July 26, 2006

The economics of Middle East turmoil

Rice U. economics professor Mahmoud Amin El-Gamal writes on his "Islam and Economics" blog:

The economics of middle east turmoil: With numerous self-styled pundits commenting on the current events in the middle east, I am surprised not to have heard anyone yet bring up a simple economic formula: If you are a major oil exporter, and you spend $1 in any direction that increases turmoil in the region, or ensures continuation of turmoil, you are likely to reap the fruits manyfold through higher oil prices.

Wars have always more than paid for themselves from the point of view of arms dealers, etc. Now, they are also an economically profitable trade for oil exporting countries. (Or course, some oil exporting countries in the region are nervous about long-term implications of the fighting, but they cannot deny that the fighting makes them much richer). Some countries lose tourism receipts, of course, but (a la Kaldor-Hicks efficiency analyses), they can be -- and probably will be, directly or indirectly -- compensated for those lost receipts. Construction firms will make huge profits, no doubt...

All in all, the more turmoil there is, the more that the rich will grow richer. The poor and dispossessed will die, but their surviving family members can be fed empty slogans by beneficiaries on all sides. In the final analysis, economists can even celebrate the eventual rise in per capita income, especially if the death tolls are substantial.

Of course, this strategy would work best for an oil producer well-insulated from the turmoil it exacerbated. Thus, it would be more rational for, say, Norway to fund instability in the Persian Gulf than for, say, Kuwait to try to ride the tiger.

The Soviet Union, as a major oil and mineral producer, was a big winner from the oil price rises of 1973 and 1979. The profits helped fund the Soviets' adventuresome foreign policy of 1974-1979, which in turn raised fears around the world, driving up oil and gold, further strengthening the Soviets. (Similarly, South Africa was a big winner from the precious metals bubble of 1979.) Then, in 1986, the Reagan Administration talked the Saudis into flooding the world with cheap oil, driving the price of a barrel down to about $10. As planned, this devastated the Soviet's ability to project force. Like a shark that has to keep moving forward or die, the Soviet Union was gone within a half dozen years.

My published articles are archived at iSteve.com -- Steve Sailer

No comments: