Nexus—OIL and AL Qaeda

Following the defeat of the Ottoman forces at the gates to Vienna three centuries ago the West maintained an uncontested ascendancy over a poor and backward Islamic Community. Resentment of the West’s ascendancy had to be contained for Islam’s financial capacity to effect change was minimal. The meteoric rise of oil revenues in the 20th century meant a new era for Islam; oil revenues were the catalyst that converted passive resentment into Islamic Terrorism.

This discussion paper demonstrates how well established historical patterns, such as the nexus between the use of warfare and growing financial capacity, were either not seen, or were ignored. That same lack of vision still prevails. Responding to violence with violence may well serve emotional needs for revenge, but the use of violence also drives up the price of oil providing still more resources for the extremists, further heightening the threat.

Oil provides the revenues for the Fundamentalists, but it as well represents their basic weakness. An examination of the economies of Middle Eastern nations shows that the removal of oil revenues will render these nations politically inert. Recognizing this economic weakness, a global embargo of oil imports from the Middle East is shown to be an attractive means for defeating Al Qaeda. Severely curtailing then eliminating the reliance on Middle East oil will decimate the Islamic terrorists by cutting off both emotional and financial support.

The discussion paper closes with a recommendation to replace global Middle East oil imports with synthetic fuel made from heavy hydrocarbons. Europe, America, China and India have vast reserves of coal and other heavy hydrocarbons that can be converted into synthetic fuel at reasonable prices using advanced technology that will protect the environment.

It is hoped that this discussion paper will help in moving the U.S. a step further toward a serious national debate about our future with regard to the critical and intertwined issues of policies for energy and policies for the war on terror. The War on Terror and the real war in Iraq are painful, but for the vast majority of our citizens life remains normal and good. Taxes have not been raised and the sacrifices required have been paid only by a very small minority of our 300 million people.

Yes, there is rising tension and debate about the course that we should pursue in Iraq, but that debate is largely framed from a short term perspective with little consideration given to longer term consequences. Those longer term consequences far override the short term in their implications for our nation and form the basis for this paper which is meant to frame issues for discussion.

After a life time of service to this nation, both in and out of government, I have to conclude it is time for change. It is time we took the framing of national policy issues out of the hands of the party politicians with their partisan aims and again, in our early tradition, put the debate into the hands of the people seeking solutions above party politics.

A brief retrospect on the author: The most vivid of early memories is of a lovely Sunday morning in San Diego listening to a distraught announcement that the “Japs” had attacked Pearl Harbor. A just turned 9 year old understood little, but he knew his father was on the almost prophetically named USS Honolulu in that harbor. Following a childhood of war, the adult went to Korea, returned to the defense industry including a decade with RAND, obtained a PhD in foreign affairs and entered the U.S. Foreign Service. An assignment to Afghanistan occurred between the overthrow of the King and the Soviet invasion. A couple of years in Amman were during a relatively peaceful interval between wars. In the Philippines violence by both the left wing rebels and the Muslim insurgents kept us on our toes. Warfare seems to have permeated the life experience.

Since retirement, I have spent almost a decade examining a massive set of facts on more than 1000 incidents of the political use of warfare. Those incidents cover a six hundred year period and involve essentially every nation, especially the more powerful nations. Certain themes occur and recur with almost clockwork regularity. It would not be wise to cite these recurring themes as historically deterministic for I have lived through refutations: it would be perhaps even more unwise to ignore, or be unaware of them. To make that assertion more concrete let me give an example — the century long abysmal track record of failures for nations engaging in pre-emptive warfare should have given us pause before making the decision to attack Iraq. Ultimate results in Iraq will not be judged for years to come, but for now one must conclude that the expected result was not achieved. The unintended and unexpected consequence of the invasion of Iraq parallels what had been demonstrated in hundreds of cases by one nation after another seeking to retard events in a changing world.

I raise Iraq for it epitomizes the limitations of our policy processes thereby highlighting the need for a leadership that has far better understanding of the trends now operating in the world and of the probable consequences of efforts to counter and control those trends. But, Iraq is not the issue. Some sort of interim “win” in Iraq will not solve, perhaps will worsen, the conflict between Islam and the West. This conflict dates back 14 centuries and relates to differing definitions of the true God and to mutual commitments to spread each group’s respective version of love for that God. With something like one and half billion Muslims in the world, spread across vast regions, Iraq is a mere wayside marker in the road ahead, of learning to live together, or more dangerously learning to kill more efficiently.

Islam is a religious force with vast numbers of adherents. But, for now Islam is a community that is economically weak and vulnerable. It was and it remains the West’s seeming insatiable demand for Middle East Oil that provided the catalyst for the shift from passive resentment of the West to active efforts by Islamic reformists to damage the West and rebuild Islam to its once great, even dominant position. It is with this awareness that I selected the title of this discussion paper: Nexus—Oil and Al Qaeda.

Warfare is expensive and disruptive. Islam has huge, centrally controlled, unearned financial resources from oil exports which provide the base for Islamic terrorism. Remove those oil revenues and the Islamic heartland, from which the impetus for terrorism flows, returns to inert, desert poverty. No longer will there be either the will or the capacity to injure the West. The energies of the community will be fully consumed with efforts to avoid near starvation and with efforts to establish political stability, internally. Islam’s endemic conflict with the West will not disappear, but we will buy time, much time, to seek a better formulated response to that conflict before it again becomes active.

It is not a simple task, nor will it be cheap, but it is entirely feasible to eliminate the need for the West to import oil from the Middle East. It will take time and cooperation with our Western colleagues to do that. However, the commitment to find alternative energy sources, once it has progressed to the point of becoming credible, will place the handwriting on the wall for the Middle East to see. That credibility can be achieved within a few years, perhaps 3 to 5 years. As we move to a new energy future, as we must, those in Islam who would kill and maim are going, not immediately, to be restrained for they will soon be seen as threatening to destroy Islam’s golden goose (oil) in a most fundamental sense. Those of us who have traveled in Islamic lands know how little exists there and how poorly organized the people are to produce a sustenance by working. Remove oil income and Iran’s economy will collapse, Saudi Arabia will struggle just to feed its people.

The issue of the day is not win or lose in Iraq, that very question is meaningless unless placed in a larger context of issues of how to learn to live with a wealthy, resurging Islam and how to adjust our energy policies to reduce our vulnerability to manipulation by enemies. Still further extension beyond poorly formulated assertions of win or lose in Iraq is required, for when one thinks of the energy future the very puzzling issues of environmental consequences are inevitably raised.

These are extraordinarily difficult matters to understand and adapt to, yet our adaptation will be of fundamental importance to our, the world’s future. Let me disavow claiming the prescience, the skill, as a single scholar, to map out a rational and preferred path for policies in these critical areas. However, I do claim to provide hard evidence in support of a conclusion that we are currently on the wrong paths. In addition, I make a contribution to what ultimately must be a bipartisan debate regarding the development of a more functional approach to the energy future. Wisdom must guide our final conclusions, recognizing that almost all of the points critical of today’s policies are embedded in hard to dispute factually derived patterns of behavior.

In a very important sense one can almost see the hand of destiny guiding us. We need, urgently, to begin to define an energy future that does not depend on a few sources of supply and which is one that will enable us to ensure that our environment remains stable. Without the pain of 9/11 and without the disarray and pain of Iraq it would be difficult to mobilize our democratic system to pour in the resources required to define and develop that future. Thus, once again the old proverb of “every crisis containing within it an opportunity” is proven true.

For centuries Islam remained politically weak and inert, constrained in its enduring historical conflict with the West by its absence of resources. I will demonstrate in the following paragraphs how money flowing into the coffers of Islam from the West—to pay for the West’s oil imports—provided the resources needed to resume violent conflict.

ISLAM AND THE WEST
A brief review of centuries of conflict is helpful in moving into this section. Our educational system has given little attention to Islam and to the West’s relations with Islam. Much folklore exists around the Crusades and our world histories have a usually brief reference to defeating the Turks at the gates to Vienna. There is little else—when in fact the two great religions of the World, Christianity in the West and Islam from the Middle East, have been in almost constant conflict since the time of Mohammed. And for most of that time Islam was in the ascendancy.

A leading scholar of Islam, Bernard Lewis, notes that in the 7th century following Islam’s establishment “Muslims progressed from victory to victory... creating in less than a century a vast realm extending from the borders of India and China to the Pyrenees....” In the 7th Century Christians inhabited large areas in the Eastern Mediterranean, yet within a generation of the Prophet's death Islamic armies were laying siege to Constantinople. The siege did not prove successful but Islam had established a position that the West viewed as threatening. Historian Andrew Wheatcroft notes “That they [Muslims] quickly became Christendom’s prime focus for fear and hatred.” These were the years of Islamic ascendancy. The early Arabic empires were far ahead of the West as centers of learning, as well as in power.

As the original Arab derived empires decayed, slowly what is now Spain was being re-conquered by European peoples, but it was not until the time of Columbus in the late 15th century that the Moors, as the Spaniards termed them, were finally driven from the Iberian Peninsula. In the meantime, the Crusades were started with the dream of retaking the lands of Christianity’s birth. The dream initially successful against the declining strength of Islam, took place as a new force emerged in Islam, the Turks, first the Seljuks and then the Ottomans. Crusader kingdoms were established in the lands east of the Mediterranean but were short lived. Their establishment and demise were fraught with violence between Saracen and Infidel, continuing the long pattern of conflict. As the Iberian Peninsula was being reclaimed in the west, in the East Ottoman armies, leading a rejuvenating Islam finally captured Constantinople and occupied much of the Balkans.

For another two hundred years Medieval Europe looked with fear on the well organized Ottoman armies. It was only with the victory at the great Sea Battle of Lepanto in 1571 and the lifting of the second siege of Vienna in 1683 that the threat to Europe from the East effectively disappeared. Still it was another two centuries before the Balkans and Greece succeeded in throwing off Turkish rule.

After a millennium of threat and defeat Europe was now in the ascendancy. European nations, particularly England and France began to establish their presence in and control over many of the Islamic lands. Europeans remember perhaps most vividly the years of Moorish rule in Iberia, the Crusades and the specter of Ottoman expansion into Eastern Europe. Muslims, in varying degrees depending on where in the vast Islamic community, are more likely to remember the Crusades aimed at lands Islam reveres and the 19th and 20th century European colonization. The essence of this very brief story is that these two great peoples, divided by opposing religions, have fought for centuries. It is that first one and then the other was the more dominant, although neither even at its apogee proved able to vanquish the weaker. The centuries of conflict developed both mutual fear and hatred, emotions which remain with us today. The West looks at recent experiences and views itself as pre-eminent in the world. Muslims look back on their period of greatness, perhaps often placing on the West’s shoulders a certain share of the blame for their own fall.

Within this context of continuing, often brutal conflict, we sometimes forget the common roots that exist between the predominant religion of the West and the different varieties of Islam practiced in the Muslim lands. Christianity and Islam, along with Judaism, share a common faith in monotheism. And, all three religions—Judaism, Christianity, and Islam—regard Jerusalem as a holy city. Yet, despite their common roots, theological differences remain unresolved.

Thus, we face the 21st century with an excess of emotional and intellectual baggage accumulated over the centuries of conflict.

PERSONAL EXPOSURE
My first tour abroad in the Foreign Service was in the Philippines with its 500 year history of conflict between the dominant Christian Community and the displaced minority Muslim Community of the South. I thought on my first visit to Jolo in the far south that our naval lieutenant escort was over doing things a bit with his hand constantly hovering around his loosely holstered pistol. In retrospect perhaps he was only being wisely cautious. I went then to Afghanistan where hostility toward Christians was widespread in the rural areas. From there I was on to Jordan where Christians were better tolerated, but the antagonism toward Israel colored much of our relations with locals.

These years in Islamic countries preceded the rise of the Fundamentalist resurgence led by Bin Laden. Even so the sense of grievance was often palpable and the need for restitution was voiced by a few friends and those counterparts who were more open in their expressions. We in the U.S. official community knew there were a few terrorists but at the time they were largely thought to be from the Palestinian Community. There was very little feeling of personal threat until we arrived in Egypt late in the 1980s. The resentment, the feeling of injustice was clearly there in earlier years, why did it take so long for the resentments and often hatreds to be manifested in the violence we see today?

THE OIL CATALYST
That question brings us to the nexus of oil and Islamic violence. I will show with hard facts several patterns that are of great importance in understanding our current conflict with Islamic Fundamentalists.

The paragraphs above sketch in qualitative terms the nearly 1500 years of struggle and conflict between Islam and the West on which the current tensions are built. However, with the decline of the Ottoman Empire, an economically weak Islam had little choice but to put up with incursions from the West. During its several centuries of “dark ages” Islam engaged in relatively few wars, about one fifth the number of wars fought by the West. Conflict was not absent but capacity to mobilize warriors, to arm them and to send them to war was very limited.

The receipt of oil revenues by Middle Eastern countries set the stage for the Islamic Community to more often use warfare to manage its conflicts, including those with the West. Islam's use of warfare increased dramatically in the 20th century.

Some might argue that it is spurious to make a connection between the rise in violence and the rise in oil revenues even though they occur together in time. I will point out, to counter that argument, that the Islamic increase in the use of warfare following the development of its enhanced financial capacity mirrors closely a pattern shown throughout the world. New money, especially unearned money, leads to a greater ability to use warfare and in consequence has repeatedly lead to a greater use of warfare to manage conflicts of interest.

This conclusion derives from the experiences shown in the use of warfare for political purposes over the past six centuries. A data base of 1000 plus incidents of warfare was assembled for the analysis. Details of statistical manipulations of these data may be reviewed at www.AmericanEnergyIndependence.com/warfare.aspx — The summary is in the following sentences.

By century, for the five centuries from 1400 to 1900, there were 14, 13, 13, 15 and 13 wars fought within the Islamic Community. This shows a remarkable stability in the use of warfare despite the many changes that took place over this time. That stability is attributable to two regularities in political behavior.

Conflicts of interest are numerous for all nations. Warfare has been the ultimate institution for managing those conflicts to achieve the most favorable results possible.
At a given level of financial, political and emotional capital there is a tendency for the frequency with which warfare is used to be relatively stable. Conduct of warfare is expensive in financial, political and emotional capital. An increase in any one of these elements of capital enhances the ability and/or willingness to engage in warfare to achieve desired ends in conflicts. And from 1) above conflicts of interest are numerous given ample need for forceful management.

From the same tendency, the West showed a similar stability in warfare levels during 4 of these 5 centuries. However, after four centuries of relative stability in the frequency of use of warfare, with the increased financial capacity resulting from the industrial revolution in the 19th century, the West tripled its use of warfare.

Islamic nations generally did not participate in the expansion of economic capacity that resulted from the industrial revolution in the West. The economies of Islam remained backward and poor on into the early part of the 20th century. With stagnant economic capacity Islam fought just 13 internal wars in the 19th century, almost exactly its average rate of use of warfare over the previous 400 years.

That situation changed in the 20th century. Oil revenues began to accrue by the second decade of the 20th century. Did warfare use increase in the 20th century? Yes! In the final three quarters of the century there were forty incidents of warfare fought within Islam. These forty wars followed the initiation of exports of oil to the West. We see the rate of use of warfare, after more than five centuries of remarkable stability, roughly quadrupled, far too great an increase to be a statistical accident. Remember that the first oil was shipped from the Middle East (from Iran) in about 1912 while the first Saudi oil revenues came from the selling of oil concessions in the 1920s.

Again a rhetorical question to further explore this relationship, did Islam’s use of warfare grow during the century as oil revenues increased? Again, emphatically Yes! For these purposes I switch from number of wars fought to a ratio – the ratio of wars fought by Islamic nations to those fought by Western nations. In the first third of the 20th century that ratio stood at about 0.40, somewhat above its average of the prior century. By the middle of the 20th Century the ratio increased to 0.80 and in final third Islam finally fought more wars than the West, bringing the ratio of its wars to those of the West to 1.20.

Both groups showed stable warfare use rates for many centuries followed by a surge in wars when financial capacity suddenly grew.

Let me cite a few other cases to finally put to rest the assertions of the skeptics that this is merely an accident of history. The rise in warfare use by Islam following the increase in oil revenues replicates that of Spain which almost doubled its involvement in warfare following the acquisition of the gold and silver of the New World. In a similar pattern sparsely populated Sweden rose to prominence in Europe’s religious wars following its exploitation and sale of its high quality iron ore.

Even where the increased revenues occurred as a result of increases in earning capacity, the availability of more money has been followed by a more frequent use of warfare. As noted above, the West as a group more than tripled its frequency of use of warfare following the acquisition of new wealth created by the industrial revolution. Within the West, the UK doubled its fighting of wars as it lead the industrial revolution. More recently the U.S. has become a leading nation in the use of warfare as it attained pre-eminence in the economic sphere. Asia, as for Islam, did not experience the industrial revolution in the 19th century, nor did Asian nations in general have large oil deposits to generate unearned revenues. Asian nations began to modernize their economies in the second half of the 20th century; by that time their overall frequency in the use of warfare almost doubled. These are facts from an exhaustive listing of warfare incidents and the pattern is universal and essentially cannot be refuted.

Apart from the empirical relationships, logic supports the conclusion. Wars are expensive to fight. In the case of Spain and Sweden the historical record shows how the kings struggled to develop the revenues (from sales of royal lands, new taxes, borrowings, and so forth) required to fight the wars they wished to fight. Despite efforts to restrict its uses, warfare remains an instrument for the protection and/or projection of interests. Nations and others turn to warfare and violence when their interests, in their judgments, so require it — to the extent they can afford to.

The conflict of Islam with the West coincides with the founding of the religion nearly 1500 years ago. Perhaps it is an intrinsic fault of our democratic systems that our focus is on domestic affairs, at least until the external crisis arrives at our doorstep. If our leaders had been reasonably alert they would have seen Al Qaeda on the horizon certainly by 1950 and perhaps could have ameliorated the conflict somewhat.

That foresight need not have been based solely on the expectation that past patterns would be repeated as argued above; there were specific precursors that could be observed as taking place. For example, it is generally accepted that Islamic Fundamentalism of this century has its roots in the thinking of Wahabists in Saudi Arabia.

It is accepted that King Fahd promoted a puritanical and intolerant view of the Islamic religion in an effort to stabilize his newly formed country and to build support for the royal family. Did he see the ultimate consequences? In hind sight it seems inevitable that the Islamic reformists that were being sponsored would follow a path similar to those followed by revolutionaries since the beginning of recorded history. Believers seeking to make their place in history must mobilize enough of society to force their message on the rest. A tried and true method is to demonize a plausible external entity. For Bin Laden and company Christianity and thus the West was, given the history of conflict with Islam, the inevitable demon target. And as the U.S. became the dominant actor of the West, just as inevitably we became the Great Satan, a Shia term but one that conveys the Al Qaeda frame of reference well enough.

We know that Saudi Arabia has practically no revenues except those derived from oil. We know that Saudi in addition to supporting the spread of Wahabist views, also largely financed the formation of Al Qaeda in its early years. We know this for the U.S. cooperated with the Saudi’s in promoting resistance to the Soviet incursion into Afghanistan and from this came Bin Laden’s brainchild. Here the causal connection of oil to Al Qaeda is well documented.

Our intelligence service has repeatedly stated over the years that Iranian funds support much of the violence against the West and against Israel. Terrorists do not come for free; they must be trained, equipped and fed. Families must be supported for many in the terrorist fold. Travel funds are required to enable them to mobilize and get from place to place. Often false papers are required. The terrorists need their sources of intelligence as well. These all require money. The following two quotes from Newsweek, presuming the quotes are not planted, give the direct causal relation between Iran and the Mahdi army in Iraq and Hizbullah in Lebanon.

Newsweek of July 24, 2006 “Many Lebanese owe a great deal to Hizbullah’s clinics, schools and other basic social services in the areas it dominates – underwritten, of course, by hundreds of millions of dollars from Iran.”

Again from this issue of Newsweek quoting a former member of Sadr’s forces in Iraq, “I used to fight for free, but today the Mahdi Army receives millions of dollars every month from Iran in exchange for carrying out the Iranian agenda.”

More recently there have been many reports of Iran supplying weapons and weapons technology to the insurgents in Iraq. The connection is so well known among the Palestinian that the dominantly Sunni Palestinians have taken to calling the Hamas forces stooges of the Shia.

Further development of the nexus seems akin to beating a dead horse, so I rest my case in the belief that it meets the requirement of leaving no reasonable doubt.

We brought it [the use of violence] onto ourselves. A people with traditional enmity toward the West were fed vast infusions of money in demanding they sell us the oil that lay under their sands.
With traditional enmity exacerbated by recent colonial intrusions the newly wealthy moved to demonize the West as part of their effort at resurrecting their once great empires.

Let me add that the pattern of use of violence to promote interests is no more a characteristic of Islam than it is of the West, if we use historical experience as the standard. To characterize our opponents as evil for their use of warfare is historically inaccurate and likely to be dysfunctional for it makes sensible compromise much more difficult. Negotiating with an evil empire, if that is the mind set, is a troubling and difficult exercise.

OVERVIEW
In part one; I produced historical data demonstrating how our imports of oil from the Middle East provided the catalysts for the development of Islamic Fundamentalism. In this section I produce data for recent years showing that every event threatening political instability in the Middle East, whether the result of actions by them or by us, has produced huge increments in revenue for the Middle East oil exporters, thereby enhancing the revenue base for the Jihadists. Just since the invasion of Iraq, the fear premium on the price of oil has brought Saudi Arabia an increment of over $350 billion of income from its sale of oil. Iran has benefited by an added, above the usual costs of oil, $100+ billion.

This incremental income producing effect from terrorist initiatives and our responses is part of the reason why, as quoted below, the National Intelligence Community concluded that the invasion of Iraq and the continuing operations in Afghanistan have actually strengthened the Jihadist movements around the world. The data are there for all to see. It is time that our policy makers see the obvious.

PLAYING INTO THEIR HANDS ONCE AGAIN
It is said that Bin Laden hoped with terrorism to draw the West/America into ground combat on Islam’s home turf. It appears that he misjudged his organization and Taliban allies’ abilities to combat America on the soil of Afghanistan. He was unable to replicate the successes against the Soviets. However, America may have played into his hands in seeking to establish a new political paradigm for the Middle East in Iraq. The invasion of Iraq is yet to prove successful and the passions it has aroused have enabled Al Qaeda to slowly resurrect itself in the Pathan tribal areas of Pakistan.

In an unclassified release (dated April, 2006) of a National Intelligence Estimate judging results since the invasion of Iraq the following assessments were made:

We also assess that the global Jihadist movement—which includes al-Qa’ida, affiliated and independent terrorist groups, and emerging networks and cells—is spreading and adapting to counter terrorism efforts.
Although we cannot measure the extent of the spread with precision, a large body of all-source reporting indicates that activists identifying themselves as Jihadists, although a small percentage of Muslims, are increasing in both number and geographic dispersion.

There are at least two consequences of the U.S. incursions into the Islamic Homeland that add to the strength of the Jihadist movements around the world. The first and perhaps most obvious is that the traditional emotions of dislike and fear of the West are heightened by the presence of American and other Western troops and by the death and disruption their operations bring.

The second consequence is that such incursions are seen by the oil markets as threatening more political instability in this already volatile region. The perception of that threat leads to buyers bidding higher prices for oil to insure their supply is adequate. The Jihadists’ terrorist and insurgent activities are in monetary terms cheap to conduct. Since many of their fighters see martyrdom rather than death if killed, from their perspective, these are not human costs as we would see such deaths. In the environment of unstable oil prices, it is almost as if they were fighting a traditional war of plunder expecting that the treasures (added oil revenues) acquired from the fight will produce added riches, not added costs as is true for us. These points cannot be carried too far, but there is an element of truth in them that we have ignored at our cost.

THE FEAR PREMIUM
Hostility itself is not sufficient to produce active efforts to damage the West. As discussed in Part I to undertake military operations, even the unconventional ones we term terrorism, requires funds. Before oil, Islam had few resources and fought few wars. The base oil income financed the development of the Jihadists, it is also clear that the military struggle of the Jihadists with the West is producing yet more income for their Middle East sponsors.

Either an attack against Western targets by the Jihadists, or a retaliatory attack by the West produces a consistent surge in oil prices – roughly a doubling or a fear of shortage premium in the $25 to $30 a barrel region. Some 35 years of oil price data are discussed below to document this relationship.

Bin Laden becomes almost the master strategist. With the tragedy of 9/11, he drew us into an attack near the heartland of Islam. Anger, hatred, insecurity, fear were among the emotions this incursion triggered in the Muslim world. Of perhaps greater consequence, it triggered the fear premium we now see in the price of oil.

In the four years since the invasion of Iraq a fear premium of close to $30 a barrel has been incorporated into oil prices. At 8 million barrels per day of exports from Saudi Arabia, that nation has received $350 billion in added income courtesy of the Al Qaeda attacks on the U.S., Iran has benefited by more than $100 billion over the same period.

Apart from the sharply increased resource base that this increase in oil revenues has produced for Al Qaeda, that organization has become something of an economic hero in Islam. Al Qaeda attacks the disliked sometimes hated enemy and in the process generates vast unearned wealth for the Middle East. It is win-win, you attack the disliked West, the infidels, and the West pays you exorbitant funds in consequence of that attack.

The U.S. imports about the same quantity of oil that Saudi Arabia exports. The fear premium resulting from the invasion of Iraq has cost the U.S. about $350 billion in added (above the price without the fear premium) costs for the import of oil. Not only does he, Bin Laden, generate vast new wealth for Islam, he imposes huge costs on the enemy – the $350 billion does not of course include the military costs which appear to be even higher. If we look more broadly as an Islam versus the West situation, the invasion of Iraq has also cost the European countries about $600 billion in fear premium oil costs. The West is lose-lose. We incur the damage and pay them to undertake operations that produce the damage and then we spend more to strive to prevent them from doing it again.

Because we have chosen to rely on Middle East oil exporters to produce the energy material which our economy must have we have ceded to them a power to damage us severely. By maintaining a just enough supply, largely with Saudi Arabia leadership, the oil exporters have been able to establish a market for oil that is highly unstable. Whether we act or they act, any event that might bring about a reduction in oil supply produces an immediate market response as a fear premium, around $25 to $35 a barrel, immediately is added to the resource base of the Jihadists.

A LESSON LEARNED?
It should have been foreseen that Islamic militancy would inevitably rise as the West pumped its wealth into the Middle East to pay for the imports of their oil. The effect of rising oil prices that would follow on any incursion into the Middle East homeland was equally foreseeable.

Those of us above the age of fifty or so can remember, vividly, the consternation, frustration and anger experienced in the oil consuming nations during the 1970s. Following the 1973 war OPEC cut back on production and Saudi Arabia lead the Arab countries in enforcing an embargo of oil going to nations supporting Israel. OPEC eventually raised prices by about 300 percent. A few years later the Iranian Revolution and then Iraq’s attack on Iran raised oil prices by a further 100 percent. The world struggled to adjust to prices that in real terms were reaching an all time high. The future should have been even more obvious at this point in time.

This was a period of chaos, of learning. The Arabs learned both the leverage potential of the oil weapon and the nature of the two edged sword as their price increases threatened their only source of wealth. The Western consumers learned to fear an artificially induced shortage from a restricted array of suppliers, key members of which were enemies or foes of the West. Since that time the oil market has been in an unstable situation. Major suppliers of oil have strong incentives to retard development of their reserves while at the same time keeping prices as high as possible while still low enough to discourage development of alternative sources of energy – either non-OPEC oil or sources other than oil.

Consumers learned to stockpile reserves, but they seek to avoid accessing those reserves except in the most extreme events with the consequence that the stockpiles are not large enough to greatly influence the market. Consumers also learned to seek energy supplies not within the control OPEC. Unfortunately that is a lesson that was unlearned as OPEC controlled its prices.

Fundamentally the price power remains with the suppliers who attempt to maximize their benefits from a “just enough” supply when all is well. The problem is the fear premium that emerges when all is not well. The 1973 price rise and embargo induced shortages were the result of direct action by OPEC or Middle East suppliers. Since then, the artificially induced just enough supply pattern has shifted (in the immediate sense) the onus of price increases onto the traders who procure the marginal oil supplies required to keep inelastic markets operating. Saudi in particular can, and sometime does, decry the price increases as if they have no responsibility.

EARLY EMBARGO ATTEMPT
It is important to review some of the history of the oil pricing markets in order to understand how we got here and the threat that being here implies. It was no accident that the change in market power occurred in 1973. The war of Arab against Israeli of that year only provided a convenient trigger. The embargo weapon had been tried earlier.

The first meaningful effort to use the “oil weapon” followed on the “six day war”. In early 1967 Nasser of Egypt demanded the UN peace keeping force be removed from Egyptian territory and then in May he blockaded the Straits of Tiran effectively cutting off shipping from the Israeli port of Eilat at the head of the Gulf of Aqaba. On June 5 in retaliation Israeli jets destroyed more than 400 aircraft on Egyptian, Syrian and Jordanian airfields. After six days of warfare on June 10 a cease fire was signed.

Quoting from Daniel Yergin’s The Prize¹ “Among the Arabs, there had been talk for more than a decade about wielding the “oil weapon.” Now was their chance. On June 6, the day after the fighting began Arab oil ministers formally called for an oil embargo against countries friendly to Israel. Saudi Arabia, Kuwait, Iraq, Libya and Algeria thereupon banned shipments to the United States, Britain....”

Internal instability factors, especially in Libya, combined with general antagonism toward supporters of Israel and probably toward the West in general lead to this radical action. Yergin states that by June 8, “the flow of Arab oil had been reduced by 60 percent.” A revolt in Nigeria further tightened the supply situation. The internal situation in the producing countries soon stabilized somewhat and production and exports were increased although a shortfall of about 1.5 million barrels a day had to be compensated for.

In the 1960s America had a considerable shut-in capacity that in effect was being held as a reserve. The U.S. quickly increased its production by close to a million barrels per day. Venezuela, Iran (the Shah was still in power) and Indonesia also increased production. “By July 1967...it was clear that the ‘Arab oil weapon’ and the ‘selective embargo’ were a failure.” (Yergin) It was the excess capacity available in the United States that led to the failure of this early effort to extort policy concessions by controlling oil supplies.

THE UNSTABLE MARKET
The surplus production capacity of the U.S. was not destined to endure. The surplus capacity which had been about 4 million barrels per day in the early 60s was rapidly declining with increased consumption and slowly falling production. By 1973, U.S. imports had surged to 6 million barrels a day and all previously shut in capacity was being fully used. Imports now exceeded 35 percent of consumption. The pricing power situation was ripe for change.

In the meantime some of the Middle Eastern Countries lead by Kuwait and Libya had been cutting back on their output. World wide surplus capacity was now “just one percent of free world consumption,” a fundamentally unstable situation.

In late October,1973, following America’s announcement of a major arms resupply package to the teetering Israelis, Saudi Arabia announced it was cutting off all oil shipments to the U.S. The embargo was unexpected and not prepared for. Worsening the situation was the Watergate Scandal that was then debilitating the American decision making processes. Lines at gas stations quickly reached untenable lengths. Flexing their muscles oil ministers met in Tehran in late December and made a decision to raise prices to $11.65 a barrel. The price had been under $3 a barrel in mid-1973.

As Secretary of State Kissinger commented at the time, the power balance had been irrevocably changed. Oil prices stayed steady at the new price level (roughly $40 per barrel in 2005 prices. But, a new world power balance remained as the result of a small margin (around 1 to 3 percent) of surplus capacity compared to consumption. The new element of a volatile “fear premium” was now a reality. OPEC could, and would influence prices in periods when tensions were what might be considered normal. In contrast it was the traders, encouraged by producers, who influenced prices when instability threatened. A fear of reduced availability of the oil required for presumably inelastic markets resulted in surging oil prices whenever events, usually events of violence, caused a nervous response among buyers.

SINCE 1973
The first of the instability induced surges came a few years after 1973. Following its revolution Iran in 1979 had attempted to kill the Iraqi deputy premier, attacked Iraq’s embassy in Rome and fomented unrest among Iraq’s Shiite population. Earlier in December 1978, Iran had stopped exports of oil resulting in a reduction in oil supply of 4 to 5 percent. Yet more fear was generated as Iraq invaded Iran in Sept 1980. In response to the political instability and actual reduction in supplies, prices soared to more than double the price that had held since 1973. Daniel Yergin asks and then answers—Why?

“Why should a 4 or 5 percent loss of supplies have resulted in 150 percent increase in price? The answer was the panic.”

This “panic” response to any meaningful evidence of threats to supply of oil endures today, although it does empirically seem to have certain rule of thumb limits. In several instances since 1980 when there has been the appearance of panic, prices have risen steeply for a time but then leveled off or declined by the time they had doubled.

In order to show the statistics in constant prices, I rely in the following paragraphs on the price series published by Pierre Lemieux of the University of Quebec. He computed prices from 1970 to 2006 using West Texas Intermediate as his indicator and corrected prices to their 2005 equivalent using the CPI. I checked three other price series and found similar results. Limieux’s series covered the longest period with constant prices.²

For this first period of crisis related to the Iran/Iraq situation prices were about $41/barrel in late 1978, climbing steeply thereafter to close to $95 a barrel in early 1980, a 130 percent increase which is close to Yergin’s figure of 150 percent.

Prices then fell steadily and at a rather uniform rate to about $50 a barrel in 1985. Of interest for later conclusions, the first clear demonstration of oil as a weakness (as well as a strength) came in the early 1980s. Riding on the oil boom, Mexico had incurred massive international debts and by 1982 was at the point of declaring it was unable to meet its debt payments. World financial markets teetered but a bailout arrangement was made and the situation somewhat stabilized.

Saudi Arabia was also seeing a threat to its economy as its revenues plummeted with the falling price of oil. From $120 billion in 1981 Saudi earnings declined to about $25 billion in 1985, a decline of close to 80 percent. Prices continued to fall. Iran’s earnings fell by almost half in early 1986 alone.

OPEC’S CONSOLIDATION
The price decline especially the precipitous fall of 55% in prices in the first half of 1986 resulted from several factors – increased non-OPEC oil exploitation, slowed world economic growth, conservation and the beginning of the development of alternatives. The consumers were regaining some control of the market.

The price fall reversed all of these trends. The 55 MPG Honda ideal was replaced by the 17 mpg SUV. Exploration outside of the OPEC region declined. The world economy recovered and programs for the development of alternative energy sources stagnated. Oil prices climbed back by $10 to $15 per barrel then remained steady for several years.

That 1986 decline ultimately resulted in the transfer of pricing power back to OPEC, primarily the Middle East suppliers. Prices remained low and stable from 1986 until Iraq’s invasion of Kuwait in 1990. During that time alternative energy investments declined, world economic activity grew and non-OPEC oil exploration lagged. In the face of fear that the invasion of Kuwait would result in supply interruptions, the price of about $28 a barrel which had been maintained for several years leaped to more than $52 an increase of almost 100 percent, again approaching the doubling figure. The surge was brief however, as a U.S. lead military coalition quickly drove the Iraqis back across the border. By mid 1991 prices were back under $30 and then slowly declined to closer to $25 a barrel through 1998 when another fall occurred to about $18 a barrel.

At this point new incidents pointing to possible future instability in the Middle East began to come on line. Bin Laden issued his Fatwa against the U.S. in 1998. There were the embassy bombings in Africa late in that year and then the Millennia threats as 2000 approached. In October 2000 there was the attack on the USS Cole. Tensions were rising and the fear premium began to take hold once again.

The $18 figure for early 1999 surged to almost $40 by late 2000, again bringing a rough doubling of prices. Prices soon fell back to their apparently stable level of the mid $20s when the events of 9/11 hit. From a low of about $22 just before 9/11 prices surged to $38, almost doubling by late 2002.

Prices then fell briefly following the successes in Afghanistan to about $32, before surging to the range of $70 following the invasion of Iraq – again prices tended to rapidly increase by about 100 percent. Prices have declined from their peak of 2006, but still remain high.

To avoid too much detail, let me hit the high points. After 1973, just under half of the time a stable price, 2005 prices, between $25 and $30 was sustained. There is even some evidence of a slight declining trend. I think that this is a reasonable price range to consider as the market price for crude, given the limited competitive forces operating in the world oil market. In the 35 year period there were also 8 to 9 years in which prices surged $20 to $40 above this “market” price. Those years are characterized by periods of instability related to the Middle East – the invasion of Iran, the invasion of Kuwait, 9/11 and so forth. A fear premium of $25 to $30 a barrel is suggested by this history. That is, when there is a fear of shortage of supply, the price tends to roughly double, before corrections are made.

The fear premium cuts against us in two ways. It generates new revenues for oil producers including those in the Middle East. A share of those new riches goes to Islamic Fundamentalists. The other edge of the sword is the increase in oil import costs for the West. With oil trade in the multi-millions of barrels per day, we are talking vast sums of “fear premium” money. Within the Middle East at large for this 8 or 9 year period the fear premium revenue has ranged somewhere in the multi-trillions of dollars. For the West the premium costs are far larger since it pays the higher price for all of the oil it imports whether from the Middle East or elsewhere.

It is an aside, but one that also has its relevance, the fear premium produces leaders such as Chavez of Venezuela also intent on making his place in history by destabilizing world trade.

THE DYNAMICS
For simplicity of communications I will personalize the Fundamentalists and refer to them as Bin Laden. The essence of the forces in operation here can be characterized as follows:

Bin Laden has the initiative and chooses to attack or not. His attacks cost him a few hundred thousand or perhaps millions of dollars and the lives of a few – which he sees as creating martyrs not as losses of lives.
His attack produces multi millions or even billions in new riches for the oil producers, in the Middle East and elsewhere.
His attack imposes multi billions of new oil costs on the West.
The West responds, oil prices go even higher.
The West pays high military costs, both in people and money.
The West generates more enmity among Muslims by attacking their territory.

It seems almost win-win for Bin Laden and lose-lose for the West. Are we playing into his hands? I of course cannot answer that question. The results since 9/11 have certainly raised questions regarding whether we are playing by his scenario or not. As noted above, the best minds in our intelligence community as of mid-2006 concluded our military interventions had worsened the situation, presumably for the reasons cited above.

SHATTERING THE VISION OF A MILITARY SOLUTION
We have quite a bit of evidence that suggests our approach may well be wrong. We pour money into the hands of the enemy, we antagonize friends, we exacerbate Islamic resentment of the West, we pay huge military and security costs and the results to date raise serious doubts as to whether we are making progress in improving our security.

The massive anger our nation felt toward the Islamic terrorists after 9/11 is an inevitable human response. The feeling of American military supremacy is a natural response to some years as either the sole or one of two super powers. But following those “natural” inclinations is not serving our interests and there has been more than enough evidence to lead us to that conclusion.

The friction between Islam and the West long predates the formation of the American Republic. But, as the inheritors of the mantle of leadership in the West, we also inherited the heritage of past misdeeds and conflict that belong to Europe, not to us.

This has lead to dysfunctional policies that date back for more than a century. We have inherited the onus of Europe’s colonial ventures and have done little to show that our nation is not as the Europeans were. We poured our wealth into the coffers of these “primitive” societies to secure their oil.

Ignoring a vast body of historical data we established pre-emptive warfare as our right to employ at our discretion, when we defined a threat as present. We made limited effort to establish a clear moral ascendancy with our allies, our people and with the rest of the Western world. The resulting military confrontation has evolved in a manner that has enabled their unconventional tactics to bring our hugely superior conventional military capacity into a standoff. Yet we persist in seeking to use conventional military power to defeat this foe.

A BETTER WAY TO COUNTER ISLAMIC TERRORISM
There is another way. When the West stops buying their oil, the economies of the Middle East will collapse. They cannot drink the oil and they cannot produce anything but poverty from their desert lands and ill organized economies.

Energy Independence is a better way to defeat Islamic Terrorism, one that incurs less risk and probably is no more costly.

The President of the United States, George W. Bush, announced to the world during his 2006 State of the Union address that America is addicted to oil. Yes, America and Europe are dangerously dependent on oil imports. But Islam is even more dangerously dependent on oil revenue.

We often hear of the oil giants, particularly Saudi Arabia. They are giants only at the sufferance of the West. Less than a century ago, Saudi Arabia was formed (with an earlier dispensation from the West) by a poverty stricken clan of nomadic Arabs inhabiting some of the most inhospitable lands on this planet.

It was from this desolate land that Arab armies, centuries ago, carried Islam almost to the four corners of the earth. After a millennium of dominance the political intensity decayed as it inevitably does. The political institutions decayed but the memory of past glories remained—and intensified—because Islam had little glory left, increasing the need to identify with its past greatness.

As the modern Saudi kingdom came into being, the world was converting to oil and strangely this newly formed desert kingdom rested atop massive deposits of that black gold of the 20th century. Despite Islam's long term hostility toward the West a mutually rewarding partnership emerged as Western interests began to create riches for the nomads.

About a hundred miles away, across a narrow gulf of water lay the ancient lands of Iran (Persia in earlier times). Possessed also of an illustrious history, the Iran of the early 20th century was a backwater. Poverty prevailed and little government existed to guide the people forward. Oil began to create unearned riches in Iran even before the Saudi fields came on line. Again mutual benefits flowed between the West and Islam.

There is no reason to think that these Islamic lands could not ultimately resurrect their past greatness. But, without the intervention of the West, without the unquenchable demand for oil, these and the adjacent lands would have remained backwaters for some centuries to come. Neither the political structure nor the resources needed to drive modern economies were, nor are present.

Islam is a proud religion proclaiming itself as the ultimate product of God. Centuries of disdain from the West, of periodic political oppression and a huge sense of envy were the starting point as new oil riches arrived. It was only a matter of time before a few religious and intellectual leaders began to think of resurrecting past glories, of expanding the final word of God (Allah) to new shores as their ancestors had done a millennia earlier. Both emotion and rational thought lead these thinkers to demonize the infidel West.

The religious revolution in Iran turned resentment into the taking and holding of diplomats as hostages as a means to show their inherent strength. When this played out they turned to the support of terrorists. Saudi Arabia sought to spread its version of truth by building and supporting religious schools throughout the world. And then, with American guidance, a group of Saudi expatriates sought to humiliate the USSR in Afghanistan. Their success became part of their self image of warriors able to defeat a super power of the West. The Saudi fighters then turned to terrorism.

Oil riches and the dedication of young Jihadists created a new found power for Islam. But this power has not produced, at least not produced on a widespread basis, wisdom. To paraphrase a truth that underlies the very basis for our democratic concepts, power corrupts and more power corrupts yet more.

As shown above, the Islamists take our money, convince themselves that they have the ultimate and only truth, and then seek to destroy us. Indomitable, unconquerable with our acquiescence, they have concluded the oil beneath their soils gives them the power to do as they wish with respect to the West. THEY ARE WRONG!

Cheap oil from a weak supplier fit the Western needs and beliefs very well. But, the dependence grew and supplies remained somewhat tight and sources were not diversified. Suddenly this people, once with nothing, who hated the West, had wealth and a stranglehold on the West. But that stranglehold is truly, to mix metaphors, a house of cards.

The Islamists view the West as weak and decadent, as they should for we have allowed them to exploit us because easy energy has been the easy way. But they have failed to see that it is not just indolence that has driven us – the belief in freedom and efficiency and keeping government out of business is also a part of what lead to the dependence. Soon they will see their wealth disappear as we turn our energies toward redefining our self reliance and independence.

It will take time to fully convert to non-Middle East energy sources, and yet American politicians, with lack of vision, have feared to start the transition. The American people are speaking out—demanding action, and American leaders are beginning to listen. It will be a time of conflict, because Islamic nations will virtually disappear without Western money inflowing to buy oil. Islamic fundamentalists may find it difficult to recognize that they do not have the final truth but only one of man’s version of the truth. When the oil money stops flowing, moderate pragmatic Muslims will read the handwriting on the wall.

From 1980 through 1986 the price of oil [in 2005 dollars] fell from near $100 per barrel to the low $20s. Saudi Arabia learned its lesson, America did not. Here perhaps indolence and decadence [I do not like those words of the Arabs but they do convey some truth] took hold and America again relaxed to enjoy the return of cheap oil. Critically for the future, programs that had been started that could have gotten us off the Middle East oil diet were gradually curtailed. Nonetheless, the world had demonstrated that OPEC’s rapacity could be controlled. In a few years oil prices fell far enough to bring Middle East economies near the point of collapse. With that having once been demonstrated it will go faster this time. We Americans must maintain our culture of commitment and strength as we have done many times in the past. The economic weaknesses of the Middle East oil producers are there to be exploited.

ECONOMIC WEAKNESSES OF THE OIL PRODUCERS
The weaknesses are so great and so obvious that there is little value in probing the economies in much detail. A brief review is useful though to show the severity of threat these economies face if the West embargoes the imports of their oil. While the typical Al Qaeda terrorist is unlikely to have any understanding of that threat the leaders do understand. Many of those building their grand palaces and towers in the desert understand the basis for their affluence.

Of course the fundamental flaw in the economies of the Middle East oil producers is that they are mono product economies. Oil accounts for 90 percent of Saudi’s exports and 75 percent of government revenues. The figures are 80 percent and 50 percent for Iran.

What does this mean to those nations? We can look at the experience of Saudi Arabia to get some concrete understanding of the consequences of reduced oil revenues. In Part II of this paper I tracked oil prices as they reached their peak in 1980 and steadily declined for the next 20 years. In 1980 the Saudi per capita income figure was $25,000 that fell to about $7,000 in 1999 before rebounding to $8,000 in 2003 with the invasion of Iraq. The percentage of economic decline in Saudi Arabia was far greater than occurred in the U.S. during the great depression of the 1930s.

It may be helpful to think back on America’s folklore of the suffering and unrest that followed the economic slowdown in the 1930s. The consequences for the oil producers will be far more catastrophic. At least, America had agricultural land and basic food production capacity to fall back on to feed its people, Saudi Arabia cannot even do that.

At the turn of this century Saudi Arabia produced 2.8 million tons of cereals while importing almost 5.7 million tons. Imports of the basic food stuff were almost 70 percent of consumption. The 740,000 tons of sugar consumed came 100 percent from imports.

It was not much more than half a century ago that Saudis were predominantly a nation of nomads. The rainfall conditions do not allow settled agriculture except in a small strip adjacent to the Yemen border. Survival in such an environment required the reliance on animals to forage for the sparse vegetation and the constant movement to new areas as the local vegetation is cleared. Since then the population has grown from under 10 million to over 27 million. The people of Saudi Arabia cannot be fed without imports. Imports cannot be paid for without the export of oil.

Iran is better off in the subsistence sense. It has significant arable land, especially in the north. Nonetheless, Canada’s Agri-Food Trade Service in 2003 reported the following on Iran in its assessment of market opportunities: Iran is currently one of the world's largest net importers of agricultural products, importing 30-50% of its food requirements. The country's rapid population growth and an increase in disposable income are expected to substantially raise the demand for food over the medium and long-term.

The CIA’s open publication World Fact Book pointed out: Iran's economy is marked by a bloated, inefficient state sector, over reliance on the oil sector, and statist policies that create major distortions throughout. Most economic activity is controlled by the state.

The Iranian population is passing 70 million. It has a high population growth rate along with a high and growing unemployment rate. Like Saudi Arabia, Iran has a welfare economy with a vast array of subsidies and distortions representing the consequences of the accrual over recent decades of unearned oil wealth.

Fifty years ago these, and nearby nations, were countries in which poverty prevailed, but they had a more or less sustainable economic existence, at least in the good agricultural years. Since then they have had a half century to:

Develop distorted economic structures.
Allow their populations to grow radically.
Learn to live with unearned affluence.
Promote subsidies and inefficiencies especially in agriculture.
Most critically perhaps, to teach their people to expect more of the same.

Perhaps the saddest observation that one can make is that we have succumbed to their blackmail. Are we so decadent, so without backbone? My observation is NO we are not.

The essence of this analysis is straightforward. The demand for Middle East oil financed the social processes that lead to the emergence of Al Qaeda and other Islamic fundamentalist groups seeking to demonize the West for their own purposes. The U.S. has countered the violence practiced by these groups with violence; resulting in higher prices for oil which create yet greater riches for those we seek to counter. Apart from creating more riches for the Islamic community the use of violence worsens the traditional enmity and resentment toward the West.

This does not have to be endured; the West has more than enough energy raw materials to free itself from dependence on oil and thereby break this vicious circle. While total energy independence will take some years to achieve, only a few years to establish credible intent are needed because the oil producers have no means to support their economies except by selling petroleum to the West. The pricing power in the oil market will shift to the consumers once it has been shown that we have the will to develop alternative supplies.

www.AmericanEnergyIndependence.com has a huge amount of information on alternatives to our present reliance on natural petroleum. I do not seek to replicate that information, but do believe it useful to produce enough facts here to make clear that our dependency on oil exists because we have chosen to live with it, and that we can readily smash that dependency.

There are various avenues that can be pursued to develop energy independence, most involving changing habits and promoting conservation. My purpose is served here by demonstrating that one means to break the dependency is through the development of synthetic petroleum from raw materials that the West controls access to. This synthetic can be used to fuel existing equipment and can be distributed through existing channels. That is, it is “easy and virtually painless” to do once a commitment is made. When the oil producers become convinced we are committed, a shift in power will occur — long before the final independence is established.

SYNTHETIC PETROLEUM
Technology for mining heavy hydrocarbons (coal, shale, tar sands) and refining synthetic petroleum products is well tested — coal conversion technology dates back to the 1930s, and tar sand commercial refineries are now in operation in Canada. The raw materials available for conversion to synthetic petroleum are massive, sufficient to meet projected energy needs for several centuries.

For example, the U.S. has about 270 billion tons of recoverable coal in known deposits. With existing technology U.S. coal can be mined and used to produce synthetic petroleum to cover a hundred years demand at current consumption rates. Huge shale oil deposits in the U.S. and tar sands in Canada will extend synthetic petroleum production for another three centuries. Dependence on imported oil from a hostile community rather than the development of such known alternatives has created a crisis of our own making.

Finished synthetic products can be priced at less than the price we have paid for imported oil since 2003. Private investments in this field are, however, limited by the monopolistic pricing power of OPEC. Natural oil, such as from Saudi Arabia, can be delivered to U.S. ports for under $10 per barrel. It is the threat that the OPEC monopoly will cut prices below the cost of synthetics, as they did in the 1980s that inhibits investments.

The West can prevent OPEC from retaining monopolistic control (through lowering its prices) if the West charges an import duty on oil imported from OPEC nations, including refined oil products and materials made from OPEC oil. The import duty needs to be high enough to create the equivalent of oil costing, a target figure, of about $40 a barrel. An import duty would generate funds that Western governments can use to make loans to encourage investment in the production of synthetic fuel and other alternative fuels. As the synthetic refineries come on line there would be a transfer of income from the governments of Saudi Arabia, Iran and Venezuela to the U. S. Government. Oil prices have been above $40 per barrel for most of the last four years and our economy has prospered. Thus the price is something we can live with. Another benefit is that with domestic production rather than imports we should expect an improved economic picture.

I choose the synthetic fuel option as the example because the technical and financial aspects are well known and this option requires the least adjustment to our energy infrastructure. Its implementation would enable the people of the West to regain their political clout without having to change their habits of consumption and without having to invest in a new personal transport fleet.

FINANCING SYNTHETIC PETROLEUM REFINERIES
Currently the fear premium on imported oil adds $200 billion per year to the cost of the West’s energy imports. Defense expenditures made in attempting to use force to control Iraq and Afghanistan exceeds $150 billion a year. Cost estimates for developing increased capacity for producing synthetic petroleum vary from $10 billion to $40 billion per million barrels per day (mbpd) capacity. Reallocation of just half of the above fear premium and excess defense expenditures to capital investments in synthetic petroleum would enable us to annually increase capacity by more than 4 mbpd a year or by more than 20 mpbd per year after five years of investment.

The point of the prior paragraph is not that of saying this is how to do it, but rather to show with firm data that we can do it and perhaps even save money while doing it. By initiating a conversion to synthetic petroleum the West could stop its imports of Middle East oil within five to ten years. It could break the pricing power of oil producers within 2, maybe 5, years as the program becomes credible.

Frank Denton has a PhD in foreign affairs and is the author of Knowing the Roots of War and several other books. He spent a decade with the RAND Corp. before joining the U.S. Foreign Service. He served in Afghanistan, Jordan, Egypt and the Philippines as well as in Washington. He is now retired.

References:
¹ Daniel Yergin, ?The Prize, The Epic Quest for Oil, Money and Power,? Free Press, New York, 1992
² Pierre Lemieux, ?The Oil Price Mirage,? Ludwig von Mises Institute, mises.org

Recommended reading:
Islam and Oil
The Saudi Connection — How billions in oil money spawned a global terror network. By David E. Kaplan, U.S.News & World Report
Saudis remain the world’s prime source of terror financing — By Josh Meyer, Los Angeles Times
“Saudi Arabia remains the world's leading source of money for Al Qaeda and other extremist networks and has failed to take key steps requested by U.S. officials to stem the flow... the Saudi government has not taken important steps to go after those who finance terrorist organizations or to prevent wealthy donors from bankrolling extremism through charitable contributions, sometimes unwittingly. Saudi Arabia today remains the location where more money is going to terrorism, to Sunni terror groups and to the Taliban than any other place in the world.”

Nexus—OIL and AL Qaeda

ABSTRACT