Posted by: bmeverett | November 17, 2010

Financing Terrorists

Tom Friedman has some excellent advice in this morning’s New York Times column entitled “Too Good to Check”. He gleefully notes the embarrassingly wrong rumor spread by many conservative politicians and pundits that President Obama spent $250 million a day on his recent trip to India. Mr. Friedman lauds Anderson Cooper for actually checking the facts and determining that the rumor was false, apparently started by some unnamed Indian official and repeated in the Indian press. Fact-checking is a great idea. Maybe Mr. Friedman should try it himself. In his November 13 column “I Believe I Can Fly” he once again claims that a clean energy bill “might break our addiction to oil and take money away from the people our soldiers are fighting in the Middle East.” How about some simple fact-checking here?

Let’s skip over the fact that none of the “clean-energy bills” proposed in Congress would have had any impact at all on our oil demand. Let’s instead just have a look at the issue of terror financing. It’s certainly true that some oil money finds its way into the hands of the bad guys, but the problem is a bit more complex than that. At today’s crude oil price of about $80 per barrel, OPEC countries are pulling in roughly $1 trillion dollars a year. Non-OPEC oil exporters earn another $300 billion or so.

How much of oil money gets into the hands of “the people our soldiers are fighting in the Middle East”? When the US first invaded Iraq in 2003, our enemy was the Iraqi army, which had indeed been equipped and trained with Saddam’s oil revenues. That army evaporated without putting up much of a fight. For the last seven years, our real enemy in Iraq has been al-Qaeda in Mesopotamia. According to the 9/11 Commission, the CIA estimates that prior to the 9/11 attacks, al-Qaeda financed its global terror operations on a budget of about $30 million a year or about 0.002% of current global oil revenue. The financial needs of terrorists are frightening small. The Commission estimated the costs of major terror attacks as follows: 9/11 – $400,000-500,000, East Africa Embassy Bombings – $10,000, Bali bombing – $20,000. The Commission believes that al-Qaeda’s funds have fallen dramatically after 9/11 as the US has disrupted their operations.

Most of the casualties inflicted on US forces today are by the Taliban in Afghanistan. Al-Qaeda has apparently channeled funds to the Taliban in the past, and Iran may offer them some bags of cash from time to time, but most of the Taliban’s funds reportedly come either from opium production or from stolen or diverted US economic assistance.

If oil money were the primary determinant of terrorism, we would expect to see some correlation between oil prices and terrorist activity. We don’t. The price of crude oil was $16 per barrel when the World Trade center was first attacked in 1993, $21 when the Khobar Towers facility was bombed in 1996, $11 when the East African embassies were bombed in 1998, $27 when the USS Cole was attacked and $24 on 9/11. The price reached $140 per barrel in 2008 and is now about $80, yet we have seen no significant increase in terrorist activity since 9/11.

It’s a pretty daunting task to cut down the oil market to the point where terror-sponsoring states can’t scrape up a few million dollars to wreak havoc on the rest of us. After all, North Korea, one of the poorest countries on Earth with no oil resources of any kind, has a nuclear weapons program that is giving us fits. No matter, let’s see what the US might be able to do to reduce the flow of funds to Iran, Saudi Arabia, Syria, Venezuela, Russia and the other bad actors in the oil export business. Currently, the world consumes about 85 million barrels of oil per day (MBD) with 42 gallons making up one barrel. The US consumes about one-quarter of the total, and imports about half of what we consume. Our imports are therefore about one-eighth of the total world market. If we were to suddenly stop buying oil on the market, the price would fall precipitously, and the bad guys would reel from the blow. No matter what we do, however, reducing imports will take time. Let’s say we can accomplish this monumental feat in 15 years, say, by 2025. This effort will be hugely expensive, costing American consumers and taxpayers not only a significant part of our income and living standard, but vast numbers of jobs and a substantial part of our mobility as well. By 2025, when American energy independence has reduced global oil demand by about 11 MBD, the rest of the world, particularly developing countries, will still be growing and using more oil. According to the Energy Information Administration, by 2025, China will add about 5 MBD of new oil demand, India 1 MBD and other developing countries about 5 MBD. In other words, the global oil market would still be about the same size it is today. The Chinese would be delighted if the US were to reduce pressures on the world oil market and thereby allow Beijing to buy increasing amounts of oil at a lower price. The Saudi’s wouldn’t care who bought their oil. Markets are markets. Meanwhile the US will have shot ourselves in the foot economically.

Even if the EIA forecast is wrong, and reduced US demand causes oil prices to fall, which oil suppliers get hurt first? The highest cost oil supplies on the market today are Canadian oil sands, followed by deepwater Gulf of Mexico and deepwater West Africa. These supplies would be the first to go. Who are the lowest cost suppliers: Saudi Arabia, Kuwait, the United Arab Emirates and Iran. Oil from these countries could still compete on the global market at $10 per barrel.

So let’s see. Eliminating US oil imports would help the Chinese without hurting the OPEC countries very much. The burden of energy independence would fall primarily on American consumers and on our oil-producing friends in Canada, Mexico and West Africa. Terrorists can always scrape up enough money to attack us. Why can’t Tom Friedman figure this out? Maybe it’s just too good to check.



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