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Sunday, September 5, 2010

Iraq War Costs

Stiglitz and Bilmes reimagine the true total cost of the Iraq war at something north of $3 Trillion.

Their estimate is far too low.


When the United States went to war in Iraq, the price of oil was less than $25 a barrel, and futures markets expected it to remain around that level. With the war, prices started to soar, reaching $140 a barrel by 2008. We believe that the war and its impact on the Middle East, the largest supplier of oil in the world, were major factors. Not only was Iraqi production interrupted, but the instability the war brought to the Middle East dampened investment in the region. 

In calculating our $3 trillion estimate two years ago, we blamed the war for a $5-per-barrel oil price increase. We now believe that a more realistic (if still conservative) estimate of the war's impact on prices works out to at least $10 per barrel. That would add at least $250 billion in direct costs to our original assessment of the war's price tag. But the cost of this increase doesn't stop there: Higher oil prices had a devastating effect on the economy.

I'm astounded by their meekness.  Attributing only $10 of the oil price to the war is absurdly low - possibly by an entire order of magnitude.   So - their $3 Trillion guess is low by - very conservatively - another trillion, and quite possibly 2 or  even 3 trillion.  The current crude price of $74.34 is probably still above rational evaluation by 50%, or more.  A steady, but objectively extravagant 15% year over year increase from 2002 to now would result in a crude price of about $76.50.   A more realistic increase of 8% would leave it at $46.27.   There is a lot of room on the down side.

The price movement has followed a classic bubble pattern, and it's not at all hard to put Elliott labels on this chart   (as I have done below) and project crude prices around $30 in the next few years - especially if there is a double dip recession and actual deflation.

But there is also a great deal of destabilization in the Middle East, and increased Muslim militancy caused by this war that Stiglitz and Bilmes neglect to mention.  Each of these will have high economic and human costs far into the future.

The Iraq war is the most misbegotten foreign policy adventure in U.S. history.

H/T to AB

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