The economic costs of U.S. policies in the Middle East have burgeoned and accumulated since the early 1970s. Identifiable costs now exceed $2.6 trillion –some four times as much as the entire Vietnam War, fortunately involving far fewer American casualties. Prior to 1973, the U.S. costs were modest and the profits were attractive, especially in relation to the substantial oil investment income and the growing export trade after World War II. That balance has changed radically, however, since the 1973 Arab-Israeli war. The costs have burgeoned, the economic advantages have been dissipated, and the total costs of U.S. policies have aggregated dramatically, accumulating to more than $2.6 trillion over the past 20-25 years.
Many, but not all, of the costs have derived from U.S. support for Israel, directly or indirectly. This is especially true since 1973. Other, lesser costs are legacies of the Cold War, while still others arose from conflicts or postures that were only peripherally linked to U.S. support for Israel. But the bulk of the costs are inextricably linked to U.S. support for Israel, so this paper will focus on those. The types of costs have been broken down into the following categories:
- Oil-crisis costs: the burden of quantum increases in oil prices that followed most Middle Eastern political crises;
- Aid to Israel, including off-budget items such as contracts directed to the Israeli arms industry in competition with U.S. firms;
- Support for Israel involving third parties, such as enhanced aid to Egypt, Jordan or Turkey, tied to their relations with Israel.
- Consequential costs, such as the very expensive programs under the rubric “Project Independence,” whereby the United States tried to reduce its reliance on oil imports from the Middle East.
- Exogenous costs – those remaining costs that may be related to U.S. support for Israel, but where the causal link is either disputed or less clear, such as those related to the Gulf War in 1990-91.
- Direct costs of Middle East conflicts, such as the 1990-91 Gulf War or the engagement in Somalia. Ironically, these costs turn out to be the least.
“Cost” is not a unique concept. For example, when oil prices rose in the UK after 1973, the British government collected some 80-95 percent of the increase in the form of higher taxes. UK consumers paid the full burden, but the government reaped almost all of the benefit. The cost to consumers was high, but the economic cost to the British economy was almost nil. One man’s “cost” is another man’s “benefit.” Thus, more generally, higher prices were a bonanza for oil producers but were painful burdens upon consumers. In each section I identify which type of cost is under discussion, but the different kinds of costs cannot be added together.
The focus is exclusively upon costs to the United States. Some elements are still secret, others are dispersed through multiple different accounts and effectively buried from ready public scrutiny. Many of the costs are diffuse and not perceived as such – for example, the loss in GDP caused by the Arab oil embargo in 1973. The costs of that embargo were systematically concealed from the U.S. public. Other costs can be identified but only approximated. The paper is structured as follows:
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- Oil crisis costs
- Military and economic aid
- Special and ad hoc aid: Israel
- Lost trade and employment
- Energy autarky (“Project Independence”)
- “Defense” of the Gulf
- Summary and overview
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The analysis is limited to the United States. I shall not otherwise attempt to analyze the costs borne by others. Our Middle Eastern policies have cost the United States dearly, but third parties, especially our NATO and OECD partners, have paid even more.
CRISIS COSTS
Political crises in the Middle East, which in many cases created oil-supply and price crises, are major elements in the costs of U.S. policies in the region. Ironically, these “collateral” costs dwarf U.S. military costs in the area. Middle East political crises have had profound economic consequences, even before the most recent one triggered by the attack on the World Trade Center in September 2001. This analysis excludes any effort to quantify the latest round of costs; the ramifications of 9/11 are still unknowable. We focus here more narrowly on the six oil-supply and pricing crises, 1956-91:
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- 1956: Anglo-French-Israeli attack on Egypt
- 1967: Israel’s conquest of the West Bank and Gaza
- 1973: Arab attack on Israel to recover lost lands
- Countervailing strategies: IEA and SPR
- 1978: Iranian civil war and oil strike
- 1980: Iran-Iraq War and supply interdictions
- 1990-91: Gulf War
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1956 Suez Crisis
In 1956, joint forces of Israel, France and Britain attacked Egypt, ostensibly as a reaction to President Nasser’s nationalization of the Suez Canal.2 The canal was closed to oil-tanker traffic for almost a year, until damaged or scuttled vessels could be removed. The invasion itself was short-lived, because President Eisenhower ordered the U.S. fleet into position in the Eastern Mediterranean and notified the three invaders that Washington expected them to withdraw.3
Oil prices jumped briefly, but the largest and most enduring impact of the Suez crisis was more subtle and unexpected. The flow of oil from the Gulf to Europe was interrupted, since the distance was doubled when tankers had to circumnavigate Africa. The price of delivered oil imports almost doubled, but from a small base. Well-head prices also surged briefly. However, the macroeconomic impact was small because oil costs were small fractions of national GDPs.
The enduring effect was quite different. This shift in the pattern of oil flows undercut the fragile basis for the pound sterling – most of the oil from the Gulf was “sterling” oil, paid for and cleared in the British currency. When the flow of British-controlled “sterling” oil from the Gulf was interrupted, Venezuela and the United States increased exports. Supply was soon closely balanced. The unkindest cut was different: this reconfiguration moved “dollar” oil into markets, where it replaced “sterling” oil. The ensuing pressures broke the back of the British pound, already eroded due to the war and a Socialist government. The pressures proved to be irresistible and ultimately forced the British to devalue the pound.4
This first oil-supply crisis (related to the Middle East) offered several lessons. First, financial effects were crucial. The dramatic impact upon the pound highlighted a concern that grew during the following decades. Politicians focused increasingly on the effect of oil prices on the major economies. Second, it also illustrated the crucial role the United States would come to play. Finally, it brought home to the Israelis quite painfully the need to mobilize their lobbying and media power in Washington in order to limit such independent action as that of President Eisenhower.
1967 Arab-Israeli War
Regional war broke out again in June 1967, when Israel attacked Egypt. This war had more enduring effects on oil prices, albeit with a lag. Israel’s victory was quick. It conquered and occupied the neighboring territories, including the lucrative Egyptian oil fields in the Sinai Peninsula and offshore. Collaterally Israel’s occupation of the entire Sinai Peninsula, up to the eastern bank of the Suez Canal, ensured that the Canal would remain closed, thereby denying to Egypt the important foreign-exchange revenues from the transit tariffs.5
- Higher delivery costs from the Gulf: Closure of the Suez Canal increased demand for tankers by a factor of three. The route via the Cape from the Gulf to Europe was some 1,000 miles each way, compared with 6,000 through the Suez Canal. The required extra tonnage far exceeded any surplus or spare capacity in that sector, hence the sharp run-up in freight rates, which tripled. This added roughly $2 per barrel to the delivered cost to Europe of oil from the Gulf, at a time when the FOB price in the Gulf was $1.10-1.35 per barrel.
Tanker rates jumped precipitately, so that the delivered cost of oil from the Gulf to Europe more than doubled.6 The OPEC Secretariat estimated that the increased freight rate (profits to tanker operators) averaged out to some $1.50-2.50 per barrel, a total burden of $500 million ($2.5-3 billion in 2002 dollars).7
- Globalization of tanker charges: Higher rates on the Gulf-Europe route triggered comparable increases on all major tanker routes. Tankers are fungible; they can be redirected whenever one route is more profitable than another. Thus arbitrage in the shipping market was highly developed, with the result that shipping rates for oil increased commensurately on all routes, even though only the route via the Suez Canal had been directly affected. Skyrocketing tanker rates created windfalls for both the independent ship owners and the major oil companies (offset in many cases for the latter by other effects), but consumers bore the full brunt of the higher transportation charges in prices paid at the pump or product terminals.
- Higher wellhead prices: Some oil producers, both exporting countries and the companies, were also able to capitalize on the interruption of flows through the Suez Canal. Any source of oil located closer to markets and not dependent upon the canal was in a position to raise its prices. Typically the price was increased so that the landed price of this oil was close to that from the more distant sources, allowing for the higher tanker rates. “Short-haul crude” oil commanded a premium, which consumers had to pay even though shipping costs on those routes had not risen by the same absolute amounts. North African exporters and Venezuela were particularly well-positioned to exploit their geographical advantage.8
This price increase was the first of several that were triggered by political crises, but it was different in a critical aspect. It was a transportation crisis, like that in 1956, as distinct from a supply crisis. Supply was available; adequate tonnage was not. Wellhead prices themselves were increased in only a few instances. The immediate rise in the cost of oil to consumers was due almost entirely to higher shipping rates, which in turn were due to the Suez closure.
The greatest impact was subtler and evolved only over the following three years. Closure of the Suez Canal changed the politics of the oil industry and inadvertently catalyzed the first round of permanent increases in oil prices. Higher prices proved to be worldwide and irreversible. Algerian and Libyan oil was suddenly much more valuable than oil originating east of Suez. Both countries used that leverage – by withholding exports – quite brutally and very successfully to extract higher prices from the local producing companies. The process started in 1969, two years after the canal was blocked, and it took two more years for the longer-term price impact to emerge.
This was the first victory of OPEC members in raising oil prices, the raison d’être of the organization when conceived in Caracas in 1960. Israel, by closing the canal, inadvertently provided the fulcrum for OPEC’s lever. The war brought success where negotiations and pressures had hitherto failed. The first agreement in Tripoli (1970) triggered a comparable round of increases in the Gulf (the Tehran agreement), which triggered a third and final increase in North African prices (Tripoli #2 in 1971).
In this sense, closure of the Suez Canal backfired on the Israelis. It facilitated three rounds of directly related price hikes that greatly increased the revenues of their Arab enemies, ultimately adding about $10 billion per year to gross oil revenues in the Middle East and North Africa. That gain for the Arabs dwarfed the profits gleaned by Israel from holding the canal hostage. Had passage through the canal not been denied, the North African producers would have had no market leverage to exploit, and that first success of OPEC would have been deferred.
The follow-on effects imposed costs on the United States. Even though the United States imported only modest volumes of oil by sea, the joint impact of higher tanker rates and the price hikes increased the U.S. import burden by about $47 billion (2002 dollars).
1973 Arab-Israeli War
The Arab-Israeli war, which began in October 1973, triggered still another round of quantum jumps in oil prices.9 This resulted from a concatenation of related events. In 1973, Arab states attacked Israel in the hope of regaining the territories captured from them in the prior war (1967). The Arab assault proved to be unexpectedly effective. The Israelis had believed their own propaganda about the weakness and disorganization of the neighboring Arab governments, and this intelligence failure proved to be almost mortally dangerous.
Within the first week, the Israelis suffered major losses of tanks and aircraft, as Arab armor and Soviet SAM missiles inflicted a heavy toll. The Israelis turned to the United States and demanded immediate resupply of American munitions and equipment. President Nixon acceded, and an emergency airlift was started, stripping supplies from NATO units and from depots within the United States.10
The Arab response was quick. U.S. support for Israel on such a scale was viewed by the Arab states as a hostile act, and in mid-October the Arab oil producers joined in declaring an oil embargo, focused against the United States.11 The total embargo on deliveries from Arab oil ports to the United States was accompanied by an overall reduction in output, designed to discourage third-party countries from tolerating diversion of any of their supplies to the United States.
The impact proved to be much broader and longer-lived than expected by the protagonists. Non-belligerents were affected as was the United States by the jump in prices, but the United States suffered additionally from the physical interdiction of deliveries. The “oil weapon” was effective. Oil supplies to the United States, the direct target of the embargo, were significantly reduced. By February 1974, within five months of imposition of the embargo, the shortfall of oil in the United States amounted to about 2 million barrels per day (mb/d), based upon the projections of rapidly rising oil imports that had been expected to sustain a rapidly growing economy.12 About one-half of total U.S. imports of crude oil had vanished, equivalent to rather more than 10 percent of total U.S. oil consumption.
Figure A
Economic War, embargo impacts on imports
- Loss in GDP: The announcement of an oil cut-off triggered a quick recession, as well as simultaneously unleashing inflationary pressures.13 The oil shortfall was immediately felt in terms of a sharp reduction in economic activity, even before the last tanker landed, which had been loaded before the embargo began.14
Travel and tourism were the obvious first victims, since the spectre of a shortage of automobile fuel was raised early. Other cutbacks occurred, distributed across all sectors of the U.S. economy. The Federal Reserve Board, under Arthur Burns, reacted to counter inflation – or to reduce energy consumption – which exacerbated the recessionary impact of the reduction in oil imports.15
The impacts cascaded through the U.S. economy. Three years of growth were dissipated. The loss in GDP, in the form of forgone growth, was estimated at $100-200 billion in current dollars, or almost 10 percent of GDP over the next three years. The hit was between $300 and 600 billion in current dollars. The “oil weapon” had been wielded, in spite of extensive propaganda activity to the contrary, and the effect was very real. The U.S. economy needed 12 quarters before it rebounded in 1976 to the pre-embargo level.16
- Higher oil prices – dead-weight burden: The increase in oil prices was not reversed. After the announcement of the Arab embargo was deemed to be credible, oil prices began to be driven up during the last weeks of October and early November as near-panic bidding ensued. U.S. electric utilities, then heavily dependent upon fuel oil (largely imported), in addition to Israeli brokers led the pack in bidding up prices for the limited volumes of divertible oil.17 It is not clear whether the Arab states expected such a run-up in prices, but they and other OPEC members followed the market by explicitly raising the “reference prices,” used to compute tax-paid costs or as guidelines for the sale of government-controlled oil exports. OPEC tracked the spot market; it did not lead. When spot prices rose, OPEC with some delay ratcheted up the official export prices. Even after the embargo was lifted in the spring of 1974, oil prices remained in the range of $10-12 per barrel, a fourfold jump compared with the pre-embargo price level.
How much were consumers affected? Quantification of that cost depends upon what might otherwise have been the level of oil prices under conditions of business as usual, if the Arab embargo had not forced the precipitate price increase in October-November of 1973. That analysis is highly politicized; Israeli propagandists argue that prices would have risen in any case, so that there was no link between support for Israel, the embargo and higher oil prices. To the contrary, the prevailing wisdom among economists until then had been quite the opposite: that the OPEC cartel was theoretically unstable and that costs would collapse to the level of the costs of production, some few dimes per barrel.18
I estimate the burden of higher oil prices with reference to a gradual increase in prices through 1986 to a level – for purposes of illustration – of $18 per barrel (1986 dollars),19 assuming for the sake of argument that oil prices would have risen slowly even in the absence of the embargo or the later price crises. It is argued elsewhere that it is most unlikely that prices could have remained at the level of 1972. If prices had not risen, energy balances would have been unrecognizably different:
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- There would have been much less conservation;
- Many nuclear plants would have been stillborn, forcing more use of oil to generate electricity;
- Much of the oil in the UK and Norwegian North Sea sectors would not have been developed;
- U.S. domestic oil and gas production would have declined even more rapidly.
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More comprehensive analyses of these and other factors force the conclusion that some rise in oil and energy prices was inevitable. We must consider that scenario. The impact of the crisis-induced price increases must be measured with respect to the rising baseline of oil prices. It would seriously overstate the effects of the 1973 (and 1978-80) crises if the higher prices were measured with respect to that 1972 level, rather than to the likely rising trend of oil prices. The key assumptions in estimating the effect of the oil price crises are these:
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- Prices jumped in 1973 but by 1978 had reached a temporary plateau. They would have fallen linearly to an assumed “equilibrium” level of $18 in 1986 (1986 dollars), starting from the actual level in 1978, had there not been a second and third round of price crises.
- The effect upon prices of the 1973 crisis is the difference between the actual prices through 1986 and the assumed decline. The price is then adjusted for inflation and converted into 2002 dollars.
- The 1986 price of $18 per barrel is chosen as the baseline for three reasons. First, it was articulated by key OPEC ministers as the new target. Second, the nominal price for OPEC crude has fluctuated around that average for the past 16 years. $18 represents a quasi-equilibrium figure. Third, the reference line is plausible, based upon much more intensive analysis.
The economic burden is calculated only with respect to oil imports into the United States, including those from Venezuela and Canada, which tracked the international market quite closely. Prices for domestic oil were also affected, but I focus here on the deadweight burden of the higher prices paid for foreign oil – the foreign-exchange cost. The approximate costs, in 1986 dollars as well as 2002 dollars, are displayed in Table 1 below:
Table 1
Impact upon U.S. Economy of 1973 Arab Oil Embargo (billions)
1973 Crisis Impact |
|
Oil Price Effect |
$450 |
GDP Loss |
300-600 |
Estimated Total |
$750-1,050 |
First the price effect of the 1973 crisis cost the U.S. economy one-half trillion dollars. Higher prices for imported oil cost the United States $450 billion (2002 dollars) by the time prices might have risen to the pre-1973 levels. The burden was spread across the United States, partly due to the complex system of price controls that evolved in the course of the 1970s. A particular burden of the price increase, however, was borne by the East Coast states, since they were disproportionately dependent upon heating oil for domestic use and heavy fuel oil for generating electricity. Second, the loss in GDP was $300-600 billion, which brings the total impact to between $750 billion and $1 trillion (2002 dollars).
The objective of the embargo was political, not economic. The price increases were accidental and incidental, even though they generated a massive transfer of wealth from oil consumers to oil exporters. There were significant political effects:
1. It had been argued that an embargo was a chimera, that the Arab oil weapon was a myth: “The Arabs cannot drink their oil.” The loss by the United States of 2 mb/d in imports20 proved that the principle was viable.21
2. The embargo was self-financing. The argument that an embargo was impossible because exporters could not forsake their export revenues was a canard. Higher prices more than offset the reduced volumes that were exported. Oil revenues were in fact higher during and after the embargo than before. Given the low price elasticity of oil demand, this should not have been surprising.
3. The newly demonstrated power of the Arab states counterbalanced Israeli influence in the United States for some years thereafter:
- Israel was forced to begin withdrawal from the Sinai Peninsula. It lost control of the oil fields – worth almost $1 billion per year at that point – and Egypt regained use of the Suez Canal.
- President Carter forced the Israelis to withdraw from South Lebanon after their first invasion in 1978.
- The Israeli lobby was unable to block sales of F-15 and AWACS aircraft to Saudi Arabia, thanks to the Saudis’ new wealth and newly discovered influence.
Additional, longer-run costs arose out of the 1973 embargo. The United States embarked upon a very expensive program to develop alternative energy sources – the “Project Independence” impetus to reduce U.S. reliance upon insecure Arab oil (discussed below).
The Strategic Petroleum Reserve (SPR) and Emergency Sharing Plan (ESP) of the International Energy Agency (IEA)
The 1973 embargo triggered two strategic responses. One, a major step, was the creation of a strategic stockpile of oil that could be deployed to mitigate the effects of any future oil embargo or supply crisis. Other countries, having experienced what President Nixon’s policy had wrought, independently undertook to create similar stockpiles. Second, Secretary of State Kissinger tried to rally support for Israel and the United States by establishing the Emergency Sharing Plan, whereby major countries would share oil in the event of a future embargo. Developed by the International Energy Agency in Paris, this plan proved to be abortive, and neither the ESP nor the IEA will be discussed further here.22
The SPR has been a functioning reality since 1977. It was argued at the time that such a strategic inventory would greatly reduce potential Arab leverage against Israel, which the efficacy of the 1973 oil embargo had so painfully demonstrated. The SPR was promoted by the late Senator Henry “Scoop” Jackson, who had long been active in protecting and promoting Israeli interests.
The target for the SPR was to accumulate a stockpile of one billion barrels, over and above the level of operational inventories, dictated by commercial considerations, which were held routinely by the oil industry. Several salt domes along the U.S. Gulf coast were selected, cavities in the caverns were leached out, and the infrastructure for delivering oil into the SPR was completed by 1977. At that point the newly-born Department of Energy began the process of buying crude oil and slowly filling the reserve.23 Twenty-five years later only two-thirds of the goal had been achieved. The SPR reached its peak level of 595 million barrels during FY 1995.
The SPR is available in the event of an emergency, and the physical capabilities have been tested. Thus far it has been drawn down several times to serve domestic political purposes, but there is no reason to doubt that it could deliver some 2-3 mb/d for short periods in the event of a genuine oil-supply shortfall. At the present level it would cover somewhat less than two months of oil imports.
The SPR was expensive. The premium for this insurance policy has been dear, given the adverse timing, and efforts have been made to camouflage the price tag. Most of the money has been spent on the acquisition of oil, much of that purchased in the early 1980s, when the price hit its historic peak. Typical prices paid to fill the SPR at the time were above $30 per barrel, equivalent to more than $70 per barrel in 2002 dollars. The cost of the facilities themselves was much less than the cost of the oil, about a fourth of the total outlays:
Table 2
Estimated Cost of the Strategic Petroleum Reserve24 (billions)
|
Oil |
Facilities |
Total |
Dollars as spent |
$16.8 |
$5.3 |
$21.9 |
Inflation adjusted |
29.2 |
7.9 |
37.2 |
Opportunity cost |
$115 |
$27 |
$146 |
The total outlay for the oil and installations, as reported in the budget, is $21.9 billion. That figure is misleadingly low, however, for three reasons:
- It ignores the effect of inflation over the last 25 years. Much of the oil was purchased in more valuable dollars.
- The budgeted amount includes no allowance for any cost of capital (or interest charge).
- In recent years, the oil stockpiled is government-owned “royalty-in-kind” oil, which is not reported in the budget. This oil could have been sold by the Minerals Management Service but instead is transferred “free” to the SPR.25
A better measure of the real cost is the second row above, in which the outlays have been converted into 2002 dollars. The oil cost is in fact $29 billion, almost double the budgeted figure, and the total expenditure comes to $37 billion, corrected for inflation. That correction is incomplete; the economic cost is still higher. If the opportunity cost of the capital is included – at a rate of 7 percent per year, the figure used widely for evaluating public-sector investment projects – the updated opportunity cost of the SPR comes to a minimum of $146 billion, a tidy sum. Since the project involves investments of a kind familiar to the private sector, the higher discount rate recommended by OMB is the more appropriate.26
One further correction is necessary. The oil – but not the infrastructure – has a significant salvage value. It could be sold. This is a credit against the total cost. If the SPR were to be liquidated, the oil could be sold into commercial markets at commercial prices. Hence, the DOE could recoup some of its costs. The key questions are: (1) how rapidly can the SPR be emptied and (2) what price might one expect for the oil?
Technically the DOE could draw down the SPR at more than 2 mb/d and dump that oil on the world market. But the price depends upon the current market and also very sensitively upon the rate at which the stockpile would be drawn down. A fire sale would reduce revenues. The situation is analogous to that faced by central banks that wish to divest themselves of their gold stocks. They have been forced to meter those sales slowly over the years in order not to undercut the market for their own assets.27
A realistic estimate of the salvage value of the stockpiled oil is $9 billion, a rather small fraction of the updated opportunity cost of the government’s investment in the project. This valuation is based upon three assumptions:
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- The stockpile would be drawn down over 8 years in order to minimize any impact upon realized prices.
- The applicable discount rate is 7 percent (real).
- A constant, real price of $20 per barrel (2002 dollars) could be realized. Oil prices have been highly volatile, but $20 per barrel is a reasonable approximation for the average price garnered by OPEC over the 16 years since world oil prices were realigned in 1986.
The net realizable value of the stockpiled oil, were the SPR to be liquidated, can be shown to be about $8.9 billion on that basis. The net cost of the stockpile becomes $137 billion:
Cost of SPR $146 billion
Salvage Value $ 9 billion
Net Cost $137 billion
This net cost of $137 billion is relatively insensitive to the salvage value, so further refinement of the salvage scenario is unnecessary.
1978 Iranian Revolution
Between 1978 and 1980 a further series of oil-price increases were imposed upon world oil consumers. These occurred in two distinct stages, the first triggered by the overthrow of the shah in Iran. First, prices jumped when the revolutionary forces closed down Iran’s export terminals in late 1978. This labor action was directed against the shah and his government, not against the United States or Israel. By cutting off crucial oil export earnings, the revolutionaries hoped to undermine and bring down the shah’s regime.28
The effect was impressive. Iran was a major oil exporter, and approximately 5 mb/d of oil was suddenly withdrawn from the market. This created a real shortage. The impact of that shortfall was exacerbated by speculative forces, as companies and consumers frantically bid against each other for available supplies. At the time, it was uncertain when Iran would return to the market or whether other producers could increase output enough to make up for the shortage.
Exports were soon restored. The revolutionary government, which needed oil revenues no less than that of the shah, regained control of the oil fields and export terminals and restored production by 1979, so the price spike was of short duration. I shall analyze its impact in conjunction with the effect of the Iran-Iraq war, which quickly followed, since separating the two effects is difficult and not instructive.
1980 Iran-Iraq War
In 1980, war broke out between Iran and Iraq. Even though oil markets had begun to stabilize earlier that year, as Iran returned partially to the market and other producers increased output, the new conflict triggered a further round of price rises. Export terminals in both countries were under attack, and oil liftings plummeted once more. The effects of the actual cutbacks were once again exacerbated by speculators and by oil companies or large users who frantically tried to build up inventories in the face of uncertainties surrounding supply.
Neither of these sub crises was purely local. The shah was attacked at home from both ends of the political spectrum for his close association with both the United States and Israel. The Israeli link was especially sensitive since Israel’s intimate relationship with SAVAK, the much feared secret police in Iran, was widely known. The link to the United States was only somewhat less offensive to the revolutionaries, since in their world view the United States and Israel were both forms of Satan.
The Iran-Iraq War, the conflict that had originated in local antagonisms between Ayatollah Khomeini and Saddam Hussein, quickly evolved into a special form of proxy conflict in which the United States and Israel helped to intensify and prolong the war. The United States provided Iraq with satellite photos and other intelligence concerning Iranian military positions and capabilities (some of which was either incompetent or actual disinformation). Later the United States permitted reflagging of Kuwaiti tankers under U.S. registration in order to deter Iranian attacks upon one of Iraq’s lifelines, since a sizable fraction of oil exported from Kuwait was in substance dedicated to financing Iraq’s war against Iran. Kuwait viewed that oil as loaned, whereas Iraq and Saudi Arabia saw the oil diversions as grant aid, not to be repaid, a disagreement that contributed to Iraq’s later invasion of Kuwait. In parallel, Israel restocked the Iranian war effort by selling critical U.S.-sourced equipment – ordnance, spares for Iran’s F-4s and other matëriel – at very high markups and in violation of U.S. sanctions and law.29 The very profitable sales continued for many years, in spite of the U.S. “Operation Staunch” designed to cut off arms deliveries to Iran, and in spite of the fact that the dimensions of the Israeli transactions were well known to various U.S. agencies.30
The joint effect of the revolution and the Iran-Iraq War can be estimated as done earlier. Two price spikes occurred, the first in 1978-79 and the second in 1980-81. In the early 1980s, at the peak of the frenzied buying and accumulation of inventories, prices occasionally hit $35 per barrel – the equivalent in 2002 dollars of $60-65 per barrel. The costs to the U.S. economy were similar to those incurred after the Arab embargo of 1973-74. The extra cost is the difference between the actual prices and the “equilibrium” price of $18 per barrel:
Table 3
Price Impact on U.S. Economy of 1978-80 Oil-price Increases (billions)
|
1986 USD |
2002 USD (est) |
1978-80 Crisis Impact |
$234 |
$335 |
In today’s dollars, the Iranian revolution and the Iran-Iraq War cost the U.S. economy $335 billion in higher import costs for oil. The total consumer cost, including higher prices paid for domestically produced U.S. oil and gas, is almost double that amount. In spite of domestic price controls, the higher level of world prices dragged up the prices of considerable volumes of domestically produced U.S. natural gas and oil and even had some impact upon domestic coal prices, given the competition among all fuels in the electric-power sector.
1990-91 Gulf War
The conflict started when Iraq invaded Kuwait in July 1990, after months of threats and shuttle diplomacy involving Iraq and Arab League members trying to avert a war. Once Iraq did invade, there were immediate repercussions on oil markets: (1) Kuwait suspended exports, pulling some 2.5 mb/d of supply from the market; and (2) the U.N. Security Council imposed sanctions upon Iraq, which led to suspension of most oil exports from Iraq as well.
The Gulf War was indeed a crisis, but its economic impact is both complex and paradoxical. It introduced new elements into the economics and financing of Middle East crises. U.S. consumers did briefly pay higher prices for oil, but the U.S. government actually made a profit on the war itself. Further, the United States had originally dragooned or otherwise induced some Gulf states and a few OECD allies to absorb the costs of the war. Then, however, Washington evolved ways whereby at least the Gulf states were able to recoup their support costs with considerable profit. The burden was shared, but some of the parties were more than amply rewarded for picking up their fractions of the initial costs of the war.
Price Spike
Oil prices jumped precipitately. Thanks in part to Kuwait’s over-production in the months before the invasion, prices had been close to historically low levels, fluctuating between $14.50 and $16 per barrel. In August, just after the invasion, the average price jumped to $25 per barrel and peaked still higher at $35 per barrel in October. The spike was short-lived. By February 1991, when Kuwait had been recaptured, prices had dropped back to $18 and fluctuated in that range thereafter. Both OPEC and non-OPEC producers had increased production, in some cases, as in Saudi Arabia, by reopening parts of fields that had been shut due to market constraints.
The higher oil costs were not inconsiderable, even though the perceived shortage was in fact short-lived:
Table 4
Costs to the U.S. of Higher Oil Prices, 1990-91 (billions)
Imported oil burden |
$35.7 |
Total consumer cost |
$75.7 |
The U.S. import bill rose by some $36 billion, an added cost of about $6 billion per month. But domestic oil prices quickly followed suit, at a time when imports comprised about half of total consumption and after price regulations had been lifted. The total cost to consumers for that brief crisis was $76 billion. Federal and state governments captured about a third of that increase in the form of higher income-tax payments from producing companies and as higher royalties or production taxes on oil-producing lands owned by the federal and local governments. These monies created the fiscal profit from the war. In particular, the federal government recouped at least $10 billion in higher revenues. That profit more than offset any shortfall between actual expenditures and “burden-sharing” contributions.
Financing the Gulf War
The financing of the Gulf War was unusual, if not unique. The circumstances are probably unreproducible, so it provides little precedent or model for future exercises. I summarize the key distinguishing features:
- Washington prevailed upon various allies or third parties to finance the entire cost of the war.
- The U.S. government either made a small profit on the operation or, at worst, incurred only peripheral net costs.
- Thanks to U.S.-sponsored sanctions against Iraq, the United States was able to ensure that the Gulf states that financed our war were more than amply rewarded through higher oil revenues.
- The United States was further able to construct or manipulate the U.N. Compensation Commission so that Kuwait, the Kurds, Turkey and other parties received compensation from Iraq, without burdening the United States.
The burden sharing was total. The net cost to the United States was minimal. In spite of the arcane convolutions of the accounting systems of the Department of Defense, a rough balance can be constructed:31
Table 5
Financing Balance – U.S. Account for Gulf War (billions)
Gross outlay |
$55 |
Contributions in kind |
-632 |
Quasi-cash U.S. cost |
49 |
Major Contributions |
$45 |
Germany |
6 |
Japan |
9 |
Kuwait |
13.5 |
Saudi Arabia |
13.5 |
U.A.E. |
$3 |
The officially designated cash-equivalent cost was $49 billion, after deduction of the $6 billion of in-kind assistance received from allies over and above the items shown, which added up to $45 billion.33 There was considerable debate as to the accuracy of the costs claimed by the Department of Defense – some equipment would not have been replaced in any case, some was charged at full rather than incremental cost, etc. The bottom line is clear: The difference between claimed costs and booked contributions is small. It lies well within the usual band of error and uncertainty in such budgetary exercises, and one can reasonably conclude that the Gulf War was effectively cost-free for the U.S. government. As noted above, the government at home collected incremental taxes and royalties of some $10 billion, from higher prices for domestic energy.
Congress had considered and opposed a war tax. The war was not widely supported by the public, so there was great appeal to the concept of shifting the costs off onto our allies, willing or otherwise. Covert burden-sharing provided the requisite camouflage, but cooperation from the allies was not enthusiastic. Congress found it necessary to apply pressure for compliance:
. . . a requirement added to H.R. 1282 . . . prohibits arms sales to nations that have not fulfilled their commitments to provide funds to the United States.
Thus, any country not helping finance the war would not be allowed to purchase military equipment from the United States. The need for that clause provides insight into the enthusiasm with which the Gulf states, other than Kuwait, rallied to the U.S.-Israeli cause.
Virtue Rewarded: Gulf Profits from Post-war Oil Markets
The Gulf states, however, were able several times over to recoup their contributions to the U.S. war chest, whether voluntary or coerced. They were able to share Iraq’s oil production quota, thanks to the sanctions prohibiting Iraqi exports. What oil volumes Iraq did not produce were produced incrementally by its OPEC confreres. Thus, a number of the Gulf producers raised their oil-export levels above the pre-war levels, in effect divvying up among themselves most of Iraq’s pre-war OPEC quota.
The arithmetic is straightforward. Sanctions had forced Iraq’s oil production down from a level of 2.8 mb/d, just prior to the war, to a level of 300-500,000 b/d between 1992 and 1997, when the oil-for-food program was initiated. Thus a window of opportunity of about 2.5 mb/d was opened for other OPEC producers during that five-year period, and applicants clustered eagerly about that window. Iraq’s ability to export was constrained even after the oil-for-food program began because the United States and Britain were able to stem the delivery of equipment needed to rehabilitate Iraq’s oil fields. This device permitted Saudi Arabia and others to continue to profit from Iraq’s reduced capability, although the profits declined after 1997.
The comeback was rapid, except for Kuwait. Saudi Arabia hiked production by an average of more than 2 mb/d. Its share of OPEC production rose from 25 percent in 1989 to 30 and 35 percent through 1997, when Iraq began to return to the market. The Saudis recaptured all of their contributions to the United States, plus their ostensible additional contributions to the frontline states, within the first two years. By the end of 1992, Saudi extra production had yielded a net gain of at least $20 billion. The UAE, which had advanced much less, broke even by the end of 1991. Kuwait, on the other hand, profited from two channels of compensation, although it had lost most of its production between the fall of 1990 and the middle of 1992, when the fires were extinguished and production resumed at a substantial level. First, it benefited from part of Iraq’s production quota. Its post-occupation production level was some 500,000 b/d higher than the mandated level before 1990. That yielded a net extra revenue of about $4 billion per year, which cumulatively offset income lost while production was shut down during and immediately after the occupation.34 By 1999, Kuwait, too, had recovered more in extra production, at Iraq’s expense, than it had lost during the occupation and reconstruction periods.
Second, Kuwait received a bonus. Extra production out of Iraq’s former quota offset the production volumes lost during the war, but it did not suffice to cover Kuwait’s cash contribution to the U.S. account. Those monies had been disbursed from the overseas balance of the Kuwait Investment Office. The U.N. Compensation Commission (UNCC), however, awarded Kuwait $15.9 billion for “lost production.”35 This sum, drawn from the fraction of Iraq’s export revenues assigned to the escrow account, rectified the overall cash balances for Kuwait. However, that award embodied three serious arithmetical or conceptual errors – one in favor of Iraq, the other two in favor of Kuwait.36 The latter swamped the former. The net effect was to award Kuwait a net cash windfall of more than $12 billion. This extra amount came very close to offsetting its cash support for the war effort.37
The integrity of the UNCC award has been hotly disputed.38 The United Nations does not deny the errors in the calculation of damages, and it notes off the record that the UNCC was staffed and operated largely by the United States and outside of the usual procedures for such ad hoc international tribunals.39 The senior UNCC official, a U.S. appointee, denied the errors in writing but offered no reconciliation of the data or any refutation of the corrected calculations.40
Since then, it is alleged that the UNCC account has also been used to reward Turkey for its participation in the war. Iraq was forced to compensate Turkey for the pipeline revenues it did not receive because the United Nations had blocked Iraq’s use of the export pipeline from Mosul-Kirkuk to Dortyol/Ceyhan on Turkey’s Mediterranean coast.41 Iraq invoked the concept of force majeure – it was blocked from exporting oil and using the pipeline. The drop in throughput on the pipeline was not volitional. However, the U.S.-run UNCC saw fit to charge Iraq for the fees Turkey would have collected on the volumes of oil that the United Nations prevented it from pumping though the line. Turkey also received some 1,000 older U.S. tanks and, in 1992 or 1993, a cash disbursement of $1.5 billion from an account set up by the Saudis.
Further, the escrow account into which Iraq’s oil-export revenues are paid has also been used to reward or compensate Kurdish groups in the northern “no-fly” zone, thereby relieving Washington of any need to appropriate U.S. funds for that purpose.
The results were asymmetrical. The Gulf states garnered windfalls that more than offset their contributions to the war. Germany, Japan and the other smaller allies did not.
MILITARY AND ECONOMIC AID
Regional Overview – Economic and Military Aid (budgeted)
The United States has also disbursed massive amounts of aid into the region, largely in the form of grants, non-repayable loans or loan guarantees. Some of the aid in the earlier years was tied to Cold War support for Turkey, but most of the sums have been spent since 1973, much of it tied to support for Israel’s post-1967 territorial expansion.
Total budgeted aid to the Near East, Turkey and Greece42 since 1946 amounts to $808 billion (2002 dollars), adjusted for inflation and including a 3-percent opportunity cost for U.S. capital. Of the budgeted total, some $500 billion – two-thirds – has arisen since 1973. Major beneficiaries have been:
Israel |
$247 billion |
Egypt |
139 |
Jordan |
25 |
Turkey |
159 |
Greece |
125 |
Partial total |
$695 billion |
This total omits items such as peacekeeping expenses, special aid to the Sudan, and U.S. contributions to multilateral aid or rescue programs such as the $37 billion package for Turkey after its alliance with Israel. It also excludes direct aid for Israel (see next section).
Of that partial total for official, budgeted aid, $411 billion is official budgeted support for Israel, direct and derivative. The aid to Egypt and Jordan is supplementary support for Israel and is included in that subtotal. Those aid disbursements originated with the peace treaties signed with Israel and are viewed locally as payments to both for their reduced threat to Israel, a consideration also reflected in congressional discussions of the appropriations each year. Consequently, politically if not administratively, those outlays are part of the total package of support for Israel.
Direct Aid to Israel
The most immediate and definable cost of U.S. policy in the Middle East is the program of aid for Israel. The officially budgeted aid has escalated beyond original prognostications. Thirty years ago that aid was modest, almost negligible – $100 million per year, some of it loans that were expected to be repaid.
Since then the pattern has changed dramatically. The scale of officially reported U.S. aid to Israel has risen exponentially, and the channels through which that aid moves have proliferated. One reason for the channeling of aid recently through multiple allocations has been to camouflage the total amount, since African-American groups, for one, had begun to protest such massive support for tiny Israel when monies for black groups were constrained.
The largest regularly budgeted items are: (1) Economic Support Funds (ESF) and (2) Foreign Military Financing (FMF), both of which are regularly included as line items in the annual foreign-assistance bill. But other items add to the total, even though they are not classified as foreign aid. Table 6 summarizes the major types of direct support and also indicates the fraction outside the publicly reported foreign-aid budget:
Table 6
Recent Official Aid to Israel: 1997-2002 (millions)
Military Grants |
Economic Support |
Other |
Loan Guarantees |
Total |
$12,600 |
$5,990 |
$483 |
$5,000 |
$24,073 |
FMF aid has plateaued at some $1.8 billion. ESF aid is slowly being reduced, dropping from its historic level of $1.2 billion annually to $720 million in the most recent appropriation. However, military aid (FMF) is scheduled to increase by almost the offsetting amount. Budgeted aid constituted only about two-thirds of the known aid during the period. But other items, although smaller, aggregate to significant sums, and more of the aid is channeled through other line items such as special appropriations in the defense budget or contracts via USAID (see below). Ad hoc grants are even more important. In 2000, on the occasion of the meeting at the Wye Plantation, Israel received an extra $1.2 billion, over and above the regular appropriations. Approximately $5 billion in additional aid was provided via U.S. guarantees of commercial loans to the Israeli government (see below). Earlier special lump-sum grants occurred, but an overview has not been located. The ad hoc appropriations are discussed below.
Direct aid to Israel is not only large in relation to the size of the beneficiary; it is also characterized by several peculiar features:
- It is disbursed as a lump sum close to the beginning of each fiscal year; thus Israel gains the benefit of the interest. This is lost to normal aid recipients, where U.S. aid is dribbled out in installments.43 The Israeli government maintains large overseas cash balances, so free U.S. money is deposited in interest-bearing accounts for the benefit of the Israeli government.44
- Israel is not required to purchase U.S. goods or services with American aid monies. U.S. exports suffer because U.S. aid finances the EU’s ongoing trade surplus with Israel.
- To the contrary, Israel, through the U.S. Congress, has succeeded in the “reverse tying” of aid: U.S. firms or the Department of Defense are required to purchase from Israel about 60 cents worth of Israeli goods for every one dollar the United States provides in military grants. This is the opposite of the usual procedure for offsets.45
- Loans have with increasing frequency been commuted retroactively into grants.46
The total identifiable budgeted aid since 1949 comes to $858 billion (excluding the most recent tranche of $10 billion in loan guarantees). That figure, while large, is nonetheless misleadingly low. First it must be corrected for inflation – one cannot meaningfully add outlays in dollars of 1960 to those made in recent dollars. Second, multiyear federal expenditure programs need to reflect an interest rate – the yield that the government might have realized if the funds had been invested productively. For the sake of argument, I will use a cost of capital of 3 percent (real), considerably less than that recommended by the Office of Management and Budget.47
The representative figures for the economic cost of direct aid are much higher. Budgeted aid to Israel has aggregated to $140 billion in 2002 dollars. Allowance for a modest interest rate of 3 percent produces a still more realistic estimate of the opportunity cost: $247 billion, one quarter of a trillion dollars in today’s money. The latter figure is a close proxy for the opportunity cost of that aid to the U.S. economy:
Table 7
Direct Long-term Budgeted Aid to Israel Through 2002 (est, in billions)
Reported per U.S. Budget |
Corrected for Inflation |
Economic Cost at 3 percent |
$88 |
$140 |
$247 |
Private Jewish Remittances
Additional resources are drawn from the United States in the form of private contributions from Jews in the United States and in the sale of Israeli government bonds. Most of the former are tax-deductible and constitute “tax expenditures,” as reported in annexes to the annual government budget. Recent data on these transfers have not been located; some years ago the charitable outflows ran around $1 billion per year, excluding sales of Israeli bonds. Adjusted for inflation over the past decades, these transfers may have aggregated to $20-30 billion.48
Israel Bonds are a special category. First, these are rolled; as older bonds mature and are repaid, new issues collect new money. Thus, only the net amount outstanding has constituted a drain on the United States. Second, the bonds are not tax-exempt, some media reports to the contrary, and do yield interest. The cost to the U.S. economy is thus the difference between the nominal interest rate and the market rate plus adjustment for the probability of default. That analysis is beyond the scope of this paper. An upper bound, however, for the outflow from the United States is the gross amount of those bonds outstanding, which amounts to roughly $10 billion.49 Some of these bonds are held by non-Jewish U.S. fiduciary institutions that were induced to place pension or other funds in Israel.50 The terms of the bonds violate fiduciary standards; purchase by trustees is either illegal or requires special enabling legislation. The recent effort by Jewish legislators in Illinois to require the state pension fund to invest in Israel illustrates the phenomenon.
Provisionally, one can estimate at least a minimum value for the known direct aid to Israel. This figure excludes third-party support and the complex military-assistance transactions, both of which are sketched in later sections:
Table 8
Aggregate Direct Aid to Israel (est): Opportunity Costs (2002 dollars, in billions)
Budgeted Foreign Assistance |
$247 |
Private Jewish Remittances |
30+ |
Israel Bonds (various issues) |
10-14 |
Loan Guarantees (known) |
10 |
Estimated Total |
$297-301 |
The cost of direct aid has accumulated to almost $300 billion in 2002 dollars. This figure excludes special and ad hoc aid and any indirect support or protection costs, which add considerably to this total. The latter elements are estimated in subsequent sections. The loan guarantees to date of $10 billion are shown in the table above, but discussed below.
Support for Israel: Third-Party Stipendiaries
The United States disburses aid to other countries in the Middle East, linked to their maintaining a truce with Israel and distancing themselves from active confrontation. Egypt and Jordan have been the principal beneficiaries. But modest aid money flows to the Palestinians in an effort to blunt their resentments; still further money is spent to support peacekeeping missions; and, more recently, there is active discussion about offering blandishments to Turkey to cement its new alliance with Israel.
Egypt
Egypt has received large sums from the United States. Budgeted or appropriated aid has aggregated to $57 billion, a figure almost one-half that appropriated directly for Israel itself. The history of U.S. aid to Egypt is complex and tortuous; at times it was suspended when Cairo was flirting too blatantly with Moscow.
Aid flows to Egypt, however, did become serious after 1977. U.S. pressure by 1975 had forced Israel to withdraw from Egyptian lands conquered in 1967, including unilateral withdrawal from the very profitable oil fields on and offshore of the Sinai Peninsula, which Israel had exploited since the late 1960s. U.S. aid to Egypt jumped from $20 million in 1974 to $2.6 billion in 1979, part of which was defined as compensation to Egypt for the oil the Israelis had extracted during their occupation.51 The Israelis refused to pay directly for that oil, so Washington assumed the obligation.
Since the peace treaty between Israel and Egypt, U.S. aid to Egypt has fluctuated in the range of $2 billion per year, roughly 40 percent for “economic” aid and 60 percent for military support. Inflation since 1977 has undercut the meaning of the total appropriated amount of $54 billion, so that here, too, it is important to correct for inflation, converting the budgeted total into 2002 dollars and allowing for some opportunity cost for the resources transferred from the United States:
Table 9
Direct Budgeted Aid to Egypt through 2002 (billions)
Reported per U.S. Budget |
Corrected for Inflation |
Economic Cost at 3 percent |
$577 |
$84 |
$139 |
The total aid, denominated in 2002 dollars, comes to $84 billion. The total resource cost to the U.S. economy, also adjusted for inflation and with allowance for the opportunity cost of capital, comes to some $139 billion. Most of these costs were incurred after 1978-79, when the late President Anwar Sadat signed the peace agreement with Israel.
U.S. aid to Egypt is administered directly by the USAID mission and through American contractors. Egypt, unlike Israel, does not receive cash to disburse at its own discretion. A significant fraction of the aid consists of consulting studies and overhead charges, so that a relatively small fraction is actually spent on projects whose utility is not contested. The proliferation of U.S. consultants in Cairo, known unkindly as “beltway bandits,” has frequently been the subject of adverse comment.
Jordan
Jordan, too, has received an annual allowance. Its stipend is very much smaller, in spite of the fact that its truce with Israel, unlike Egypt’s, did not result in the restoration of any of its lost territories:
Table 10
Direct Budgeted Aid to Jordan (billions)
Reported per U.S. Budget |
Corrected for Inflation |
Economic Cost at 3 percent |
$5 |
$11 |
$25 |
Adjusted for inflation, U.S. aid to Jordan has accrued to $11 billion, and the economic cost, at 3-percent interest, has mounted to some $25 billion.
Turkey
Aid to Turkey is more problematic, its rationale more complex and volatile. The amounts have been subject to changing interests and different pressures from U.S. domestic lobbies during the period. It was originally an integral part of Cold War strategy, given Turkey’s key position on the USSR’s southwestern flank. However, both the Greek and Armenian lobbies in the United States have been successful from time to time in reducing or curbing aid to Turkey, pushing their own ethnic agendas.
More recently, Turkey’s strategy has changed, and Turkey has been folded into the Arab-Israeli conflict. The Greek and Armenian lobbies discovered that their influence waned rapidly during the 1990s, once Turkey had allied itself closely with Israel, and U.S. media interest in the welfare of Turkish Kurds disappeared. In 1990, Turkey was promised considerable economic benefits if it permitted the United States to use Turkish air space and especially the base at Incirlik for attacks against Iraq. There was a brief surge in officially reported U.S. aid to Turkey in 1990-91, but other sources argue that Germany and the Gulf states, especially Saudi Arabia, were persuaded to assume that responsibility. Reports are mixed; Turkey claims that it never received the promised funds. Turkish officials argue that the country lost $30-40 billion in trade, tourism and oil-pipeline revenues because of the 1990-91 Gulf War, but it has not produced verifiable documentation.
Nonetheless, total officially booked U.S. aid to Turkey – in spite of hiatuses and challenges – has amounted to a considerable sum.52
Table 11
Direct Budgeted Aid to Turkey (through 2002, in billions)
Reported per U.S. Budget |
Corrected for Inflation |
Economic Cost at 3 percent |
$21 |
$55 |
$159 |
The total cost reached $159 billion by 2002. Almost all of these costs, however, originated prior to 1989. They therefore are artifacts of the Cold War rather than “costs” related to U.S. Middle East policies per se. Known U.S. direct aid to Turkey since 1989 is $8.2 billion, much of which is in the form of loans that are supposed to be repaid.
However, a new era may be opening with respect to aid for Turkey, both prospectively in terms of greater amounts and retrospectively in terms of debt forgiveness. A special grant of $228 million was authorized in the fall of 2002, but larger amounts are in play. Since 1990, FMS sales to Turkey aggregated to $6.4 billion, and commercially financed sales of military equipment came to another $7.1 billion. But other conduits for aid opened up as well. The recent multi-billion-dollar bailout for Turkey via the IMF has been characterized as a reward to Turkey – belated according to Turkish sources – for Turkey’s close cooperation with Israel. Since the United States puts up about a third of any IMF loans, this could be interpreted as a harbinger of new indirect aid for Turkey and represents a major increase in such support. It also illustrates the new trend whereby the United States strives to induce other countries to absorb larger shares of the costs of supporting Israel. The U.S. share of the most recent round of loans, therefore, is rather more than $11 billion, in addition to that shown in Table 11.
Off-budget aid also flowed after 1989. The United States did grant Turkey an increase in its duty-free textile-export quota to the United States in 1990 or 1991, although evidence of significant cash is still lacking. The textile quota is of interest to Turkey, since its textile industry is labor-intensive, comprises one-third of total exports, and faces stiff worldwide competition. Hence, the concession by the United States was valuable to Turkey and, from Washington’s perspective, constituted a form of politically cost-free aid that bypassed the Congress. Duty-free exports of Turkish textiles have tripled since then, from $500 million per year to some $1.5 billion (2001 dollars). This “bypass aid” was costless to the U.S. government, but implies the loss of some 20,000 further jobs in the U.S. textile industry. Another form of unbudgeted aid is being discussed: the creation of Qualified Industrial Zones (QIZ), from which Turkey could export duty-free into the United States. Turkey also received some 1,000 used U.S. M-60 tanks early in the 1990s as partial payment for its complaisance during the Gulf War.53
The ante is likely to increase. Turkey is asking that the United States forgive some $5 billion in FMF loans that have accumulated in the past 12 years. Turkey invokes the precedent of loan forgiveness for Egypt at the time of the Gulf War, which was one part of its acquiescence in support for the United States. Washington has already committed at least $6 billion in new cash to Turkey through its share of the IMF and World Bank loans in the past 24 months. The Turkish press also adds the demand that the United States open up still further to Turkish textile products. Thus, provisionally, the aid to Turkey shown in Table 11 should be increased by another perhaps $7 billion, at a minimum, reflecting front-end payments Turkey is demanding for its support in the forthcoming campaign against Iraq.54
Greece
Aid to Greece has also become part of the costs of U.S. involvement in the Middle East, although the history of that aid program is convoluted.
U.S. aid to Greece, like that to Turkey, evolved out of NATO commitments and the Cold War, but since the late 1960s aid to Greece has become inextricably part of the broader Middle East picture and the turbulent rivalries and temporary alliances among the Jewish, Greek and Armenian lobbies within the United States.55 At one stage, aid to Greece was used to placate Greek-Americans in order to reduce obstacles to aid to Turkey; then both became linked to the still-festering Cyprus issue. Earlier the Jewish lobby had supported both Greeks and Armenians against Turkey, using the Kurdish issue as the main stalking horse, but in the 1990s the Israeli lobby persuaded Turkey to ally itself with Israel, and the Jewish groups abandoned their prior cooperation with the Greek and Armenian lobbies.
In view of this history, all but the earliest loans and grants to Greece are part of U.S. engagement in the Middle East. A formula evolved whereby Greece was to receive $7 in aid for every $10 given to Turkey. Migdalovitz56 traces the perturbations in that relationship, but both received loans, grants and interest-rate concessions during the period following the end of World War II.
Table 12
Direct Budgeted Aid to Greece (billions)
Reported per U.S. Budget |
Corrected for Inflation |
Economic Cost at 3 percent |
$11.6 |
$36 |
$125 |
The economic cost has accumulated to $125 billion, roughly two-thirds of the total for Turkey, illustrating that the parity ratio has more or less been implemented. Although the Greek and Israeli lobbies cooperated for many years – witness, for example, Rep. Benjamin Rosenthal’s (D-NY) intervention on behalf of Greece at the time of the Turkish invasion of Cyprus – the linkage between support for Israel and aid to Greece is not convincing until after 1989. At that time, continuing aid to Greece became part of the costs of buying Turkish support during and after the Gulf War. Thus, at most, about $6 billion of this aid can be attributed to indirect support for Israel.
Miscellaneous Support Programs
A number of lesser items covering activities in support of Israel are known:
Table 13
Additional Support Outlays: FY 2002 Proposals (millions)
Multinational Force and Observers (Sinai) |
$16 |
UN Disengagement Observer Force (Golan) |
8 |
UNIFIL |
34 |
UN Iraq-Kuwait Observation Mission |
5 |
West Bank-Gaza ESF |
75 |
U.S. Share UNRWA Budget |
111 |
Illustrative Total |
$249 |
The United States bears part of the costs of protecting Israel’s borders, whether recognized internationally or not, and contributes modestly to the support of the Palestinian populations in the occupied territories. Estimated expenditures for FY 2002 for these categories come to $249 million, but only a more exhaustive study could verify the actual amounts, given the vagaries of these programs.
Direct plus collateral support for Israel, via the third-party stipendiaries and other channels, is displayed only illustratively in Table 14, below:
Table 14
Estimated Direct Aid and Stipendiary Support for Israel (billions)
Israel |
$300 |
Egypt |
139 |
Jordan |
25 |
Turkey & Greece |
1657 |
Border Security |
558 |
Estimated Total |
$49659 |
The total comes to $496 billion. Much of the aid to Turkey reported earlier had been unrelated to U.S. obligations to Israel; those pre-1990 sums, attributable to Cold War operations, have been deducted in this table. On the other hand, significant items are missing, so that the final figure may be appreciably larger. Some of the additional “backchannel” aid is discussed below. Important is the fact that the indirect costs of supporting Israel are almost as large as the direct aid.
Aid to the Periphery
The United States has also provided aid to countries on the periphery of the Middle East that are deemed to be intimately involved in the politics of the region. Whatever the policy objectives or ostensible rationales for such programs, these outlays, too, have accumulated to considerable sums over the past 20 years or so.
Sudan
The United States provides considerable sums in support of the civil war in the Sudan, since virtually all of U.S. aid monies move to the areas controlled by the various rebel groups. The United States is the only major donor providing development assistance to areas outside government-of-Sudan control.
Since 1983, the United States has reported delivering $1.6 billion in humanitarian and food assistance to the Sudan, channeled almost exclusively to the rebel groups in the South. Originally the Israelis had supported the rebel movement in southern Sudan, funding a handful of mercenaries and building support infrastructure in Kenya and Uganda.60 These costs have been shifted to the United States, which has since taken over the bulk of that responsibility in the form of humanitarian aid. Only part of that aid is included in the official aid budget; most is funded from the Department of Agriculture’s food programs. The ante is being upped: $139 million has been allocated officially for FY 2002, plus at least another $19 million from other budget lines. The Sudan bill in October 2002 authorized another $100 million per year for the next three fiscal years.
Central Asia and the Caucasus
Central Asia has been partly drawn into the ambit of the Middle East. U.S. aid to the area began only after the dissolution of Soviet power in the area, driven by at least three disparate motives: (1) supporting the newly independent states in cutting the umbilical cord to Russia; (2) mobilizing support for Israel and opposition to Iran; and (3) providing bases and joining in the struggle against militant Islam. This aid is illustrated here, even though it is only related in part to U.S. Middle East policies. It is not included in totals. Known aid for the “emergent democracies” in the most recent years is tabulated in Table 15.
In the year 2000, officially reported aid to the “emergent democracies” totaled a half billion dollars. This figure has increased since then and does not include outlays for military construction at airfields or bases used by U.S. forces newly mobilized in the region.
Table 15
Reported U.S. Aid (millions) to “Emergent Democracies” (2000 dollars)61
Armenia |
$93 |
Azerbaijan |
115 |
Georgia |
131 |
Kazakhstan |
57 |
Kyrgyz Republic |
39 |
Tajikistan |
21 |
Turkmenistan |
11 |
Uzbekistan |
65 |
FY 2000 Total |
$532 |
Other
Additional small annual outlays can be noted that also, if fully itemized, would add up to an appreciable sum. Aid to Ethiopia and Eritrea runs currently some one quarter of a billion per year. The abortive campaign in Somalia cost more than $2 billion. Here, too, the rationales are mixed. In these cases the countries were rewarded or pacified for cooperation with Israel at various times, their location at the southern end of the Red Sea looming large in Israel’s geostrategic thinking. But U.S. aid was also used at different times to try to counter Soviet influence.
Propaganda expenditures for the Middle East have changed and increased, with the creation of new broadcasting facilities. Radio Farda and Sawa were established to convey American “messages” to the younger generations in Iran and Arabic-speaking countries. These outlays are not included. It is also certain that considerable military construction outlays are not reflected in any of the data in this study – expansions in Turkey or Central Asia or U.S. contributions to new bases in the Gulf such as the el-Odeid airfield west of Doha in Qatar. Lastly, idiosyncratic expenditures, such as the annual $15 million costs of the Lockerbie tribunal, are not included. These, too, if identifiable, would add further to the total. Even with the known omissions, the trackable costs have been some $32 billion.
SPECIAL AND AD HOC AID FOR ISRAEL
Further elements must be reckoned. In addition to the budgeted amounts included within the annual foreign-aid appropriation bill, Israel has received sizable amounts of ad hoc aid that do not appear as line items in the legislation. No comprehensive overview has been found, but listed below are a number of outlays that themselves add up to a material increase over the budgeted aid. It is probable that this supplementary list significantly understates these outlays and transfers.
Oil-Supply Guarantee for Israel62
One form of aid is contingent in the sense that it has not been invoked, but the burden on the U.S. economy could be very large under plausible scenarios. In 1975, Secretary of State Kissinger negotiated an agreement with Israel whereby the United States would guarantee its oil supply in the event of a crisis. The language of the original agreement and the periodic renewals was cryptic, providing no indication of the potential magnitude of this liability:
. . . the United States government will promptly make oil available for purchase by Israel to meet all of the aforementioned normal requirements of Israel.
The Memorandum of Understanding (MOU) explicitly notes that this guarantee is intended in part to offset the oil supplies Israel had captured on the Sinai Peninsula in the 1967 war. After exploiting those fields for 8 years, it was forced to restore the fields to Egypt after 1975. The MOU also commits the United States to construct and stock a supplementary strategic oil reserve for Israel:
. . . to make available funds . . . . for the construction and stocking of the oil reserves to be stored in Israel, bringing storage reserve capacity and reserve stocks now standing at approximately six months, up to one-year’s need . . .
This latter commitment was equivalent to some three-quarters of a billion dollars in 1975 dollars and oil prices ($3 billion in 2002 dollars), based upon the prevailing price of oil and costs of constructing comparable storage facilities.63
Special legislation was enacted so that oil deliveries to Israel would be exempted from restrictions otherwise imposed by Congress upon exports of oil from the United States.64 In general, Congress had prohibited exports of U.S. crude oil in order to protect U.S. consumers. That was waived expressly for the benefit of Israel although Israel was not explicitly named in the enabling legislation. The MOU itself is subject to renewal every five years, which hitherto has been done discretely with single-sentence references in unrelated legislation.
Translated into lay language, given the context and history, the Oil Supply Guarantee implies potentially very high costs to the United States, much greater than the commitment to construct the extra stockpiles in Israel discussed above:
-
- The United States ensures sustained oil supply for Israel in the event of a crisis. At the time of the signing, Israel was heavily dependent upon oil from Iran delivered via the pipeline from Eilat to Eshkelon, which supplemented the oil pumped from the captured Egyptian fields.
- The United States guarantees physical delivery in its own vessels if commercial tankships were to be unavailable or unwilling to unload in Israel.
- The United States would divert oil from supplies of its own, even if U.S. consumers were experiencing shortfalls, to ensure that Israel received at least 93 percent of its requirements.
The contingent costs of this arrangement are obviously scenario-specific. The burden to the U.S. economy can be illustrated given the following crisis parameters:
- The United States loses one-half or more of seaborne imports, allowing for diversions by Canada from Midwestern pipelines.
- The Emergency Sharing Plan (ESP) of the International Energy Agency is not invokable.65
- The embargo causes material cutbacks in U.S. industrial production, so that the additional diversions of oil to Israel imply high opportunity costs.66
This reference scenario is plausible. In that case, Israel could demand diversions of up to 200,000 b/d from the United States. In such a crisis, the cost to the U.S. economy is considerably greater than the price, as plants shut down for want of fuel or customers. A rough estimate under such conditions is that each lost barrel costs $250-500 in lost GDP.67
The supply guarantee thus would cost the United States approximately $1.5-3 billion per month for the duration of the supply stringency. It is probable that the arrangements could be kept secret from the U.S. public, but the costs remain quite real:
- Construction of oil stockpile for Israel: $3 billion (2002 dollars)
- Crisis supplies: $3 billion per month
The first is a one-time outlay, whereas the supply during a crisis is open-ended, the total magnitude depending upon its duration and Israel’s success in minimizing the amount to be paid for any oil diverted by the United States. This guarantee gives Israel a “first call” on scarce oil if the U.S. is subject to an embargo.
Loan Guarantees (1992-98)
Since 1992, Israel has benefited from almost $10 billion in a new form of crypto-aid: very large loan guarantees. The United States was committed to guaranteeing up to $10 billion in loans that Israel would draw from commercial banks or other lenders, relying upon the full faith and credit of the U.S. government, rather than its own credit rating. As of mid-2002, $9.3 billion of those guarantees had been exercised.68
This amount, although outside the foreign-assistance budget, is the economic equivalent of aid. The value of the guarantees are high – Israel otherwise would have paid much higher interest rates for short-term, more volatile borrowings. But the cost to the U.S. is very high, too. The probability that Israel can repay those loans is very low. History bodes ill for the sanctity of these guarantees. First, there is the precedent of nonpayment. Most prior “loans” to Israel have been commuted into grants, so never will be repaid. Israel did not default; the loans were simply forgiven. Second, the Cranston Amendment provides that U.S. aid to Israel will never be less than the amount needed by Israel to cover any debt service owed to the United States. Thus it would follow that U.S. aid would be increased to cover Israel’s service of the debt.69 When Israel is unable to pay the lender of the guaranteed notes, the United States steps in and leaves the lender whole, paying principal and interest. At that point, Israel, for whom the loans were guaranteed, owes the United States that amount. Thus, under the Cranston Amendment, if reinstated, the United States is obligated to increase any given level of aid to cover the new debt.
Third, Israel’s credit rating, absent U.S. guarantees, is precarious. Its current-account deficits have been chronic for the past 50 years, showing no sign of improvement as the country continues to be unshakably dependent upon massive injections of foreign aid. The economy is in even poorer condition since late 2000 because the costs of the latest intifada and the costs of protecting the lands conquered in 1967 have escalated. Direct costs are high, but direct consequences have been even more costly. Tourism and foreign investment have been dramatically reduced; the costs of replacing cheap Palestinian labor with more expensive expatriates from elsewhere have trebled; and per capita GDP is falling. The net foreign-exchange cost of the intifada for Israel is some $5-7 billion per year in terms of lost foreign-exchange revenues or higher costs.70
The burden is high, and the economy is weak. Thus, it must be anticipated that there is a high probability that the United States will be forced to appropriate funds at that point in the future when the loans are due and cannot be rolled over. Notionally, the loans were earmarked for financing increased Jewish immigration into Israel. Since money is fungible, the money in fact helped finance Israel’s chronic deficit on current account during the 1990s.
The $10 billion burden will fall upon the U.S. taxpayer, although the timing cannot be predicted. The subsidy embedded in the guarantees consists of two parts: the interest subsidy, wherein the U.S. government assumes the credit risk, and the probability of default. The annual subsidy cost of these guarantees can be estimated as the difference between the “guaranteed” borrowing rate and the rate that an unsubsidized Israel would have to pay on world markets. Other borrowers with similar credit indicators pay 500-700 basis points more than the rate on U.S. Treasury paper, so these guarantees reflect a subsidy element of $500 million a year or more. The Israeli press claims that the interest differential is only 250-300 basis points, but this applies to shorter-term conventional borrowings. As noted earlier, Israel has disguised the impact of the recent borrowings by undertaking zero-coupon loans, where the risk accumulates with time, rather than vice versa.
The rating agencies have not downgraded Israel’s sovereign credit rating. The reader must weigh those statements cautiously. First, the agencies’ track record is demonstrably poor. The rating agencies missed the defaults of Enron, WorldCom and other well publicized cases. Second, the agencies’ statements are equivocal.71 They themselves refuse to be quoted, but it is understood that they recognize that Israel’s official credit rating is low, but argue that it is not below investment grade because of a logical circularity:
-
- The economic prospects warrant a sharp downgrade below investment quality.
- The Israeli lobby recognizes the urgency of massive new aid.
- The United States will yield and provide the needed aid, largely in loan “guarantees,” which camouflage the economic impact on the United States.
- Since Washington will be obliged to come to the rescue, the credit rating does not need to be adjusted.
Their analysis factors in what they view as the certainty that the United States will rescue the economy with additional loan guarantees. Thus Israel’s rating is sound because it will be bailed out. The new demands for rescue funds are high. Both the U.S. and Israeli press report that the Israelis are demanding for 2002 an extra $4 billion in new military aid, over and above appropriated levels, as well as an additional $10 billion in loan guarantees.
As before, the United States will be required to guarantee full performance on $10 billion in commercial loans undertaken by Israel. Those loans would not be possible without the U.S. guarantee, given Israel’s fragile economy and unfavorable and persistent balance-of-payments deficits. Just as the United States had forgiven earlier loans to Israel, in view of the precedents and Israel’s faltering economy, it is all but certain that the U.S. Treasury will be required to make good on these guarantees. At least one other block of guarantees is known – $600-plus million for “housing loans.” Still others are bruited about but undocumented. Total U.S. guarantees to Israel will thus exceed $21 billion if the latest round of demands is approved.72
The new debt is dangerously structured. Much of it is in the form of zero-coupon loans or bonds, i.e. borrowings where no interest is paid until the loan matures, at which time the lender must be paid the full principal and all accumulated interest. This device can be used to make debt-service burdens appear low. Neither interest nor authorization nor sinking-fund payments need to be reported. But it greatly increases the risk to the guarantor. Typically loans involve regular amortization – say, semiannual payments of both interest and principal. Hence, the lender’s and the guarantor’s exposure declines steadily as the loan approaches maturity. In the case of Israel’s zero-coupon borrowings, the relationship is exactly the opposite. The risk exposure increases over time, while the debt-service requirements of the borrower are systematically understated, implying a better credit position than is the case.73 Guarantees have been treated as “aid” in the year in which the guarantee is signed. Formally the budget cost is the expected net-present value of loss in each year of the duration of the guarantee.74 Given the very high probability that the United States will need to increase aid to cover the guarantees, a workable approximation to the annual cost is the face value of the commitment in the year when the loan is drawn.75
The Lavi Fighter and the Arrow Missile
Israel has received more than $2.5 billion in direct support for two major military design and manufacturing projects – development of the Lavi fighter and development and construction of the Arrow missile system. The Lavi project was finally discontinued, but occasional funding for the Arrow may be continuing. The United States also advanced some $400 million to fund development of the Merkava battle tank, directly competing with potential U.S. exporters. At least another $130 million in U.S. money was devoted to a laser-guided missile project. Other, smaller amounts for smaller projects regularly appear in the DOD budget, but no annual total has been documented.
It is reported in the aerospace press that Israel, unable to commercialize large-scale production of the Lavi fighter, sold the design, jigs and manufacturing data to the People’s Republic of China, where the modified aircraft is designated as the J-10.76 It is unclear whether that transaction competed with possible sales of U.S. aircraft or preempted sales by the Russians.
Prepositioned Arms and Excess Defense Articles
The United States has “pre-positioned” in Israel significant amounts of equipment and expendables, such as ordnance. These materials are stockpiled for delivery to U.S. forces in the area, but it is expected that the Israelis would use the materials themselves. It is understood that this equipment is not included within CENTCOM’s logistics planning, since they are not presumed to be at the disposition of U.S. forces.
Further, Israel benefits regularly from discounted sales of serviceable U.S. equipment (Excess Defense Articles), sold at prices well below commercial levels. The subsidy is the amount by which the items are underpriced, a discount negotiated case by case. DOD officials with very close ties to the Israeli establishment have generally been responsible for setting the prices and determining which items are “surplus” and available for delivery to Israel. It is reported that Israel draws upon these depots for its own use, but data is closely held.
Informal estimates put these discounts at several billion dollars over recent years, but a comprehensive reckoning has not been found in the public record, and the DOD is loath to provide an accounting.77 For example, in 1990, $700 million in equipment was stripped from US/NATO bases in Europe for transfer to Israel.
“Offsets” and Weapons Technology
Preferential and concessional grants of arms contracts for local manufacturers – offsets – is another form of aid to the Middle East. Hitherto the principal beneficiary has been Israel, but the issue is becoming increasingly important with respect to both Egypt and Turkey. The pros and cons of offsets in military procurement contracts have been extensively debated.78 Offsets take many forms: 1) locals produce part of the system; 2) the foreign vendor buys other equipment from the client for his own production elsewhere; 3) the vendor brokers local equipment to third parties; 4) the vendor and local firms coproduce and sell to third countries; or 5) the vendor is obligated to invest in unrelated industries in the purchasing country. The direct impact is that a given deal means fewer jobs in the source country and more jobs in the buyer’s industries, quite aside from any technology or manufacturing know-how that may also be transferred.
In the case of the Middle East, however, a distinction is critically important – some importers of U.S. arms do not pay. It is true that offset agreements have become an integral part of the international aerospace and weapons market, but the notion of an offset is radically different in the case of stipendiary clients such as Egypt, Israel and – increasingly – Turkey. Paying and non-paying clients are fundamentally different. I focus here on the impact of such agreements in the special cases of countries that do not pay for the weapons procured from the United States. In such instances – grant funding or gift transfers – the competitive necessity for an “offset” is moot. Hence, in the case of the Middle East it is necessary to distinguish two distinctly different sub cases:
Paying clients
In the case of clients who pay for arms purchases, there exists a competitive market with usually more than two sellers. Offset agreements, or co-production arrangements, are part of the sales packages negotiated in the competition for such contracts, just as are financing terms, price or conditions of infrastructural support.
Offsets and mandatory buybacks are unwelcome but are a real part of the international competition for the sale of weapons systems and support to paying customers. Where the arms are paid for, offsets are burdens, but are neither subsidies nor aid.
Stipendiary states
The situation is radically different in the cases where U.S. arms exports are financed overtly or covertly by grants, i.e. where the recipient stipendiary does not actually pay for the equipment.
There is no competition for free weapons – inducements do not need to be offered to stipendiaries to accept weapons for which they do not need to pay. Thus the offsets demanded by the Israelis, or given to the Egyptians, are subsidies, not market incentives. Since the demise of Soviet power, there is no competitor offering free or discounted weapons systems.
- Israel
Israel receives some $1.8 billion per year in direct, cash grants from the United States, ostensibly earmarked for purchases of U.S. weapons. Additional amounts are granted from time to time for special projects. The terms of these grants have several adverse effects upon the viability of the U.S. defense industry and upon U.S. employment:
- Israel is allowed to spend roughly 25 percent of the grant money directly for its own hardware under a special waiver of the “Buy American” provisions otherwise part of
U.S. foreign-aid programs. This fraction of U.S. military aid bypasses U.S. suppliers completely because it is spent in Israel for goods produced with Israeli labor. Officially only 25 percent of U.S. grant aid is designated for local spending, but the net fraction is much higher.
- Israel has successfully demanded that the United States buy equipment or subsystems from Israel just as if the deliveries were paid for. Thus the DOD or U.S. contractors must one way or another buy from Israel, paying in real money, some 50-60 cents worth of goods for every dollar’s worth that the United States gives to Israel – a financial double whammy. “Offsets” are demanded on both FMS and on commercially financed sales of equipment.
- Israeli arms merchants, such as IAI or Raphael, are able to embed U.S. technology in equipment they sell to third parties, often to pariah states or to countries subject to U.S. or U.N. arms embargoes. This latitude is lucrative. Israelis are able to command high premiums for the U.S.-derived equipment. In the 1980s, for example, when Israel sold large amounts of arms to Iran, in violation of the embargoes, the Iranians complained vociferously that the Israelis charged two to four times the prevailing prices.
- Most recently, Israel tried to sell the Phalcon, a knock-off of U.S. AWACS technology, to China. This sale, like an earlier effort to sell Kifr jets with U.S. engines to Ecuador, was blocked by U.S. officials, in spite of massive lobbying.
The offset agreements with Israel have proliferated and are little publicized. Some are large, such as those involving the F-16, but smaller arrangements, such as those with General Dynamics or Textron, are numerous, and amount to appreciable sums. The package of special terms has been very profitable to Israel, although no reliable estimate of the annual extra profits has been located in the public domain. The Congressional Research Service notes that weapons systems and subsystems make up almost half of Israeli-manufactured exports. This is due in considerable part to the package of subsidies, financial and technical, from the United States.
The Israeli arms industry has devoted special attention to developing “relationships” within the U.S. Department of Defense to ensure preferred access for Israeli suppliers.79 Weapons are a major export item for Israel, where the ability to offer U.S. technology, sometimes locally enhanced, is an important marketing tool. U.S. support for expanding and sustaining the Israeli arms industry has been most important, partly because it is readily concealed. Jawboning is the key factor in forcing U.S. firms to buy unwanted Israeli subsystems or components, as the legislative mandate is minimal. Since the early 1980s, key slots in the DOD have been held by persons close to Israeli intelligence or its arms industry. For example, the present deputy secretary of defense, Douglas Feith, had represented Israeli arms firms and Turkish manufacturers, through his Washington-TelAviv-based law firm for some ten years prior to being appointed by Deputy Secretary Paul Wolfowitz.80
The network of officials close to Israel, recruited under Wolfowitz, Feith and Richard Perle, have played the key role in transferring aerospace and arms-industry jobs from the United States to Israel. The group was instrumental in negotiating the formal “offset” agreements. Beyond that, however, a system evolved in which U.S. firms were signaled that they could expect favorable or expedited resolution of matters before the DOD if they were known to have purchased matëriel from Israeli firms. Conversely, if U.S. firms balked, other matters pending before the DOD were found to be obstructed. The impact of this arrangement can be documented indirectly in two ways:
-
- First, the asymmetry in U.S. arms exports to Israel versus the larger volume of U.S. imports of systems and subsystems from Israel. This is a major factor in the unfavorable balance of trade with Israel.
- Second, the cryptic reports of subcontracts or purchases with Israeli firms for equipment where domestic manufacturing capability is established and known.
Although tens of thousands of U.S. jobs have been sacrificed through such “offsets,” a more serious consideration is that every production line that is gratuitously transferred abroad undermines the readiness of the U.S. industry. Not only jobs are at stake; defense readiness is impaired. Economies of scale are sacrificed, even if the production line itself is not lost. Recent examples of such one-sided arrangements:81
- Export of hardware, technical data and assistance to support manufacture of airfoils for F100, J-52, J-57, TF-30, F119, F135, TF33 and F117 aircraft engines with Israel for sale back to the United States (emphasis added).
- Export of hardware, technical data and assistance to support manufacture of Tactical Air Launched Decoys (TALD) and Improved TALDs with Israel Military Industries Ltd. of Israel, for sale in the United States and thirteen other countries (emphasis added).
These are examples of the free transfer to Israel of technical data and expertise, developed and paid for by the DOD, which subsidize Israeli firms to displace U.S. manufacturing.
The arms industry is extremely important to the Israeli economy, thanks to the subsidies and technology transfers. The special concessions by the U.S. Department of Defense had created and sustained a major part of Israeli industry, which probably would be much smaller and less profitable, absent covert and overt cooperation with key officials in the DOD.82
- Egypt
The major offset deal is co-production in Egypt of the MA1A battle tank. The amount is relatively small, but it illustrates a costly and increasingly common feature: Egypt is reportedly trying to sell its co-produced tanks to third parties, directly competing with the United States. This trade is small compared with that involving Israel, but there is the likelihood that it will grow in time as the Egyptians bargain for closer parity with Israel.
Special Commercial Support for Israeli Firms
A final element in cost arises through the support given by the United States to Israeli industry more generally.
- Extensive subcontracting to Israeli firms for assembly and equipment for the F-16. Lockheed-Martin purchases the subsystems not merely for the aircraft given to Israel, but also incorporates them into planes sold to third parties.
- Contracting to Israel to upgrade and maintain U.S.-produced tanks used by the Turkish army (M-60A1s). These are shipped to Israel for reworking, tasks which could be performed by the U.S. primary manufacturers, such as General Dynamics, employing
U.S. labor.
- Preferential selection of Israeli firms for contracts with USAID, especially in Africa and Central Asia.
- $668 million contract for upgrading Turkish F-4 Phantom aircraft, again in direct competition with U.S. manufacturers.
- Research support – some $1.5 billion – to subsidize Israeli production of the Lavi fighter, in direct, longer-term competition with U.S. aerospace firms.
- An arrangement whereby an Israeli firm received multibillion dollar contracts to build highly subsidized solar power plants in California that in fact ran primarily on natural gas.83
Such transfers directly affect U.S. jobs. There has been a long history of such transfers – some legal other involving the theft or diversion of technical information – and still others where co-production was imposed upon U.S. manufacturers, enabling the Israelis to appropriate the technology.
The magnitude of these transactions is sensitive and not openly discussed. The effect is partly included within the calculation of job losses, discussed below, but further details have not been located.
Covert and Indirect Support
Over the years, there have been a number of instances in which the United States rendered important support for Israel that involved real costs to the United States but which has not appeared in any discussions of more formal aid. Information is still tightly restricted, so the following instances can only be sketched:
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- Construction of a new airfield for Israel for some $300 million.
- Trade subsidies to the Soviet Union in return for their issuing privileged exit permits for Russian Jews destined to immigrate to Israel. The arrangements were offshoots of the Jackson-Vanik Amendment.
- An understanding with Ceausescu, the since-deposed dictator of Romania, whereby the United States granted Romania most Favored Nation trade status, access to Ex-Im bank, and international financing in return for facilitating the emigration of Romanian and Soviet Jews to Israel.84 Every Russian Jew who was routed via Romania to Israel was denied the option of emigrating to a country of his choice, but was forced to continue to Israel. The Austrians had refused to force emigrants onto aircraft flying to Israel, so the deal with Ceausescu was struck, and the tightly controlled transit route via Romania emerged as an alternative to flights through Vienna. Identifiable benefits for Romania exceed $1 billion.
- A back-up oil-supply agreement with Mexico. The Mexicans agreed to supply oil to Israel in emergencies, along with a smaller, similar guarantee from Norway, in return for trade concessions from the United States. Mexico was able to use that arrangement as leverage in discussions with the United States concerning implementation of NAFTA (North American Free Trade Agreement).
- Increasing use of Israeli contractors by USAID, as a form of off-budget aid to Israel. This has been especially important in Africa and in Central Asia. Employment of Israelis, rather than Americans, supports the Israeli economy but also helps them reinforce their intelligence operations in this newly critical area of interest to them.
- Israel has benefited for many years from special tariff and quota exemptions, as well as loose controls on country-of-origin restrictions. These loopholes have facilitated Israeli exports to the United States and contributed to the unfavorable balance of trade from the U.S. standpoint, exacerbated by the systemic U.S. failure to enforce regulations that otherwise might restrict Israeli exports to the United States. The Department of Commerce has been notably reluctant to intervene where Israeli exports are subsidized or where Israel exports, duty and quota-free, classes of products such as textiles produced elsewhere. Cases are known where U.S. manufacturers were forced to close or curtail operations because of subsidized Israeli competition that was not subject to countervailing duties. Conversely, U.S. firms have complained regularly that the Free Trade Agreement works only in one direction, i.e. that the U.S. market is opened to Israel, whereas potential U.S. exporters to Israel are hamstrung by taxes and other controls imposed by Israel to protect its domestic market.
- Theft of U.S. technology and trade secrets. In addition to technology obtained overtly, discussed above, there is a long history of Israeli commercial espionage in the United States. Some pilfered technology is used by Israeli industry, and some is sold to parties such as China or South Africa.85
No quantification of these arrangements has been located, but the costs, especially in terms of lost U.S. jobs, are material. These factors, too, are partly reflected in the adverse trade-aid balance between the United States and Israel.
LOST TRADE AND EMPLOYMENT
U.S. trade and American workers have suffered directly as a result of U.S. policies in the Middle East. Trade has been a major casualty of the steady deterioration in the presence and status of U.S. goods in Middle East markets. The effect is large: some 200,000 jobs have disappeared, thanks to the cumulative effect of U.S. policies over the past 20 years. But the factors that have caused the evaporation in U.S. exports are varied. Some jobs have been lost because Israel uses U.S. aid money to import from the EU or other competitors, while others have been lost because the United States arranges for contracts to be given to Israeli rather than American firms. Furthermore, additional U.S. jobs have been sacrificed to the regime of U.S. sanctions applied in the Middle East. In this section are reviewed the major types of losses that can be traced; the actual total losses are considerably larger.
U.S. trade with the Middle East falls into three distinct categories, reflecting the distinctly different political relations between the United States and the countries of the region:
- Stipendiary states: Egypt and Israel depend heavily upon U.S. aid but tend to import from third countries. The trade-aid imbalance results in significant losses in U.S. jobs with respect to these two countries, where the major effect is observed in the case of Israel.
- Sanctioned states: U.S. trade with Iran, Iraq, Libya and Syria has suffered sharp reductions. The U.S. policy of self-denial has resulted in these four countries’ shiftingtheir trade to U.S. competitors. One senior foreign official announced that he thought U.S. sanctions were “splendid – otherwise we never might have had this market (Libya).”
- Preferred customers: A few countries, such as Saudi Arabia, which do not receive U.S. aid, nonetheless do import preferentially from the United States. The U.S. share in the imports of these countries indicates the level of exports that can be expected under favorable political conditions.
Further losses have arisen when the Israeli lobby has blocked contracts for U.S. firms or where business has been diverted from U.S. companies to their Israeli competitors. These more diffuse costs are discussed below.
Stipendiary States: The Trade-Aid Imbalance (Egypt and Israel)
Commercial relations between the United States and Egypt or Israel are distinctive in two respects: (1) the United States provides massive direct aid to both countries, and (2) U.S. exports to both are less than could be expected. The imbalance between aid and trade is particularly marked in the case of Israel.
Over the past ten years, the trade gap has widened steadily, to the detriment of the United States. A free trade agreement between the United States and Israel was signed in 1986, but benefits to U.S. exporters have been modest. U.S. exports to Israel have risen only slowly, while Israeli exports to the United States have increased dramatically. The net U.S. trade deficit reached more than $5 billion in 2001 (Figure B).
Figure B
The trade data in this case, however, are misleading.86 The substantive deficit is much greater than that reported officially. The figure for U.S. exports does not reflect whether the exports were paid for or not. The distinction is important in the case of Israel; given the large amount of U.S. aid it receives. More important is the balance of paid exports versus paid imports. The difference is illustrated in the calculation summarized in Table 16 for the single year 2001:
Table 16
Trade-Aid Imbalance with Israel (2001 dollars, in billions)
Gross U.S. Exports |
7.5 |
Aid from the U.S. |
4.4 |
Paid U.S. Exports |
3.1 |
U.S. Imports from Israel |
11.9 |
Trade-Aid Imbalance |
-8.8 |
In 2001, Israel imported $7.5 billion in goods from the United States, based upon U.S. sourced data. But total direct U.S. aid was more than half that amount: approximately $4.4 billion. Thus, paid exports were only $3.1 billion. That amount is much less than the $11.9 billion in goods that the United States imported from Israel. Thus, when we distinguish among gifts, grants and paid exports, the effective trade-aid imbalance was $8.8 billion in Israel’s favor and against the United States.
The trade-aid gap has persisted for many years. In the early 1990s, the balance was tipped further against the United States because of Washington’s $10 billion in loan guarantees to Israel that did not translate into increased imports from the United States. The effect of that additional $10 billion is not reflected in the above figure.
Most of the U.S. funds are used to import goods, for example, from the EU, which enjoys a consistently large trade surplus vis-à-vis Israel. The contrast is stark: the EU provides minimal aid to Israel, but Israel buys from the EU. Conversely, the United States provides billions each year in assistance, but little of that money flows back to U.S. firms or workers.
The trade-aid imbalance is shown in Figure C, which includes public and private aid as well as the de facto aid in the form of the loan guarantees between 1992 and 1998.
Figure C
The imbalance is costly to the United States, translating into the loss of some 125,000 American jobs each year.87 The job losses are spread throughout the U.S. economy, because primary exporters, who lose the business, then buy less from their suppliers or service establishments.88 A similar effect is observed in the case of Egypt, but the magnitude is much smaller. The trade-aid balance is slightly positive, i.e. in favor of the United States, but more refined analysis suggests that U.S. aid to Egypt is in effect only partly tied. An important fraction of U.S. aid to Egypt is spent supporting a clutch of U.S. consultants and advisors. These monies flow back to the United States but are not reflected in the trade data. Thus, while the imbalance does exist, it is not significant.
Trade Losses in Sanctioned Countries: “Trade Suffers from the Flag”
The United States has also sacrificed jobs in another area of its Middle East policies. U.S. trade with the four sanctioned countries Iran, Iraq, Libya and Syria is at very low levels, in spite of the large annual revenues of the four. Instead of politics enhancing trade, the United States, through its set of unilateral sanctions, has lost trade opportunities.
The effectiveness of sanctions has been amply discussed in other studies.89 Here I focus on the other side of the equation: estimating the costs to the United States of its policy of “self-denial” with respect to this bloc of four states.90 Methodology here is important. Measuring what did not occur – quantifying “non-trade” – is speculative. Nonetheless, there are two ways of testing the possible effect of sanctions upon U.S. trade with a targeted country:
-
-
- Trend analysis, tracing the share of the United States in the country’s imports, plotted over time. A sharp drop in that share, coinciding with a policy change or sanction regime, is strong circumstantial evidence that there is a trade loss due to that policy.
- Relative market share (comparables test), comparing the U.S. share in the country’s imports with the U.S. share in imports of other groups of comparable countries.
-
The loss of trade with Iran can be vividly illustrated by examining the trend in U.S. exports since the early 1970s, starting with the oil boom before the overthrow of the shah’s regime (see Figure D). U.S. exports to Iran rose rapidly after 1973, tracking rising oil prices and oil revenues. They peaked in 1979 at $4 billion (some $10 billion in current dollars) and then petered out. These figures for the early years are low because most of the military equipment was not registered as imports from the United States. Conversely, in the most recent years, the data understate imports from the United States because certain high-value items, such as Apollo workstations, are imported indirectly via Dubai and thus not registered as U.S. exports to Iran.
From Figure D the trend is quite clear: U.S. exports, instead of continuing to rise, all but disappeared. It is clear that trade fell victim to politics. The trend is sharply downward, and the U.S. share of Iran’s imports is a fraction of what would be normal. But the actual market loss is greater. New potential markets have opened up in both Iran and Iraq for U.S. agricultural products. The Iraqi market will expand even further when constraints are reduced. But U.S. farmers are unable to compete for the new opportunities. Particularly important in the case of Iran (and Iraq) is the loss of markets for key U.S. agricultural exports. Both countries are importing increasing volumes of grains and poultry, products in which the United States has a global comparative advantage. U.S. exporters note bitterly that they would normally expect to win about a third of such trade but find that they are excluded. Rough calculations indicate that there is an additional trade loss of $2-4 billion per year because of impediments to U.S. exports of agricultural products to these markets. Tentatively, these constraints cost still another 25,000-50,000 jobs over and above those reckoned below.
Figure D
The market-share test is corroborative. It also permits detecting of longer-term distortions in the trade relationship, as in the case with Libya, where deterioration in the political relationship and in trade both predate the various sanctions regimes.91 The relative loss in trade is measured as the difference between historical shares and post sanctions shares or the actual share in imports versus that for the comparable group.
Blocked or Lost Contracts
Various business groups have offered anecdotal evidence of how U.S. sanctions spill over into other losses of business. Some buyers “specify out” U.S. components – require that a plane or plant contain no U.S. elements, lest spares become unavailable, as has happened with Boeing aircraft, or delivery be suspended, as happened in the case of high capacity compressors destined for Russian gas pipelines in Germany.
Cases in the late 1970s and early 1980s initiated the trend, in which it was trade in Europe that was interrupted or made conditional as part of U.S. Middle East policy. The legislative connection was the Jackson-Vanik Amendment to the 1974 Trade Reform Act, which prohibited U.S. export incentives, such Ex-Im Bank financing, OPIC insurance, MFN status or Commodity Credit Corporation loans to countries that restricted emigration. While ethnically non-specific, the focus was to facilitate emigration of Jews:
It [the Jackson-Vanik Amendment] was used with enormous success to open the doors of the Soviet Union for Jewish emigration.92
In the late 1970s, President Carter suspended major wheat sales to Russia over the question of Russia’s increasing the number of privileged exit visas for Soviet Jews. In the early 1980s the Reagan administration blocked sales of U.S.-licensed heavy-duty gas compressors for Russia’s planned gas-export lines, again concerned with trading the permits against more emigration rights for Soviet Jews.
These applications of the principles of the Jackson-Vanik Amendment catalyzed concern as to the reliability of the United States as an international supplier and encouraged competitors to offer guarantees of performance.
Several examples of large losses of jobs and contracts in the Middle East can be cited, where the diversions resulted from public lobbying by the U.S. Jewish community. One instance involved the design and construction supervision of the “Great Man-Made River” project in Libya, a major irrigation system originally conceived by U.S. firms. Yielding to pressure, Brown & Root, the prime contractor, transferred all the design (A&E) work from the United States to Britain – welcomed by Prime Minister Thatcher. The construction itself was carried out by Korean firms in any case, but the United States lost $2-4 billion in engineering fees and sales of construction equipment.
A second and even larger example is what became known as the “Yamamah Project” in Saudi Arabia. The Saudis had wanted in the mid-1980s to purchase more aircraft from the United States, but the Israeli lobby was able to block the transactions. Britain, the second-choice supplier, was awarded the package of contracts for manufacturing and equipping the aircraft, organizing ongoing training programs, and providing extensive maintenance and infrastructural support.
The scope of the project evolved over the years. Estimates of the total magnitude range between £20-40 billion over a ten-year period, subject to revisions, change orders and extensions as is typical on most large-scale military projects. The United States lost between 500,000 and one million man-years of work as a result of that affair.93
Quantification of Job Losses
The lost trade consists of exports of both goods and services. Hard data by country of destination exists only for the exports and imports of goods. Indicative measures of the absolute losses are revealed by comparing U.S. shares of the four markets with the U.S. share in Third World markets more generally (Table 17).
Table 17
Loss of Market Share: “Sanctioned States”
|
U.S. Share |
Typical Share |
Shortfall |
Iran |
2% |
16.6% |
14.6% |
Iraq |
1% |
16.6% |
15.6% |
Libya |
0.3% |
16.6% |
13.3% |
Syria |
6% |
16.6% |
10.6% |
The lost exports of services can be estimated only on a global basis. One assumes that the services exports to a given country are the same fraction of reported goods exports as observed for the United States overall.
Data for goods and services exports (total) are available in the Balance of Payments Yearbook (BPY). The dollar value of trade is translated into the number of jobs using the study from the International Trade Administration (U.S. Department of Commerce) from 1997. It details the number of direct and indirect jobs embedded in exports of different categories, as well as providing an estimate of the number for “average” exports of manufactured goods. The job content of services exports is higher, per dollar, but using the same number as for manufacturing results in a lower limit for the actual impact.
It is an open question whether a trade multiplier greater than one is applicable. In the case of a slack economy, the argument is probably positive. That further adjustment has not been undertaken, and the calculation of lost jobs may be on the low side.
Figure E
Lost trade, due to those sanctions alone, is just under $5 billion per year, equivalent to some 70,000-80,000 jobs having disappeared throughout the U.S. economy. To this figure should be tentatively added another 25,000-50,000 jobs lost because of foreclosed opportunities for grain and other agricultural exports not reflected in the preceding tables.94
Lost Investment Opportunities and Income
The sanctions have considerably reduced opportunities for U.S. firms to invest in the sanctioned countries, an effect which has been exacerbated more generally by the overall deterioration in U.S. relations in the region. However, even though this trend is quite real, the economic impact upon the United States is subtler and potentially smaller than the losses of trade discussed above.
The losses from lost investment opportunities depend upon three considerations. Would the lost project have: (1) generated profits higher than might have been earned elsewhere? (2) generated incremental exports from the United States, since it is argued that ownership is correlated with purchasing patterns? (3) cemented or catalyzed other business? These questions are beyond the scope of the present analysis. One case is clear: U.S. firms that used to operate in Libya have been banned by the U.S. government from continuing their once-profitable operations in the upstream oil industry. The magnitude of the lost profits to the four U.S. firms so affected has been intensely disputed and is complicated by ambiguities in the applicable Libyan tax code. The loss can be estimated, however. The U.S. companies controlled about 250,000 b/d of equity crude oil. Allowing for a narrow profit margin of $1 per barrel, and an opportunity cost of capital of 7 percent, the dead-weight loss since the early 1980s comes to some $10 billion. This is a pure loss to the U.S. economy, since the investments were already made and since European and other firms were able to take over the fields and reap the benefits. The president of one such non-U.S. oil company remarked: “We are grateful to Senator d’Amato (former R-NY) and the Israeli lobby – otherwise we would not be here and not be making any money.”95
The United States is clearly absent from actual or negotiated concessions or joint ventures in Iran and Iraq, where U.S. foreign competitors have also been quick to enter. The lost opportunities here are less than in the case of Libya, where the returns from investments have been denied by U.S. action. The losses here would not be the total returns on any new investments, but any extra, risk-adjusted profits that might have been earned.
One point must be stressed. Even though the oil industry is globalized, firms tend to buy equipment preferentially from their home countries. Thus, the sanctions on investment carry two costs that are very real but also difficult to quantify:
-
-
- Contracts go to English or Italian firms, for example, which otherwise would have been signed with U.S. firms. U.S. equipment is generally viewed as superior in flexibility and quality, so that this loss is real and noted by all parties.
- Non-U.S. countries, by establishing footholds in areas forbidden to U.S. entities, have created credibility as operators. This demonstration of experience has enhanced their ability to compete against U.S. firms more generally elsewhere in the world oil industry.
-
Sanctions against Iraq: Countervailing Effects
Sanctions against Iraq had a more complex impact upon U.S. trade. The American share in Iraq’s imports is miniscule; the United States has lost export jobs because of the hostile relationship with Iraq. These pro forma losses have been partly, if not largely, offset by another effect, however. Some lost trade has actually been mitigated because Saudi Arabia, in particular, has increased its production of oil at Iraq’s expense and is importing incrementally from the United States, especially in terms of new orders for weapons systems since 1992.
Diverted trade
Three different periods must be delineated. Under U.S.-implemented sanctions, oil revenue has been shifted from a poor customer to a good customer, so U.S. trade will have benefited indirectly from the sanctions against Iraq. This effect was marked in the early 1990s, but has steadily declined in the last years.
Discussed below are ways in which the Gulf states profited from the sanctions against Iraq by being able to take over part of Iraq’s OPEC quota for themselves. This had the effect of increasing U.S. exports to the area, since Saudi Arabia, Kuwait and the UAE have a higher propensity to import from the United States. Thus the United States has regained through this effect part of the trade it otherwise would have continued to lose if Iraq had continued to export and to spend its oil revenues elsewhere than in the United States.
Incremental Arms Sales
One policy did produce tangible economic benefits – close relations between the United States and the southern Gulf states, especially Saudi Arabia. That region has been a major market for the U.S. armaments industry, thanks to an active export-promotion policy. These exports differ from commercial exports in that the political motivation and correlations are explicit. This part of U.S. trade with the region is incremental and policy driven. That being said, it is important to note that arms exports fall into two categories:
- Paying Customers: Saudi Arabia, Kuwait and the UAE usually pay the equivalent of cash and sometimes have made advance payments on new systems. Therefore such sales represent net gains to the U.S. economy.
- Stipendiary states: Recipients of U.S. military equipment either do not pay at all (Israel and Egypt) or receive concessional financing and may indeed ultimately be granted forgiveness of the military loans (Turkey).
The three paying customers have contributed significantly to the U.S. trade balance since the mid-1970s, when such sales began to become important, growing with increased oil revenues and intensified regional hostilities. Between 1990 and 2000 the three clients purchased $43 billion in U.S. equipment or financed military construction contracts:
Table 18
Weapons Sales and Export Jobs: Sales (billions) Jobs (man-years)
|
Sales |
Jobs |
Saudi Arabia |
$35.1 |
490,000 |
Kuwait |
5.6 |
78,000 |
U.A.E. |
$1.6 |
22,000 |
Incomplete data suggest that the paying customers purchased comparable volumes in the period 1980-89, so that the incremental employment impact is probably close to double the figures tabulated above. The Gulf states have begun to require offsets for such contracts. The implications of the offset requirements are quite different from the cases of the stipendiaries. First, the offsets requirement is inflated by a “multiplier,” so that the actual net effect is often only a small fraction of the contract value. Second, the required investments are in areas that compete minimally, if at all, with U.S. exports. Third, the requirements are part of competitively negotiated packages, so do not constitute subsidies in any sense.
ENERGY AUTARKY
“Project Independence”
The 1973 oil crisis triggered two strategic responses. The first was the $100 plus billion investment in the Strategic Petroleum Reserve. The second was much more expensive: the massive program known colloquially as “Project Independence.” The avowed objective was to achieve energy security by reducing reliance upon oil imported from Arab producers. The costs of trying to achieve energy autarky were in addition to the higher oil prices. Even though no overview of the costs or benefits has been located, U.S. energy patterns did change after 1973. Higher oil prices led to higher energy prices, and real changes in energy consumption patterns did result. “Independence” proved to be an illusion; “dependence” actually increased. However, certain modest successes must be noted:
Table 19
Indicators of “Project Independence”96
|
1973 |
2000 |
Change |
Units |
Energy Intensity |
18.38 |
10.77 |
-41% |
1000 BTU/1996$ |
Auto Fuel Economy |
11.9 |
16.9 |
+42% |
Miles per gallon |
Miles driven/auto |
9,984 |
11,988 |
+20% |
Miles |
Gasoline consumption |
6,624 |
8,472 |
+28% |
Thousands b/d |
Oil Imports |
6,256 |
11,459 |
+83% |
Thousands b/d |
Oil imports almost doubled during the period, though independence was the avowed goal. In 1973, 6.6 mb/d were imported. By 2000, even allowing for the economic slowdown, imports had risen to 11.4 mb/d.
Nonetheless, dependence and imports would have been much greater had it not been for a number of market-driven responses and the limited effect of certain government policies. Energy efficiency increased considerably; over the 27-year period, conservation was significant. There resulted a drop of 41 percent in the amount of energy needed per dollar of GDP. This was the result almost entirely of higher prices, not government policies. But automobile fuel economy also improved. The fleet average fuel economy increased from 11.9 mpg in 1973 to 16.9 mpg in 2000, due in considerable part to government mandate. But gasoline use increased nonetheless, because cars were driven more and there were more cars on the road, again a result of the economic growth during the 17-year period.
In spite of conservation, imports increased, owing to depletion of U.S. oil reserves and longer-term growth in the U.S. economy. Virtually all of the success in curbing energy consumption resulted from higher prices, as consumers responded with better insulation and industry installed energy-saving equipment. Little, if any, of the improvement can be attributed to the government programs except for the “CAFÉ” standards, the mandated annual improvement in the fuel economy of new automobiles. Better fuel economy resulted in a reduction of oil imports by some 1.5 mb/d. Absent the changes in the auto fleet, the United States would be importing some 13 mb/d of oil, instead of the 11.5 mb/d recorded in the year 2000.
Imports would have been much higher, had prices not risen, but Project Independence must be viewed as a costly failure. Joint pressures from the Israeli lobby and diverse domestic pressure groups did lead to implementation of numerous, high-cost programs that bypassed market mechanisms and that were designed unsuccessfully to further cut demand for Arab oil or to blunt the newly discovered “Arab oil weapon.”97 Here are some of the more prominent or costly such efforts.
Gasohol
One widely publicized, expensive program designed to increase energy independence is the set of subsidies for gasohol, a mixture containing 90 percent oil-derived motor fuel and 10 percent ethanol (ethyl alcohol), which in the United States is produced from corn. Enthusiastically received in the corn-growing states, this program resulted from the joint efforts of the Israeli lobby, some of the environmentalist groups and the Archer Daniels Midland Corporation (ADM), the largest single manufacturer of fuel-grade ethanol and a major contributor to U.S. election campaigns. This program is cited here because it illustrates how Israeli interests were able to mobilize or ally themselves with unrelated pressure groups.
Ethanol is indeed a renewable form of energy and is unequivocally “home-grown.”98 The target was 1 billion gallons per year of gasohol, an objective that was indeed achieved. The program started in 1978, partly as a sop to U.S. farmers when President Carter embargoed exports of farm products to the USSR. It relied from the beginning on an impressive array of subsidies, almost all of which were “off budget” (requiring no appropriation bill).
The two largest elements of subsidy have been the exemptions from federal and state taxes on gasohol fuel. The federal tax credit most recently has been 5.3 cents per gallon. But gasohol contains only 10-percent ethanol, while the subsidy applies to the entire gallon. Thus, the effective subsidy for the ethanol itself came to $0.53 per gallon of gas containing ethanol. The arithmetic is even less favorable. Ethanol has only two-thirds the energy value of gasoline, so the seemingly modest federal tax exemption is the equivalent of about $35 per barrel of oil. The state taxes range between 1 and 15 cents per gallon of gasohol, so the joint subsidy in some cases has exceeded $100 per barrel of oil equivalent.
The subsidy per barrel is almost twice the average price (even more where state tax credits are granted). Fortunately for the American consumer, the volume is still limited, although there is a new movement to increase the requirement for ethanol-based fuels by tweaking the EPA regulations for motor fuel. Currently, based upon the production of 1.5 billion gallons per year, the minimum estimate of the annual federal tax subsidy is about $750 million per year, plus another perhaps $500 million per year in state motor-fuel tax exemptions or credits.99 Additional subsidies are granted in terms of income tax and other credits, but the major items are the exemptions for motor fuel levies. The subsidy can be roughly estimated as follows:
Annual Cost (2001) ca. $1.5 billion
Cumulative opportunity cost over $25 billion
Any impact on energy independence has been small. Because the subsidies disguise real costs, the energy input into gasohol production is high, creating a negative energy balance at first – more energy went in than came out. More recently, there is a modest net energy gain from the program. The savings in oil imports, net, amount to less than 100,000 b/d.
Unconventional Gas Subsidy
A third component of the energy-independence package is worth noting because, once again, the subsidy was hidden. This was a tax credit for the production of unconventional natural gas, chiefly gas from coal beds or from low-yield, high-cost gas reservoirs (“tight gas”). The project did produce significant volumes of new natural gas, albeit at high cost. But this “success” had no material impact upon oil dependence, since oil was no longer being displaced as a power-plant fuel. The subsidized gas competed against unsubsidized gas, with the result that much of the new gas produced in the United States enjoyed the tax credit. As earlier, several lobbies joined forces to institute sizable tax credits for the production of “tight gas.”
The subsidy was set at $3 per barrel of oil equivalent, granted as a tax credit against other taxable production by energy companies and indexed to inflation. Most recently, it averaged $1.02 per 1000 cubic feet of gas. Sources differ strikingly as to the volumes of gas qualifying for the subsidy and the amount claimed by producers. A minimum figure for the federal subsidy is $1.2 billion in 1999:
Annual unconventional gas subsidy $1.2 billion (1999)
Possible cumulative cost over $20 billion
The tax credit varied from year to year, some production was phased out, and some credits may not have been taken because of loss carry forwards. Total costs may well be appreciably higher than noted above.
Unconventional Energy: Covert (“Ratepayer”) Subsidies
Still another set of costly subsidies involve support for “unconventional” sources including wind, geothermal and solar energy schemes. These enjoyed a panoply of subsidies – some, such as federal tax credits, are included in the figures reported below. However, a major source of such subsidies was heavily disguised and is still quantitatively elusive. These were “stealth subsidies” or “ratepayer subsidies.” Regulated utilities were required to buy high-cost “alternative” energy. The high costs of the new sources were averaged with the low costs of older sources (“rolled in”), so that consumers never perceived the very high costs of the alternative sources. The price of “new” gas or synthetic gas was set very high – at one point close to $100 per barrel of oil. But the consumer did not perceive these high prices, because the very high-cost new supplies were rolled in with the artificially low-priced older supplies.
This program was rationalized as part of “energy independence,” but little oil was saved, because little was being consumed by electric power plants. The costs, however, were very high, and investment banks and consortia of private investors were able to exploit the provisions of the regulations at great profit. A reckoning of the total subsidies in this form has not been located, and the state of California, where most of the high-cost power was produced, does not seem to have kept records of the extra prices paid for the power. It is possible that the subsidies were some $10 billion per year for almost 20 years, until deregulation made it more and more difficult to disguise the high costs.
Official Estimates of Energy Subsidies and R&D
The three programs noted here are for illustration only. They suggest the scope of the costs incurred throughout the economy as different lobbies allied with one another to create subsidies for their own often diverse purposes. The Department of Energy attempted to tally the subsidies. The DOE/EIA reported a figure of $4 billion per year, reflecting perhaps $100 billion for the whole period since the Arab oil embargo. This figure includes as “subsidies” accelerated tax depreciation, which is available to all industries, while it omits the large subsidies paid for solar or wind energy at the state level or the costs of promoting uneconomical conservation programs.
A more comprehensive study of the response to the embargo and Israel’s fears of the Arab oil weapon would reveal much larger costs throughout the U.S. economy. The overriding consideration, however, is the fact that few of the efforts to cut dependence upon Arab oil involved budgeted expenditures. To the contrary, in order to camouflage the high costs and the dimensions of the underlying lobbying efforts, the subsidies were cast as tax credits or mandated by regulators as “add-ons” to regulated electricity or gas rates.100 Two features must be emphasized: 1) the impact upon oil imports was minimal, and 2) the costs were disguised and camouflaged, reflecting the unwillingness of the public to accept higher energy costs as a price of perceived greater energy security.
“DEFENSE OF GULF OIL”
“Protecting” Gulf oil supply and suppliers is often mentioned as a major cost to the U.S. taxpayer. Quasi-journalistic sources have claimed that the real cost to the United States of a barrel of oil from the Gulf is $90 or more, once the costs of military support are reckoned in.101 While there is no question that the United States maintains forces in the Gulf or “over the horizon,” identification and quantification of these costs raise a number of conceptual and definitional issues:
-
-
- Does the U.S. presence secure that oil or does that presence increase the risk of conflict or interruption of supply?
- What fraction of such costs are still borne, overtly or covertly, by local states, especially Saudi Arabia?
- Which of the operations would be carried out independently of current threats or perceived risks to oil supplies?
-
A published estimate from DOD sources is available for the period 1980-90. The Department of Defense calculated that $27.2 billion ($40.8 billion in 2001 dollars) had been spent during that decade to maintain the U.S. military presence in the region. DOD added that a further $273 billion ($407 billion in 2001 dollars) had been expended in “support” of that presence.
The GAO report that reviewed these claims scaled down the estimates considerably.102 First, of the $27.2 billion, about two-thirds represented the cost of maintaining the carrier task force based out of Diego Garcia. GAO noted clearly that the operation would have been supported for other geopolitical reasons in any event, and indicated that at least $16 billion of the reported outlays were in fact not specific to the Middle East. Second, the much larger figure of $273 billion also represents programs or activities that were not specific to Southwest Asia or the Gulf. These represent equipment or readiness costs for resources that would have been available to CENTCOM in event of need. Only a fraction might be attributable to incremental needs to protect the Gulf.
One concrete example illustrates the ambiguity. Kuwaiti tankers, subject to regular attacks by Iranian aircraft and torpedo boats, were reflagged as U.S. ships, so that they could enjoy U.S. protection during the Iran-Iraq War. The reported cost was around $250 million, but did that expenditure protect oil supplies for the United States? Or did it protect a flow of oil that was sold for the benefit of Iraq and therefore was a cost for supporting Iraq against Iran?
More recently, only anecdotal costs have been cited, ranging typically between $35 and $50 billion per year. These figures, too, are suspect. The total defense budget lies between $350 and $400 billion. If credence is given to the claims of $35-$50 billion, that implies that operations in the Gulf consume 10-percent more of the total annual defense expenditure. This is implausible, given the force levels in the area and given the fact that, as before, many of the outlays are not incremental – the troop levels would have been maintained, but elsewhere, just as the base at Diego Garcia still serves other strategic objectives.
The current level of expenditure for the Gulf is therefore a “guesstimate.” Absent better information, a figure is reported for the incremental costs of $2 billion per year. This figure, however, does not include any new costs associated with the build-up for the possible attack on Iraq.
CONCLUSION
I have attempted to estimate the cost to the United States of instability and conflict in the Middle East. The minimum estimate comes close to $3 trillion, an amount almost four times greater than the cost of the Vietnam War (reckoned in 2002 dollars).103 Even this figure underestimates the costs because certain classes of expenditure have been left unquantified. In particular, no reliable figure is available for the costs of “Project Independence” to reduce reliance on Middle Eastern oil. Similarly, aid to Israel is also understated, since much is outside of the foreign-aid appropriation process or implicit in other programs.
Table 20
Overview, Cost to U.S. of ME Conflicts since WWII104 (2002 dollars or jobs per year)
Type of Cost |
Events |
Costs |
Political or Military Crises |
Conflicts in 1967, 1973, 1978-87, 1990/1 and construction of Strategic Petroleum Reserve |
$1.5 trillion105 |
Economic and Military Aid |
Total regional (budgeted) Near East, Greece, Turkey and periphery |
$867 billion |
Ad Hoc Support for Israel |
Trade preferences, loan guarantees, privileged contracts and technology access |
$56+ billion |
Lost Trade and Domestic Jobs |
Effects of sanctions and blocked contracts |
$275,000/yr |
Energy Autarky |
"Project Independence" |
Indeterminate |
|
Of which identifiable programs |
$285 billion |
"Defense" of Gulf Oil Supplies |
Presence and preparedness in the Gulf |
$40+ billion |
Contingent Cost |
Oil supply guarantee for Israel (1975 MOU) |
$3 billion/month106 |
Total identifiable costs come to almost $3 trillion. About sixty percent, well over half, of those costs – $1.7 trillion – arose from the U.S. defense of Israel, where most of that amount has been incurred since 1973 (see Table 23). Tables 21 and 22 deal with detailed breakdown of costs in billions of 2002 dollars.
Table 21
Type of Cost |
Event |
Amount |
Subtotal |
Total |
Political or Military Crises |
|
|
|
$1,220-1,520 |
|
1965 War |
|
de minimis |
|
|
1967 War |
|
$40+ |
|
|
1973 War |
|
$750-1,050 |
|
|
GDP Loss |
$300-600 |
|
|
|
Import Price Impact |
$450 |
|
|
|
1978 Iranian Revolution and Iran-Iraq War |
|
$350 |
|
|
Gulf War 1990-91 |
|
$80 |
|
Economic and Military Aid |
|
|
|
$808 |
|
Regional (Budgeted) |
|
$808 |
|
|
Israel |
$247 |
|
|
|
Egypt |
$139 |
|
|
|
Turkey |
$159108 |
|
|
|
|
$125 |
|
|
|
Jordan |
$25 |
|
|
|
Other Regional |
$110 |
|
|
|
West Bank and Gaza |
$1 |
|
|
|
Peacekeeping |
$2 |
|
|
Ad Hoc support for Israel |
|
|
|
$56+ |
|
Preferential Contracting |
$40 (est)109 |
|
|
|
Discounted Arms Sales |
Not Traced |
|
|
|
Israel's SPR (1975 MOU) |
$3 |
|
|
|
Loan Guarantees |
$10 |
|
|
|
Oil Supply Guarantee |
Up to $3 billion/month110 |
||
|
Supoprt for Lavi and Other Projects |
$3 |
|
|
Estimated Total (min) |
|
|
|
$2,084-2,384 |
Table 22
Type of Cost |
Event |
Amount |
Subtotal |
Total |
Budgeted Aid Periphery |
|
|
|
$32 |
|
Sudan |
$2 |
|
|
|
Ethiopia & Eritrea |
$12 |
|
|
|
Caucasus & Central Asia |
$6 |
|
|
|
Somalia |
$2 |
|
|
|
Other SW Asia |
$10 |
|
|
Private U.S. Aid to Israel |
|
|
|
$40-50 |
U.S. Share of Multilateral Aid |
|
|
|
$10 |
|
Tukey |
$7 |
|
|
|
UNRWA |
$3 |
|
|
Lost Trade and Doomestic Jobs |
|
|
|
$10 + 275,000 jobs/yr |
|
Embargoes and Sanctions |
|
100,000/yr |
|
|
Trade-aid imbalances: Israel |
|
125,000/yr |
|
|
Blocked trade opportunities |
|
650,000 man-yrs |
|
|
|
50,000 man-yrs |
|
|
|
|
600,000 man-yrs |
|
|
|
Known investment losses |
|
$10 billion |
|
Energy Autarky |
|
|
|
$381 (min) |
|
Strategic Petroleum Reserve |
|
$146 |
|
|
"Project Independence" |
|
$235 (min) |
|
|
Gasohol |
$25 |
|
|
|
Estimated state subsidies |
$100 |
|
|
|
Unconventinal gas |
$20 (est) |
|
|
|
Unconventional energy |
Not traced |
|
|
|
Other Federal Subsidies |
$90 |
|
|
"Defense" of Gulf Oil Supplies |
|
|
|
$40 + |
|
Presence and preparedness in the Gulf |
|
$40 + |
|
Total (min) |
|
|
|
$513-$523 |
Table 21 Total |
|
|
|
$2,084-2,384 |
Total Cost to U.S. |
|
|
|
$2.6 2.9 Trillion |
A large part of the cost has been inextricably tied to U.S. protection of or support for Israel.
Table 23
Overview: Costs to U.S. of Support for Israel
|
Type of Source |
Estimated Amount |
Totals |
Direct |
|
|
$1,854 |
|
Official foreign aid |
$247 |
|
|
Rescue costs (1973) |
1,050112 |
|
|
Collateral costs (aid) |
451 |
|
|
Special, ad hoc support |
106 |
|
|
Trade & job losses |
275,000 jobs/yr |
|
Linked |
|
|
$324 (min) |
|
Aid to periphery (NIS, etc) |
49+ |
|
|
Energy autarky |
235 (min) |
|
|
"Defense" of the Gulf |
40 |
|
Contingent |
|
|
|
|
Oil supply guarantee |
$3/month113 |
Not implemented |
Unrest in the Middle East has proven to be very expensive for the United States. Most U.S. foreign aid goes to Egypt and Israel, but the total costs to the United States of conflict in the region are very much higher than the aid bill itself. The total costs of supporting Israel are some six times official aid figures (Table 23). Oil-price crises have been particularly expensive, a sobering lesson from the history of the Middle East in the last 30 years. “Burden-sharing” in the future is unlikely. While successful in eliminating much of the cost of the 1990/91 Gulf War, such cost-shifting will be much more difficult. Turkey is likely to demand considerable rewards, since it protests that it received little to offset the $30 billion it claimed it lost in the last war. Israel, too, is demanding more aid – $4 billion in military support and a further $10 billion in loan guarantees, over and above the current level of appropriated aid.
This paper has estimated the costs to the United States, but the burden shared by the other oil-consuming states has in fact been much higher. Even though they do not share in policy formation, they do share in the costs of the consequences. They are drained little by foreign aid to the region – unlike the $800 billion borne by the United States – but they bear much more of the costs of oil crises because they import much more oil than the United States. Thus the total burden, shared by default, is two to four times higher than that for the United States alone. All states, not just the United States, have borne the heavy burden of conflicts in the Middle East.
1 The core of this paper was presented at a conference sponsored by the U.S. Army War College and the University of Maine, October 2002. The author thanks Brock Bevan for research assistance, but is solely responsible for the contents of the article.
2 See Donald Neff, Warriors at Suez (Simon & Schuster, 1981), for insight and background.
3 Such intervention, in 1956, was possible because the Israeli lobby was not yet fully organized in the U.S., and Eisenhower was interested in disengaging Britain and France from the Middle East. Moreover, President Eisenhower himself had such independent stature that he was in no way beholden to Jewish campaign contributors or vulnerable to other pressures.
4 See, for example, James M. Boughton, Northwest of Suez-The 1956 Crisis and the IMF, IMF Working Paper No. 00/192, Washington, DC, November 1, 2000.
5 Israel, Iran and a Rothschild group jointly financed a pipeline from Eilat to Eshkelon after 1967. The new pipeline bypassed the Suez Canal, and as long as the canal could be kept closed, the partners profited handsomely from the transit rates offered traders, especially those from Iran, who were willing to transship and use that pipeline.
6 See Petroleum Press Service and Middle East Economic Survey (MEES) for running accounts of the convulsions in tankship rates.
7 “OPEC looks at tanker profits following June war,” MEES, 1967, nd. The Secretariat’s calculations appear to cover only the first four months of the Suez Canal closure, so the estimate is probably very low.
8 These costs persisted into the early 1970s, even though the crisis accelerated the trend in the oil industry to construct larger and larger tankers – “VLCC’s” (Very Large Crude Carriers). These supertankers achieved significant economies of scale but were too large to transit the Suez Canal. The larger tankers mitigated the effect over time, but did not eliminate it.
9 The U.S. media propagated alternative interpretations, chiefly that the oil companies engineered the price increases or that the price increase was inevitably driven by market forces independent of political events in the Middle East. See Cyrus Bina, The Economics of the Oil Crisis: Theories of Oil Crisis, Oil Rent, and Internationalization of Capital in the Oil Industry (London: Merlin Press, n.d.), p. viiiff.
10 President Nixon’s rationale in rescuing the Israelis from disaster is beyond the scope of this exercise. Israel’s threat to use nuclear weapons and U.S. fear of a Russian intervention were both seriously debated as risks at the time.
11 Germany and the Netherlands were included at first, because their territory was believed to have been used to stage the rescue of Israel. By late fall the United States had become the sole target of the embargo.
12 Monthly data include crude oil and products, DOE and EIA reports, various years.
13 Higher oil prices also ignited inflationary pressures which propagated through the U.S. economy.
14 Steaming time between the Gulf and the U.S. was 4-6 weeks, so that there was a lag before the physical shortages were felt.
15 The reaction to the 1973 crisis and also a model for calculating the GDP loss – hypothetically – can be found in: U. S. Department of Energy, Energy Security: A Report to the President of the United States, Washington, 1987, p. C-5ff. The analysis is based upon the impact of a worldwide cutoff of oil, not specific to the U.S., so the conclusions are at best illustrative.
16 U.S. General Accounting Office, Oil Supply Disruptions: Their Price and Economic Effects, GAO/RCED83-135, Washington, May 1983. The caveats in the text are important, since the models proved to be inconsistent.
17 Electric utilities, as regulated at the time, enjoyed “fuel adjustment clauses,” so they were able to pass higher fuel prices automatically on to their customers. Analogously, the Israelis reportedly enjoyed a guarantee from the U.S. that their higher costs were somehow to be reimbursed, so both parties were less constrained in bidding for scarce supplies.
18 See the writings especially of the late Prof. Morrie Adelman of MIT, who was the most prominent proponent of that theory.
19 We note that $18 was the target price set by the Saudis and Kuwaitis when the key OPEC ministers actively began to try to control oil prices after the OPEC ministerial meeting in Brioni in the summer of 1986. 20 U.S. customs data showed unequivocally that the U.S. lost almost the entire volume of oil originating in Arab terminals, in spite of consistent media reporting that the embargo was a sham.
21 Even the Canadians threatened to cut off deliveries to the U.S. during 1973/4. Following a discrete démarche, the U.S. diverted certain scarce volumes of oil arriving at U.S. ports to supply eastern Canada, an incident which caused considerable discomfort between Ottawa and Washington. This ensued because at that time eastern Canada was physically supplied with oil via the pipeline from Portland, ME, which was included among the embargoed ports.
22 International Energy Agency, Oil Supply Security: The Emergency Response Potential of IEA Countries, (Paris: 1995); the official volume does not discuss the probability that signatories might renege.
23 The DOE had forgotten to install facilities for extracting the oil for emergencies, but that oversight was duly rectified some years later.
24 The Department of Energy has suppressed the website which reported on expenditures and fill rates; recent data are not available. Further, the administration has transferred government-owned royalty oil into the SPR, instead of purchasing oil on the open market, since those transfers are not reported as budgetary expenditures. The figures in this section therefore understate the full costs.
25 See Bamberger, op. cit.; the DOE has pulled the website for the SPR details.
26 Elsewhere we use 3 percent as the discount rate applicable to aid outlays, since those are a mixture of consumption and presumptive investment.
27 Some analysts assumed that oil prices would continue to rise forever. They were thus able to show that the SPR was all but costless because the salvage value would exceed total expenditures.
28 In 1951 Communist-dominated unions also attempted to block exports; they failed. However, a Britishimposed embargo on sales of Iranian oil was successful, but the regime was able to survive at that time since it was less addicted to oil income.
29 Stephen Green, Living by the Sword (Brattleboro, VT: Amana Books, 1988).
30 See Report of the President’s Special Review Board, Washington, February 1987, for a sanitized version; see also Section 4 on ad hoc U.S. aid for Israel.
31 See S. Daggett, and G.J. Pagliano, Persian Gulf War: U.S. Costs and Allied Financial Contributions, CRS Issue Brief, September 1992; and G.J. Pagliano, Allied Burden Sharing inTransition: Status and Implications for the United States, Congressional Research Service, October 25, 1991, for contemporary assessments.
Sums reported in Table 4 are rounded and conformed from the more detailed data cast in the DOD’s reporting formats.
32 These purportedly consisted of petroleum products and related infrastructural support supplied primarily by Saudi Arabia and were presumably booked at full cost, rather than at incremental value.
33 The allies also were committed to contribute additional sums to frontline states like Israel and Turkey which bore costs or suffered losses in pursuit of the war.
34 The opportunity cost of such incremental production was low – any additional oil produced in the 1990s otherwise might have been produced only 100-150 years later, given the high reserve-to-production ratios. Hence, the associated costs were only incremental production costs which ranged between $1 and $3 per barrel.
35 This award was compensation for lost production; claims for environmental damage and other losses are quite separate. United Nations Compensation Commission (UNCC), Report and Recommendations Made by the Board of Commissioners Concerning the Fourth Installment of “EI” Claims, S/AC.26/2000/16, Geneva, 2000 (otherwise briefly designated as the “E1/4 Report”). The UNCC was established by the Security Council to adjudicate claims against Iraq and award compensation to be paid out of a specified fraction of Iraq’s oil revenues.
36 T.R. Stauffer, “Critical Review of UNCC Award for Lost Production and Lost Reserves (“Fluid Loss” and “PSL” Claims),” MEES, Vol. 44, No.5, January 29, 2001; see also T.R. Stauffer, “Compensation to Kuwait: Multi-billion dollar miscalculation,” Middle East International, February 9, 2001, p. 20ff for a non-technical exposition of the issue.
37 Some of the $15.9 billion award was justifiable; the politically inspired windfall is the difference.
38 Alain Gresh, “Enquete sur une commission occulte: Iraq paiera!” Le Monde Diplomatique, October 2000, pp. 1,16,17.
39 Private conversations with senior U.N. officials.
40 J.L. Loftis, “When $15.9 Billion Is About What You’d Expect: The UNCC’s Award to Kuwait Petroleum Corporation”, MEES, August 13, 2001,pp. D1-D8.
41 UNCC, Report and Recommendations Made by the Panel of Commissioners Concerning the Sixth Installment of “EI” Claims, S/AC.26/2001/18, Geneva, September 28, 2001.
42 Turkey and Greece are included in “Europe” in USAID statistics.
43 While this attracts much comment, the financial benefit is minor. At current interest rates the “benefit” is some $50 plus million per year. When the rate for Federal Funds was much higher, the extra benefit did exceed $ 100 million p.a.
44 Central Bank of Israel, various issues.
45 The literature describing and critiquing “offsets” is legion; the relevance of an “offset” when goods are transferred free is even more strongly challenged.
46 The language is opaque: “The United States has not canceled any of Israel’s debts to the U.S. government, but the U.S. government has waived repayment of aid that originally was categorized as loans”; Clyde Mark, op. cit., April 2002, p. CRS-6.
47 Office of Management and Budget, Circular No A-94 (Revised), Guidelines and Discount Rates for BenefitCost Analysis of Federal Programs, Washington, October 29,1992.
48 This estimate is roughly consistent with the inflows of private transfers tabulated in the IMF’s Balance of Payments Yearbook, noting that two-thirds or more of such monies originate in the U.S.-based diaspora. The budget cost is roughly one-third of the gross amount, allowing for an average marginal tax rate of 30-33 percent; since the transfers are unrequited, however, the dead-weight burden on the U.S. economy is 100 cents for every dollar.
49 State of Israel, Annual Report on Form 18-K to the U.S. Securities and Exchange Commission, Exhibit D, annual. Any inflation adjustment is small, since the maturities are relatively short.
50 For example, see recent issues of Haaretz for efforts by Jewish legislators to require the state of Illinois to invest pension monies in Israel.
51 Private communication; the quid pro quo is still officially denied.
52 Carol Migdalovitz, Turkey: Issues for U.S. Policy, CRS, RL 31429, May 22, 2002.
53 It has not been established whether the value of those tanks is included in the reported aid data.
54 Aid to Turkey since 1990 is included with support for Israel because of the key role played by the Israeli lobby in procuring the assistance. Turkey complains that promised aid the last time (1990-91) was not forthcoming, hence its insistence upon up-front compensation this time.
55 See, for summaries of the tortured histories, H.R. Demekjian and A. Themelis, Ethnic Lobbies in U.S. Foreign Policy: A Comparative Analayis of the Jewish, Greek, Armenian and Turkish Lobbies, Occasional Research Paper No. 13, Panteion University, Athens, 1997; Carol Migdalovitz, “Greece and Turkey: Current Foreign Aid Issues,” CRS 86065, December 3, 1996.
56 Migdalovitz, op. cit.
57 Only direct aid since 1989 can be linked to support for Israel.
58 Estimated; a consistent chronology of those outlays has not been found as of publication date.
59 This figure excludes consequential costs, such as the 1973 oil crisis, or support not included within the foreign-aid budget appropriations; see the conclusion for a more comprehensive estimate of the total.
60 It is alleged, without documentary evidence, that the CIA paid a part of the Israelis’ costs.
61 USAID, “Green Book,” annual.
62 U. S. Department of State, Memorandum of Agreement Between the Governments of Israel and the United States, Part D, Washington, DC, September 1, 1975.
63 Allegedly the project was funded out of the DOD budget under the rubric of “prepositioning.”
64 The authorization applied to “any country pursuant to a bilateral international oil supply agreement entered into . . . before June 25, 1979.” Export Administration Act, P.L. 96-72, 93 STAT. 518. Since only Israel fell in that category, the guarantee was Israel-specific in spite of the fact that Israel was not named in the document.
65 See IEA, 1995, op. cit.
66 The United States is more vulnerable to oil interruptions in the year 2002 than in 1973, in spite of the SPR, because there is virtually no capability for switching end users from oil to alternative fuels. That multi-fuel capacity was once extensive, but it was slowly eroded away as prices rose and as the utility industries were deregulated.
67 The estimate presumes a linear relationship in the short run between oil supply and GDP. Small shortfalls cause proportionately lower losses, whereas larger losses cascade through the economy, especially as consumers and producers retrench faced with the uncertainty of serious shortfalls.
68 State of Israel, op. cit., p. D-67.
69 Recent loans are frequently “zero coupon” obligations. Interest is due only when the loan matures, so that the debt service requirements can be legally understated until the balloon payment is due at maturity. The accumulating interest is not paid out and is not calculated in determining the debt-service obligation, a device which permits a country’s precarious financial situation to be partly sanitized.
70 See regular reports of the Central Bank of Israel and the Central Bureau of Statistics. A summary of the malaise can be found in Thomas R. Stauffer, “Israel’s Fruits of War Now Seen Spoiling On the Vine,” Washington Report on Middle East Affairs, November 2002; the topic reoccurs from time to time in Haaretz.
71 Private discussions.
72 It possibly may be much higher; it is not clear how the zero-coupon loans will be charged in the final reckoning in the probable case of de facto default.
73 The Treasury’s procedure for budgeting for the annual cost to the United States of loan guarantees seriously understates the risk of such loans, quite aside from the fact that a special dispensation reportedly deems the guarantees and loans to Israel to be riskless, so that the implicit budget cost is set at zero.
74 Office of Mangement and Budget, Circular A-34: Instruction on Budget Execution, Washington, DC, various versions. The underlying model, developed in conjunction with the Ex-Im Bank, is also ill-suited to evaluate such zero-coupon loans.
75 Technically the annual “aid” element is the risk-weighted net present value of the value at maturity, adjusted for required fees. The net adjustment is small, and the approximation is used in its place.
76 Jane’s, All the World’s Aircraft: 2002-2003, London, 2002.
77 But see Paul F. Pineo and Lora Lumpe, Recycled Weapons: American Exports of Surplus Arms, 1990-1995, Federation of American Scientists, 1996; and the Federation’s website.
78 Sources are legion; for the summary arguments, see U.S. Department of Commerce, Bureau of Industry and Security, Office of Management and Budget, Offsets in Defense Trade 2001: Report to the Congress Conducted Under Section 309 of the Defense Production Act of 1950, Washington, DC, annual.
79 Aaron S. Klieman, Israel’s Global Reach: Arms Sales as Diplomacy, (Washington, DC: Pergamon, 1985); Sadeh, Sharon, “Israel’s Beleaguered Defense Industry,” MERIA Journal, Vol. 5, No. 1, March 2001.
80 At least two senior figures in the DOD had been caught during earlier assignments in overt espionage on behalf of Israel but, after dismissal, were reappointed to even more sensitive posts dealing with arms sales. These officials, and those brought with them, have played the key roles in ensuring that U.S. firms buy Israeli equipment rather than American.
81 U.S. Department of State, notification per 67 Fed. Reg. 71601 (December 2002).
82 The Israelis have succeeded, since the late 1970s, in placing their people in the relevant slots in the Department of Defense; see, for example, Claudia Wright, Spy, Steal and Smuggle: Israel’s Special Relationship with the United States (Belmont, MA: AAUG Press, 1986) or Michael Saba, The Armageddon Network, (Amana Books, 1984). Newer material is scattered through the secondary press.
83 State regulators protested the deal once the heat balances of the plants were rendered transparent, but stated that they were forced to authorize the contracts after direct intervention from the White House on behalf of the Israeli firm.
84 Roger Kirk, and Mircea Raceneau, Romania versus the United States: Diplomacy of the Absurd, 1985-1989, (New York: St. Martin’s Press, 1994); D.B. Funderburk, Pinstripes and Reds: An American Ambassador Caught between the State Department and Romanian Communists, 1981-1985, Washington, DC: Selous Foundation Press, 1989).
85 See Saba and Wright, op. cit.; Samed and Klieman note selectively Israeli successes in stealing weapons technology.
86 The data are based on U.S. exports and imports; Israeli data tends to omit imports of weapons from the United States, so that reliance upon the Israeli data leads to an overstatement of the trade deficit by approximately $1 billion per year.
87 $70,000 in manufactured exports generates one job in the United States; Office of Trade & Economic Analysis, International Trade Administration, U.S. Department of Commerce, U.S. Jobs From Exports: A 1997 Benchmark Study of Employment Generated by Exports of Manufactured Goods, Washington, DC, February 2001; and American Petroleum Institute, How Unilateral Economic Sanctions Affect the U.S. Economy: An Inter-Industry Analysis, Research Study #094, November 1998, Washington, DC.
88 That figure includes the effect of arms trade, but not those jobs lost in Israeli sales to third countries where Israelis have captured potential U.S. markets.
89 See studies by Gary Hufbauer, USA*ENGAGE, etc.; the literature is legion and the arguments pro or con will not be repeated here.
90 The losses include estimated losses in exports of services.
91 Three usable sets of comparables can be identified: (1) “developing countries”; (2) “non-oil developing countries”; and (3) “oil-exporting countries.” These are categories maintained by the World Bank group for reporting international trade patterns.
92 JINSA, “Jackson-Vanik Endures,” Security Affairs Archive, June 1, 1993.
93 See various publications by Anthony Cordesman, for example, from the Center for Strategic and International Studies in Washington, as well as ongoing discussions in the various specialized trade publications such as Jane’s or Aviation Week.
94 See Congressional Budget Office, The Domestic Costs of Sanctions on Foreign Commerce, Washington, March 1999, for discussion of the calculation of trade losses and the limitations on such calculations.
95 Private communication.
96 DOE/EIA, various publications.
97 Higher prices after 1973 – via market responses – reduced U.S. energy consumption per dollar of GDP by 25 percent or the equivalent of more than 10 mb/d of oil.
98 Brazil at various times exported some sugar-based ethanol to the United States, in spite of opposition from ADM and U.S. farmers.
99 U.S. Department of Energy, Office of Integrated Analysis and Forecasting, Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 1999:Primary Energy, September 1999; and U.S. Department of Energy, Energy Information Administration, Office of Integrated Analysis and Forecasting, Federal Financial Interventions and Subsidies in Energy Markets 1999: Energy Transformation and End Use, Washington, DC, May 2000.
100 Through the 1980s, high costs of new supplies of power or gas could be disguised when the state or federal regulators permitted the high costs of incremental new supply to be “rolled in” against the prices of existing supplies. These were regulated at artificially low levels. Thus very costly new gas could be added while overall gas prices still appeared to be low. This device was effective and important, and a senior official was seconded from Israel to oversee part of that activity on behalf of the DOE.
101 See, by way of illustration, Citizen Action, Subsidizing Big Oil’s Foreign Investments: Importing Oil, Exporting Jobs and Making War, Washington, 1996.
102 U.S. General Accounting Office, Southwest Asia: Cost of Protecting U.S. Interests, GAO/NSIAD-91-250, Washington, August 1991.
103 Center for Defense Information, Military Almanac 2001 – 2002, Joint authors: Nicholas Berry, Marcus Corbin, Christopher Hellman, Jeffrey Mason, Col. Daniel Smith, USA (Ret.), Rachel Stohl, Tomas Valasek
104 “Costs” are only those borne by U.S. consumers or by the U.S. Government; costs to the rest of the world are considerably higher. Costs cannot be added together because some are consumer costs, some are balance of payments drains, and others were borne directly or indirectly by the USG but did not flow identifiably to
U.S. consumers.
105 Average of upper and lower estimates.
106 See text; the cost is scenario-specific.
107 Estimating the impact of higher domestic prices is beyond the scope of this study. Since oil prices were rather closely correlated with the prices of other energy forms, rough estimates indicate that the “knock-on” effect may well have been larger than the direct impact upon imported oil – i.e. and additional cost, not included here, of more than $400 billion.
108 Excludes U.S. share of IBRD and IMF commitments. 109 See text; this figure is elusive and may be very low. 110 See text; this contingent cost is scenario-specific.
111 Such transfers are official designated as “Excess Defense Articles” (EDA’s).
112 Average of upper and lower estimates.
113 See text; the figure is scenario-specific.
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