Monday, November 3, 2008

Christopher Fettweis' "Losing Hurts Twice as Bad"

Christopher J. Fettweis is an Assistant Professor in the Political Science Department at Tulane University. For the last three years, he taught strategy at the US Naval War College in Newport, RI.

He applied the “Page 99 Test” to his new book, Losing Hurts Twice as Bad: The Four Stages to Moving Beyond Iraq, and reported the following:
My book deals with the likely domestic and international consequences of the war in Iraq. Page 99 is in the section about the effect of the war on oil markets; here it is.

The day that the war started, the twentieth of March, 2003, was hectic for commodity traders. Investors were nervous, and their anxiety drove the price of oil up over thirty dollars a barrel before it finished the day at $28.61. Traders told New York Times reporters that they expected the price to settle “at $25 to $32 during – and perhaps after – the war.” That prediction, as it turns out, was a bit optimistic. In May 2008, the price of a barrel of crude oil broke $120 for the first time. Worldwide demand rose during those intervening five years, to be sure, but it hardly quadrupled. The remarkable rise in the price of oil is directly related to the war, which helped to weaken the dollar and caused serious instability in the market.

Oil is traded on the futures market, which means that its price today is in part a reflection of what investors think it will be worth tomorrow. The insecurity that the war has brought has both discouraged exploration for new supplies in the Middle East and added a “security premium” onto every barrel bought and sold. If there had been no invasion of Iraq, the price would more accurately reflect the forces of supply and demand, and would probably be about half of what it is today.

The implications of expensive oil for the global economy are likely to be profound. Petroleum producing states, many of which are not the world’s most democratic or friendly to U.S. interests, are making more money than ever before. The war has been a godsend for Iran, Russia, Saudi Arabia and Venezuela. For consuming nations, however, the news is grim. Historically speaking, U.S. economic performance has always been inversely related to the price of oil. As prices rise, productivity and growth fall. When prices are low, like in the mid-to-late 1990s, the U.S. economy expands. The next few years are likely to be very difficult economic times for the United States.

Americans may soon look back on the days when they were paying $3.50 for a gallon of gasoline with nostalgic fondness, because all projections have the price rising steadily over the next few years. If the war were to end quickly, much of that security premium would go away, and prices would probably fall to some degree. But they will never go back to where they were before this war boosted them through the roof.
Read more about Losing Hurts Twice as Bad at the publisher's website.

--Marshal Zeringue