the 1991 value.
15.2.3 Expected wartime expenditures related to the Persian Gulf
Expected wartime expenditures related to the Persian Gulf can be estimated as
the annual probability of a war of a given magnitude multiplied by the estimated
annual cost of such a war. For example, Ravenal ( 1991) speculates that over a decade
there might be a 10% chance of having a conventional war that costs half as much as did
the Vietnam war, and an 0.25% chance of having a nuclear war that costs 25% of GNP.
Ravenal estimates that the Vietnam war cost about $ 1,050 billion in 1991 dollars. Thus,
the expected ten- year cost of a conventional war would be 0.1 x 0.5 x $ 1050 billion,
which is $ 53 billion total over 10 years or $ 5.3 billion per year. To calculate the expected
cost of a nuclear war, Ravenal takes the FY1992 GNP of $ 6 trillion and compounds it at
six percent annually to account for inflation and growth. This comes to $ 79 trillion over
ten years. The expected loss over the decade therefore would be $ 79 x 0.25 x 0.0025, or
$ 5 billion per year. ( This is lost GNP only; it does not include the value of human
casualties.)
Our own estimate of the expected military cost of conventional wars in the
Persian Gulf, based partly on the costs of the 1991 Gulf War and the 2003 Iraq war, is
similar to Ravenal’s. First, we note that the DoD spent around $ 61 billion on the 1991
Gulf War ( GAO, 1992, p. 51), although allied contributions offset much of this ( see
Table 15- 4). From FY 2003 through FY 2006 the war in Iraq has cost about $ 300 billion,
and the war in Afghanistan almost $ 100 billion ( in current dollars, above peacetime
14 Note that Hall relates defense spending to the quantity of oil imports, whereas we relate it to the value
of imports from the Persian Gulf.
15
spending levels), including costs of reconstruction ( CBO, 2006a; Belasco, 2006;
http:// costofwar. com; Wheeler, 2006). The CBO ( 2006b) projects that a further $ 200 to
$ 400 billion will be spent in Iraq through FY 2017 ( in this case excluding reconstruction
costs) 15.
Thus, the total cost of the 1991 Gulf War and the 2003 Iraq war is expected to be
at least $ 500 billion, including rough estimates of the costs of reconstruction in Iraq, but
excluding the cost of the war in Afghanistan on the grounds that it is not related to the
Persian Gulf or oil. If such a sequence of wars is assumed to occur every 50 years, then
the annual expected cost is approximately $ 10 billion per year. We assume a range of $ 5
to $ 15 billion per year, in current dollars for any year from 1990 to 2005.
15.2.4 Peacetime plus wartime expenditures
The total ongoing peacetime plus expected wartime expenditures related to the
Persian Gulf are thus $ 30 ( peacetime) + $ 5 ( wartime) billion per year in the low case to
$ 60 ( peacetime) plus $ 15 ( wartime) billion per year in the high case. The total range is
$ 35 to $ 75 billion per year in 1991 ( and 1991 $), and $ 37 to $ 88 in 2004.
15.3. U. S. ASSISTANCE TO THE MIDDLE EAST: ATTRIBUTABLE TO OIL
INTERESTS IN THE GULF? ( MOSTLY NOT)
The United States maintains an influence in the Middle East not only through the
projection of military power, but also through foreign military sales and various types
of foreign aid to countries throughout the region. Countries of the Middle East and
North Africa receive 80- 90% of all U. S. military assistance and 30- 40% of total U. S.
assistance – generally between $ 5 and $ 6 billion in total assistance per year ( Table 15- 9).
But can any of the $ 5- 6 billion in U. S. grants to countries in the Middle East and North
Africa be attributed directly to U. S. oil interests in the region? 16
Most of the U. S. assistance in the Middle East and North Africa goes to Israel and
Egypt. It is likely that none of the grants to these countries are expressly related to U. S.
oil interests, primarily because these countries do not produce much oil. However, to
the extent that grants to these countries are meant to promote regional stability ( as
opposed to, say, economic development purely for the benefit of the country), they
arguably are related to U. S. oil interests, because the U. S.’ main reason for wanting to
keep the region stable is to keep the oil accessible and inexpensive. However, we will
argue that none of the grant aid to Israel is meant to promote regional stability, and that
although some of the grant aid to Egypt and Turkey is, the amount is relatively small.
Israel receives more outright grant money from the U. S. than does any other
country in the Middle East. However, it appears to us that the U. S. gives aid to Israel
15 The CBO ( 2004) estimates wartime costs that are in addition to those for “ routine” military operations,
which is precisely what we want because we already estimate “ routine” costs here ( as “ peacetime” costs).
16We ignore loans because they are supposed to be paid back, and sales because they are beneficial trade.
Only outright grants are economic costs to the U. S.
16
because of the strong Jewish lobby17, not out of a desire to maintain stability in the
region ( and hence protect oil supplies). Indeed, U. S. aid to Israel antagonizes the Arab
members of OPEC, and foments regional instability and ill- will towards the U. S. Thus,
U. S. aid to Israel undermines U. S. oil interests in the Persian Gulf.
The U. S. better serves its oil interests in the Gulf when it sides with oil- owning
Arab nations against Israel rather than the other way around. This was demonstrated
negatively in 1973 and 1974, when OPEC placed a temporary embargo on oil shipments
to the U. S. and the Netherlands in retaliation for their support of Israel in the Arab-
Israel War of October 1973. It was demonstrated positively during the 1991 Persian Gulf
War, when Israel not only was excluded from the U. N. coalition, but was pressured to
refrain from retaliating against Iraqi missile attacks on its territory, in order to maintain
the support of the Arab nations. There is little doubt, then, that the U. S. helps Israel for
reasons other than oil, and would continue to give Israel $ 3 billion per year even if there
were no oil in the region18.
Egypt is the second largest aid recipient in the region. To some extent, aid to
Egypt is motivated by a desire to promote regional stability, which in turn is motivated
by the desire to protect the oil there. A strong relationship with Egypt also provides the
United States with an alliance with an important Arab nation and helps the U. S.
maintain an influence in the region. Thus, an argument could be made that at least
some of the $ 2 billion in assistance to Egypt could be linked to U. S. oil interests.
U. S. aid to Turkey is small relative to that provided to Israel and Egypt -- less
than half a billion dollars. Some of this aid is the result of Turkey’s membership in
NATO and is therefore not directly linked to oil objectives in the Gulf. However,
Turkey was used as a base of operations during the Gulf War, so it is possible that at
least some of this aid can be attributed to U. S. interests in Gulf oil.
In summary, the U. S. provides almost $ 6 billion annually in assistance to
countries in the Middle East and North Africa, most of which goes to Israel and Egypt.
We believe that substantially less than $ 2 billion of this can attributed to oil interests in
the region -- that is, that if there were no oil in the Middle East, the U. S. would scale
back its assistance to Middle East countries by considerably less than $ 2 billion.
Moreover, even if the U. S. did give less grant aid to the Middle East, it very well might
give more to other regions. ( Although, if this were the case, one would have to consider
that there might be a cost to the U. S. of not giving to these other regions now.) It is not
clear, then, that U. S. oil interests in the Middle East cost the U. S. more than a trivial
amount in grant aid. We assume that the net cost of grant aid attributable to Middle
East oil is small enough to be ignored.
17According to a report in the Wall Street Journal, “ 80 pro- Israel PAC’s [ political action committees]
spent more than $ 6.9 million during the 1986 [ election] campaigns, making them the nation’s biggest-giving
narrow- issue interest group” ( Fialka, 1987).
18Our position, then, is that if there were no oil in the Persian Gulf, the U. S. would not spend money just
to defend Israel, but would continue to grant economic assistance to Israel.
17
15.4. FROM THE COST OF DEFENDING ALL U. S. INTERESTS IN THE PERSIAN
GULF, TO THE COST OF DEFENDING OIL CONSUMED FOR
TRANSPORTATION
15.4.1 The five steps of the estimation
In this section, we work from our estimate of the cost of defending all U. S.
interests in the Persian Gulf towards an estimate of the military cost of using oil in
highway transportation. We start with: i) the estimated $ 35 to $ 75 billion spent annually
to defend all U. S. interests in the Persian Gulf ( see section 15.2), and deduct: ii) the cost
of defending interests other than oil in the Persian Gulf; iii) the cost of defending
against the possibility of a world- wide recession due to the effects of an oil price shock
related to the use of Persian- Gulf oil by other countries ( such a recession would harm
the U. S., even if the U. S. did not produce or consume oil); iv) the cost of defending the
investments of U. S. oil producers in the Persian Gulf, apart from the interests of U. S.
consumers; and v) the cost of defending the use of oil in sectors other than highway
transportation. The steps of the estimate are summarized in Table 15- 12.
15.4.1.1 The cost of defending the Persian Gulf.
See section 15.2.
15.4.1.2 The cost of defending interests other than oil in the Persian Gulf
In section 15.1, we cite evidence that in the Persian Gulf, the U. S. cares more
about the oil than about anything else. If oil security accounts for more than 50% of U. S.
“ interest” in the Persian Gulf, and if military expenditures in some sense are
proportional to degree of interest, then, loosely speaking, less than 50% of the cost of
defending the Persian Gulf should be assigned to interests other than oil. Of course,
military expenditures probably are not strictly proportional to degree of interest,
however measured, because of the “ fixed” costs of defending the region -- costs that are
incurred if there is any regional defense at all, regardless of its size, scope, and purpose.
However, as mentioned above, we believe that truly fixed costs are relatively minor. For
want of a better analysis, we assume that these non- oil interests are responsible for 25%
to 40% of the total amount spent annually to defend the Persian Gulf. This means that
the cost of defending oil- related interests in the Persian Gulf is 60% to 75% of the total
cost of defending the Persian Gulf.
By contrast, Koplow and Martin ( 1998) assume that non- oil interests – promoting
regional stability, and preventing the emergence of a hegemonic power – are
responsible for 2/ 3, or 67%, of the cost of defending the Persian Gulf. We think that this
is too high, because if the area did not have so much oil, it is unlikely that the world
would care much about it is political make- up and stability19. Moreover, Koplow and
Martin ( 1998) note that Earl Ravenal, an expert on military spending, believes that
virtually all defense spending on the Middle East should be attributed to oil.
We assume that underlying motivations for wartime military expenditures in the
Middle East are largely the same as the underlying motivations for peacetime military
19 Koplow and Martin ( 1998) base their allocation on the discussion in Fuller and Lesser ( 1997) of U. S.
goals in the Persian Gulf. However, we believe that Fuller and Lesser ( 1997) clearly indicate that the goals
of preserving regional stability and preventing the emergence of a regional power ultimately derive from
the overall all goal of preserving access to oil at reasonable prices.
18
expenditures, and hence that the share of Middle- East defense spending attributable to
oil is the same in peacetime and wartime. ( More precisely, we assume that the
percentage by which Congress would reduce wartime expenditures were there no oil
in the Middle East is the same as the percentage it would reduce peacetime
expenditures.) In any case, there is ample evidence that the desire to protect access to
Middle East oil is a factor in U. S. wars in the Middle East. For example, Plesch et al.
( 2005) claim that “ oil played a strong if not determining factor” ( p. 8) in the Iraq- Iran
war, the 1991 Gulf War, and the 2003 U. S. invasion of Iraq. They cite a statement by
then Senator Jesse Helms, at a hearing on U. S. dependence on foreign oil, that the cost
of the 1991 Gulf War “ was really there to protect world oil demand” ( in Plesch et al.,
2005, p. 8). Similarly, Copulos ( 2003) notes that “ while there are a variety of concerns
associated with the Baghdad regime, the security of energy resources in the region is
unquestionably a major consideration – especially given Saddam Hussein’s repeated
attempts to gain control over neighboring oil- rich territory” ( p. 30). Copulos ( 2003)
ends up assuming that 50% of the wartime costs are attributable to oil ( p. 35).
15.4.1.3 The cost of defending against the possibility of a world- wide recession due to the effects
of an oil- price shock related to the use of Persian- Gulf oil by other countries
Rapid price changes could occur and would affect the U. S. even if the U. S. did
not import any oil from the Middle East. A Congressional Research Service ( CRS)
analysis conducted after the Gulf war concluded that “ so long as domestic suppliers of
energy can participate in these [ world- oil] markets, disruptions to the world supplies of
energy will be felt even in a self- sufficient United States as domestic suppliers of the
affected energy source divert their supplies to foreign markets and as suppliers of
substitute energy sources do the same” ( Makinen, 1991, p. CRS- 7). Moreover, even if the
U. S. did not produce or consume any oil at all, it still would be hurt by a world- wide
recession triggered by a rapid increase in oil prices, at a minimum because foreign
demand for U. S. goods and services would decrease. As the CRS points out, “ the only
way to prevent this sequence of events from occurring would be to completely isolate
the U. S. from foreign markets” ( Makinen, 1991, p. i).
Unfortunately, we have no way of estimating how important it is for the U. S. to
protect itself against this effect alone, as distinct from effects related to U. S. production
and consumption of Persian- Gulf oil. We believe, though, that the interest is
comparatively small albeit not trivial. We simply assume that this general interest in
preventing any price shock, regardless of U. S oil imports, is somewhat less important
than are the interests related specifically to U. S. production and consumption of Persian
Gulf oil.
15.4.1.4 The cost of defending the investments of U. S. oil producers in the Persian Gulf, apart
from the interests of U. S. oil consumers
Even if the U. S. did not consume any oil at all and somehow was completely
insulated from the worldwide economic impacts of sudden increases in the price of oil,
Congress still probably would allocate resources to defend Persian- Gulf oil, because
U. S. corporations have invested billions of dollars in the petroleum industry in the
Persian Gulf and sell billions of dollars worth of Persian- Gulf oil worldwide, and
Congress is influenced by the financial interests of large oil corporations as well as by
the ostensible interests of oil consumers. We can gain a sense of Congress’ assessment of
the need to defend the interests of producers per se by comparing the value of U. S. oil-
19
producer assets, sales or investment in the Middle East with the value of U. S.
consumption of oil from the Persian Gulf.
The Bureau of Economic Analysis ( BEA) provides data on the assets of foreign
affiliates of U. S. petroleum companies, sales of foreign affiliates of U. S. petroleum
companies, and direct investment by the U. S. petroleum industry in its foreign affiliates
( Table 15- 10, parts A, B, and C). Table 15- 10 part A indicates that the assets of Middle-
East affiliates of U. S. petroleum companies have ranged from $ 15 billion in 1997 to
perhaps as much as $ 30 billion today ( extrapolating the trends in the data). Part B of
Table 15- 10 shows that the sales of Middle- East affiliates have ranged from $ 7 to about
$ 15 billion ( extrapolating the trends in the data), and Part C shows that that direct
investment by the U. S. petroleum industry in foreign affiliates in the Middle East has
ranged from $ 3 billion in 1997 to perhaps $ 5 or $ 6 billion today ( again, extrapolating the
trends in the data) 20.
Which of the three measures best represents ( in the eyes of Congress) the value
of the “ interest” of U. S. petroleum companies in the Middle East? The data of part A,
the assets of Middle- East affiliates of U. S. petroleum companies, probably overstate the
Middle- East interest of U. S. producers, because U. S. parent companies do not own all of
the assets of their foreign affiliates ( Mataloni, 1995). For example, if parent companies
own half of their affiliates’ assets, then the ownership interest of U. S. petroleum
companies in their Middle- East foreign affiliates has ranged from $ 8 to $ 15 billion per
year.
On the other hand, the data of part C, direct investment in Middle- East affiliates,
probably understate the Middle- East interest of U. S. oil companies, because U. S.
companies have indirect as well as direct investment in their Middle East affiliates21.
And finally, although the data of part B, sales of Middle- East affiliates of U. S. petroleum
companies, may be a ready indicator to Congress of the magnitude of the Middle- East
interest of U. S. producers, if U. S. parent companies do not own all of the assets of their
foreign affiliates, then they probably do not have stake in all of their sales.
In order to narrow the range, we can consider possible “ indirect” investment by
U. S. petroleum companies in the Middle East, via holding companies in other parts of
the world. Such indirect investment does not show up in part C of Table 15- 10, because
in the BEA statistics an indirect investment in country B via a holding company in
country A was counted as a direct investment in the country of the holding company –
country A – not as an indirect investment in country B. For example, the BEA counted
a direct investment in the Middle East by a U. S. foreign affiliate located in, say, the
Netherlands as a direct investment in the Netherlands, not as a direct or indirect
investment in the Middle East ( see Borga and Mataloni [ 2001] and Koncz and Yorgason
[ 2006] for more discussion). On the other hand, the BEA counts as a direct investment in
20The BEA data of Table 15- 10 indicate that Middle- East assets, sales, and investment are 3% to 10% of all
foreign assets, sales, and investment in the petroleum industry. However, data from the EIA ( 1994, 2006c)
indicate that between 1986 and 1992, and 1998 and 2004, 10% to 16% of the total foreign income tax paid
by 25- 30 major energy companies ( mostly petroleum companies) was on income from the Middle East.
This difference may be due to differences in coverage between the EIA and the BEA surveys.
21 Because direct investment “ is measured as the yearend value of U. S. parents’ equity ( including
retained earnings) in, and net outstanding loans to, their foreign affiliates” ( Mataloni, 1995, p. 43), direct
investment may be a proxy for direct ownership of the assets of Middle East affiliates of U. S. petroleum
companies.
20
the Middle East any investment in holding companies that are located in the Middle
East but actually do business elsewhere.
Ideally, to get a true picture of total investment in working foreign- affiliate
petroleum companies in the Middle East, we would deduct U. S. investment via non–
working holding- company affiliates located in the Middle East, but add investment in
holding- company affiliates, located in other regions, that invest in working affiliate
companies in the Middle East. No such data are available, but we suspect that the
addition would greatly exceed the deduction: it seems, for example, much more likely
that U. S. companies will have in Europe holding companies for Middle- East operations
than have in the Middle East holding companies for European operations. The Middle
East has most of the oil; it is the necessary place for operations, but given its instability,
unfamiliarity, and remoteness, certainly not a good place for a non- operating holding
company. If such indirect investment in the Middle East is half as much as the direct
investment22, then the total direct+ indirect investment by petroleum companies in the
Middle East ranged from $ 4 billion to about $ 9 billion.
The discussion to this point suggests that value of the interest of U. S. oil
producers in the Persian Gulf has ranged from $ 4 billion to perhaps $ 15 billion per year.
However, one also has to consider that if the U. S. did not consume Persian- Gulf oil, U. S.
producers might have less of a stake in the production of Persian- Gulf oil. Allowing for
this, we assume that the interests of U. S. producers in the Persian Gulf, apart from the
interest of U. S. consumers of Persian- Gulf oil, have ranged from $ 3 to $ 10 billion per
year from the mid- 1990s to 2005.
This range of $ 3 to $ 10 billion as the value of U. S. oil- producer interest in the
Middle East can be compared with the value of U. S. oil- consumer interest in the Middle
East, represented by the value of imports from the Persian Gulf23. As shown in Table
15- 11, the value of imports has ranged from around $ 10 billion from 1993 to 1998, to
over $ 40 billion in 2005. Therefore, on the basis of these illustrative estimates, we
assume that in the eyes of Congress, the “ interests” of U. S. producers in the Persian
Gulf are 25% to 33% of those of U. S. consumers of Persian Gulf oil, and that Congress
would budget defense spending accordingly24.
15.4.1.5 The cost of defending the use of oil in sectors other than highway transportation
The deductions to this point leave us with the cost of protecting U. S.
consumption of Persian- Gulf oil in all sectors ( ground transportation, heating, power
plants, etc.). Because this is the cost of U. S. consumption per se ( because costs
attributable to U. S. production, world oil use, and non- oil interests already are
accounted for), it seems reasonable to assume that it is proportional to the amount
consumed. The last question, then, is: what fraction of Persian- Gulf oil is used by motor
22 The use of holding companies increased dramatically from 9% of the direct investment abroad position
in 1982 to 35% in 2004 ( Koncz and Yorgason, 2006).
23 Although the “ Middle East” as defined by the BEA includes a few more countries than does the
“ Persian Gulf” as defined by the EIA, none of the countries in the Middle East but not the Persian Gulf
countries export significant amounts of oil to the U. S. ( see Table 15- 11).
24 In the first version of this research report, we assumed that the interests of producers were 50% to
100% of the interests of consumers. Koplow and Martin ( 1998) cite a personal communication from an
expert at the OECD who thought that this range was too high. We believe now that it is indeed too high.
21
vehicles? Or, to put it another way, if motor- vehicles consumed X fewer barrels of oil,
what fraction of X would have come from the Persian Gulf? ( Keep in mind that the
motor vehicle sector consumes much more oil than is imported from the Persian Gulf.)
At the margin, or even on average, the source of the oil used by motor vehicles
depends on short- run and long- run production costs, contractual obligations, national
laws and policies, the quality of the oil, transportation arrangements, corporate
strategies, and other factors. In the long run, it is likely that a reduction in oil use mostly
will reduce exploration for and production of domestic oil, because the marginal oil in
the U. S. is so costly to produce. In the short run, the picture is less clear. In the absence
of a formal model of the regional supply of oil to the motor vehicle sector, we estimate
that in 1991, anywhere from 24% to 68% of imported petroleum ( crude oil and
products) from the Persian Gulf went to the motor- vehicle sector, and 76% to 32% to
other sectors. This estimate is developed in Report # 10. These percentages ( 24% to 68%)
depend mainly on three quantities: the ratio of highway fuel consumption to total
petroleum products supplied, the amount of finished highway fuel imported from the
Persian Gulf, and the amount of other finished petroleum products imported from the
Persian Gulf. Time series data on highway fuel use, from the Federal Highway
Administration ( 2006), and on petroleum products supplied, from the Energy
Information Administration ( EIA) ( 2006a), indicate that the ratio of highway fuel
consumption to total petroleum products supplied has been steadily if gradually
increasing. This will tend to increase the percentage of Persian- Gulf oil that goes to the
motor- vehicle sector. ( There is no obvious trend in imports of highway fuels vs. other
products from the Persian Gulf
[ www. eia. doe. gov/ oil_ gas/ petroleum/ info_ glance/ petroleum. html].) We assume
therefore that the percentage of Persian Gulf oil that goes to the motor- vehicle sector
increases 0.7%/ year from the 1991 value.
15.5 RESULTS AND DISCUSSION
15.5.1 Results
Table 15- 12 shows the results of the analysis. Part A shows the results of the five-step
analysis presented above. Part B shows the cost of defending each individual
interest. The bottom line of our analysis is that if all motor- vehicles in the U. S. ( light-duty
and heavy- duty) did not use oil, Congress might reduce defense spending by $ 3 to
$ 31 billion per year, over the long haul. This amounts to about $ 0.02 to $ 0.18 per gallon
of all gasoline and diesel motor fuel in 2004 ( Federal Highway Administration, 2006).
The lower end of this range is trivial, but the upper end is not.
15.5.2 Other issues
15.5.2.1 The beliefs of policy makers versus the beliefs of analysts
We emphasize ( again) that resources will be devoted to the military to protect
U. S. oil interests if the President and the U. S. Congress, who propose and approve the
military budget, believe that it is important to protect oil supplies. That is, for any case
at hand, it does not matter if analysts such as Bohi ( 1991) and Toman ( 1991) are right in
asserting that the macroeconomic costs of price shocks need not be large; what matters
is what the the decision- makers believe. Of course, one would hope that eventually
22
decision makers would believe what was true, but this is only a hope, and in any event
the “ truth” presently is subject to debate.
15.5.2.2 Free riders on U. S. defense
Should some of the U. S. military cost be allocated to oil consumption and
production by other nations, on the grounds that these other nations benefit from U. S.
military expenditures? The answer is an unambiguous “ no”. These other nations are
free riders, and whenever there are free riders the incidence of benefits does not
correspond to the incidence of costs. In an economic cost or cost- benefit analysis, the
relevant question always focuses on opportunity cost, on the counterfactual: if the U. S.
did not have oil interests in the Persian Gulf, and in fact was completely insulated from
any worldwide recessions traceable to any country’s use of Persian Gulf oil, would it
spend money ( without reimbursement or reciprocation) to protect oil in the Persian
Gulf? Obviously not. U. S. expenditures are motivated entirely by U. S. interests, broadly
defined; no interests, no expenditures. The presence of free riders cannot change this
reality25.
15.5.2.3 Military spending and economic growth.
One might ask if military spending affects economic growth, and hence has
social benefits or costs in addition to the direct expenditures. One could argue, for
example, that technological spin- offs of military research and development become a
positive externality in the private sector and contribute to economic growth. However,
there is no strong evidence that defense spending spurs economic growth. Most studies
have found either no link between defense spending and economic growth, or else
weak and ambiguous links. As Gerace ( 2002) notes, “ the net effect of military
expenditures on economic growth is theoretically ambiguous” ( p. 2), and “ there is no
general consensus on whether military spending positively or negatively affects
economic growth” ( p. 1).
Huang and Mintz ( 1991) found that military expenditures have not had any
significant effect, external or otherwise, on economic growth. Payne and Ross ( 1992)
found “ no causal relationship in either direction between defense spending and
economic performance” ( p. 161). Dunne ( 1990) stated that model results “ do not
suggest that the share of military expenditures is a significant influence on the
unemployment rate... The fear that reductions in the share of military expenditures will
be associated with higher average unemployment levels is misplaced” ( p. 57). Kinsella
( 1990), Gold and Adams ( 1990), Huang and Mintz ( 1990), and Gerace ( 2002) also found
no links between defense spending and economic growth.
There are some suggestions that reductions in defense spending boost the
economy. Huang and Mintz ( 1991) found that non- military government expenditures
have contributed to economic growth, which suggests that it might be productive to
transfer funds from the military pot to other government pots. Others have reached
similar conclusions. According to the Congressional Budget Office ( 1992):
Over the long term, the so- called peace dividend -- if used to reduce the federal deficit --
would increase national savings and investment and would therefore benefit the
25If U. S. allies reimburse the U. S., or otherwise have an explicit quid- pro- quo agreement regarding U. S.
military services, then the U. S. cost is equal to its expenditures less the reimbursement or exchange.
23
economy. By the next decade, the dividend realized under the 1991 plan could result in a
permanent increase in GNP of around $ 500 billion a year ( in 1992 dollars)... Over the next
few years, however, applying the dividend to deficit reduction could adversely affect the
economy, lowering GNP and employment, unless an expansion of monetary policy
offsets defense spending cutbacks. The short- run changes will be modest in the national
economy -- within the normal range of variation in GNP -- and in state economies, but
could be serious for some industries and local communities.
Findlay and Parker ( 1992) noted that:
Increases in military spending cause a significantly larger increase in interest rates than
do increases in non- military spending... Our results then suggest that the crowding out of
private expenditures can be reduced when the government shifts resources from military
spending to non- military spending ( p. 195).
Heo ( 1998) tests the effects of defense spending on growth in 80 countries using
a nonlinear defense growth model, and finds that “ two thirds of the countries under
investigation may expecte a ‘ peace dividend’ due to the negative relationship between
defense spending and economic growth” ( p. 637).
Boyd and Chermak ( 2002?) used a computable general equilibrium model to
analyze the welfare effects of military expenditures to protect Middle- East oil, domestic
tax subsidies to oil producers, and the Strategic Petroleum Reserve. They found that
eliminating the military expenditures to protect Middle- East oil ( and reducing taxes
commensurately) increased consumption and production in most sectors, even when
the elimination was assumed to result in higher oil prices.
However, others have found that reductions in defense spending might hurt the
economy. Atesoglu and Mueller ( 1990) estimated a two- sector production function of
the economy and found that:
there is a positive and significant relation between defence spending and economic
growth. But, findings indicate that the responsiveness of economic growth to changes in
defence spending is small. If there are significant cuts in defence spending - except for
very large sustained cuts - the adverse effects on the economic growth of the United
States should not be large ( p. 19)
Thomas et al. ( 1991) analyzed the economic impacts that would result from a
reduction in defence spending, and found that “ reducing the level of defence spending
will reduce real output, the price level, and employment. The effects of such a
reduction will tend to attenuate after about five years” ( p. 195). Similarly, Mehay and
Solnick ( 1990) estimated the impact of total defense spending and of investment and
operation expenditures on state economic growth, and found that:
Aggregate defense spending was found to be positively related to both state growth
measures. However, when defense outlays are disaggregated, only investment- type
spending is positively related to personal income growth, whereas both investment and
operating programs appear to influence employment growth ( p. 484).
It appears, then, that defense spending does not necessarily have strong
economic effects one way or the other. Payne and Sahu ( 1993) sum up prevailing views
well:
Studies in this volume show that there are theoretical bases for expecting defense
spending to have an effect on economic growth both for industrialized and less
24
developed countries. While the economic growth could be affected both from the
supply- side and the demand- side, the net effect of the diverse forces on economic growth
of a nation is theoretically ambiguous. Measuring the impact of defense spending on
economic growth then ultimately becomes an empirical question... Most studies cited in
the volume suggest that defense spending has rather modest effect on the economic
growth of an industrialized nation... In light of the weak link between defense spending
and economic growth for developed countries, one should realistically expect that a
reduction in defense spending would not make a significant difference... The defense cuts,
however, mask some harsh realities at the regional levels. Defense- based communities
may be very hard hit ( p. 14- 15).
On the basis of this brief literature review, we conclude that defense spending
does not have any offsetting economic benefits or additional external costs.
15.5.2.4 Security costs other than peacetime and wartime military expenditures for the Persian
Gulf
Expenditures on the military are only a portion of the entire relevant “ security”
cost of using oil. Just as the total social cost of pollution due to cars is equal to the value
of the resources devoted to controlling pollution ( the control cost) plus the value of the
resources damaged by whatever pollution still is emitted ( the residual damages), the
total security cost of using oil is equal to the military “ control” cost plus the dollar cost
of whatever security problems remain in spite of – or even due to – the military
expenditures. These “ residual” security costs include reduced flexibility in the conduct
of U. S. foreign policy, strains on international relations due to the activities of the U. S.
military and even to competition for oil ( U. S. Department of Energy, 1987), anti-
American sentiments due to the presence of the U. S. military in the Middle East ( Cato
Institute, 2005, p. 563), political destabilization of the Middle East, and the nonfinancial
human- suffering costs of war and political instability related to U. S. demand for oil.
Although to our knowledge nobody has ever quantified these costs, we believe that
they are important26. Indeed, one could argue that a primary motivation of many
programs and policies aimed at reducing U. S. dependence on foreign oil is not to
reduce military expenditures related to defending the Persian Gulf, but rather to
mitigate some of the political and human costs associated with U. S. demand for Persian
Gulf oil. If this is right, then the “ costs” that we have not estimated may be large
relative to the military costs we have estimated.
Also, we have not included the military cost of protecting oil interests in any
other regions. For example, the U. S. might be spending money to defend oil pipelines
and ports in Alaska, oil refineries in the Caribbean, and oil fields in South America,
Africa, and Indonesia.
26 If one accepts the estimate of Burnham et al. ( 2006) that over 600,000 people have died in Iraq as a
result of the U. S. war, and if one believes ( as we do) that there would not have been a war and hence that
those people would not have died if the region did not have oil, then the oil/ war- related cost of those
deaths could be on the order of 10 billion dollars per year, depending on how many more people die, the
value of life, and the frequency of such conflicts.
25
15.5.2.5 Will Congress reduce defense expenditures in the future, given the same set of itnerests
to protect?
It may well be that whatever the U. S. is spending on the Persian Gulf is too much
( or, doubtfully, too little), and can be reduced without compromising any U. S. interests
or missions. If Congress recognizes this, and decides that it can provide for what it
perceives to be necessary missions in the region at less cost, then present expenditures
overestimate future costs27. Several researchers have argued that defense expenditures
in the Middle East can, in fact, be reduced without compromising U. S. objectives in the
region. Kaufmann and Steinbruner ( 1991) use then- Defense Secretary Cheney’s Future
Years Defense Plan ( FYDP) for FY1996 as a baseline for one such projection. They
estimate that $ 55.1 billion of Cheney’s total budget of $ 243.7 billion should be allocated
to the Middle East, and then propose two alternative force planning contingencies for
FY2001 for the Middle East: one that requires $ 45 billion, and a “ low- cost” option that
requires $ 29 billion ( Table 15- 13).
Carpenter and Fiscarelli ( 1990) and Ravenal ( 1991) argue that the benefits of
protecting the Persian Gulf are substantially less than the military costs. Carpenter and
Fiscarelli ( 1990) believe that the U. S. should transfer much of the burden of protecting
the Gulf to its Western allies and thereby reduce its own military expenditures for the
region from some $ 40 billion to year to $ 10 billion per year ( Table 15- 13). Ravenal ( 1991)
suggests that U. S. stop policing the Gulf altogether and instead let the private sector
protect against supply disruptions by developing domestic petroleum and non-petroleum
fuels and using petroleum more efficiently28.
We do not account for this possibility here.
15.6 CONCLUSION
To estimate the military cost of using Persian- Gulf oil in transportation, one must
evaluate a series of grand counter- factuals (“ If the U. S. had no interests in the Persian
Gulf at all...”; “ If there were no oil in the Persian Gulf...”; “ If the U. S. produced but did
not consume oil...” ). These counterfactuals account for the fact that, in regards to the
Persian Gulf, the U. S. cares not only about the use of Persian- Gulf oil in transportation,
but also about the use of Persian- Gulf oil in non- transportation sectors, the interests of
U. S. oil producers in the Persian Gulf, the stability of the world price of oil, and even
matters unrelated to oil. Unfortunately, these counterfactuals are difficult to analyze
formally, and as a result much of the analysis is judgment. Although we believe that
our conceptual outline is correct, and that our estimated ranges ( Table 15- 12) are not
evidently absurd, we recognize that other analysts might disagree with us, perhaps
vehemently, at every step. Certainly, we cannot deny the possibility that the military
cost of using Persian- Gulf oil in transportation is very small -- much less, even, than our
lower bound.
27Note that, in a analysis of what social costs have been and will be, the relevant quantity is what we
have spent or will spend on defense of the Middle East, not what we “ should” spend in order to
maximize net social benefits. We would want to estimate the “ optimal” amount of military spending only
if the military were funded in accordance with an explicit social cost- benefit analysis, which of course it is
not.
28 We agree.
26
In principle, the uncertainty could be narrowed through a carefully specified
multivariate regression, in which some measure of U. S. oil interests in the Persian Gulf,
along with measures of other determinants of the U. S. military budget, explain the
military budget over time. The challenge, of course, is to find an adequate measure of
U. S. oil interests, and to identify and quantify other determinants of the military
budget. We know of no such attempt. As discussed above, Hall ( 1992) does find a
significant positive correlation between the value of U. S. oil imports and the U. S.
military budget ( with a two- year lag) 29. Of course, given that his is a single- variable
regression, one reasonably can argue that the results are spurious, or that the oil- import
variable captures the effects of omitted correlated variables, or even that if there is any
causality, it goes the other way ( i. e., that something that is associated with an increase in
military spending causes an increase in oil imports) 30. We encourage further analytical
work in this area, to help narrow the range of reasonable estimates.
29 All specifications of Hall’s model yielded the same, statistically significant ( 10% level) coefficient: for
every million barrels of daily oil imports, defense spending increased by $ 2.67 billion ( in 1982 dollars). In
1990 dollars, Hall’s result is 2670* 1.328/ 365 = $ 9.71 of defense spending per barrel of imported oil ( the
1.328 factor is the 1990/ 1982 implicit price deflator). In 1990, the U. S. imported 2.93 billion barrels of
crude oil and petroleum products ( EIA, 2006a), which according to Hall’s model would have been
associated with an increase in defense spending of 2.93** 9.71 = $ 28 billion/ year. This is the lower end of
the range of estimates, cited above, that were derived by allocating the military budget.
30 Hall argues that “ as long as the omitted variables, such as the perceived Soviet threat, are not
correlated with oil imports, a model with a single explanatory variable could result in an unbiased
statistical estimate of the portion of defense spending due to imports” ( p. 1093).
27
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34
TABLE 15- 1. SOURCES OF CRUDE OIL AND PRODUCTS SUPPLIED IN THE UNITED STATES,
1990- 2004 ( PERCENT OF TOTAL PETROLEUM PRODUCTS SUPPLIED)
Year Imports OPECa Persian
Gulfb
Non- OPECc
1990 47% 25% 12% 22%
1991 46% 25% 11% 21%
1992 46% 24% 10% 22%
1993 50% 25% 10% 25%
1994 51% 24% 10% 27%
1995 50% 23% 9% 27%
1996 52% 23% 9% 29%
1997 55% 25% 9% 30%
1998 57% 26% 11% 31%
1999 56% 25% 13% 30%
2000 58% 26% 13% 32%
2001 60% 28% 14% 32%
2002 58% 23% 11% 35%
2003 61% 26% 12% 35%
2004 63% 27% 12% 35%
Source: EIA ( 2006a).
a Includes the Persian- Gulf members of OPEC. The main non- Persian- Gulf OPEC suppliers are
Nigeria, Venezuela, and Algeria.
b Saudi Arabia is the main Persian- Gulf supplier.
c Nigeria, Venezuela, and Algeria are the main non- OPEC suppliers.
35
TABLE 15- 2. DEATHS FROM MILITARY CONFLICTS IN THE MIDDLE EAST SINCE WORLD
WAR II, THROUGH 2006
War- Related Deaths
Period and region Civilian Military Total
Through early 1990s a
Red Seab 966,422 387,805 1,354,227
North Africac 98,443 35,430 135,673
Persian Gulf 270,312 406,432 676,744
Arab- Israeli 109,516 74,533 184,249
Total through early 1990s 1,444,693 904,200 2,350,893
From 2000 to 2006
Afghanistan not estimated not estimated not estimated
Iraqd 45,000 15,000 60,000 ( 600,000+?) e
a From Cordesman ( 1993), pages 5- 8.
b Almost ninety percent of the deaths in the Red Sea region were the result of struggles between
Ethiopia and Sudan, as well as internal strife within these two nations.
c About three- quarters of these deaths resulted from the Algerian war of independence with
France ( 1954- 1962). The more recent conflicts have been smaller, low- intensity struggles such
as the Libyan- Chad war, and the U. S. raid on Libya.
d Civilian deaths from www. iraqbodycount. org. ( Note that Roberts et al. [ 2004] and Burnham et
al. [ 2006] estimate an order of magnitude more deaths.) Military deaths equal to 3,000 military
deaths among U. S. and other coalition forces ( http:// icasualties. org/ oif/) plus an assumed 4
times that amoun