My Grand Strategy

Several of the ongoing threads have inspired me to capsulize what I think are the flaws of current U.S. grand strategy, and what I would propose.

Here are what I consider the flawed assumptions of our current strategy:

1. It assumes that spreading liberalism is feasible. (It's not just democracy. Illiberal democracies are possible).
2. It assumes that we can succeed with half way measures, specifically without making major changes in our systems of rights and prerogatives, and without changing our petroleum addiction.
3. The criterion is uses for identifying strategic partners is too narrow. We base partnership on whether another state pursues AQ rather than whether they tolerate the ideology of Islamic extremism.

So, my grand strategy has five components:

1. Disengage as much as possible from the Islamic world
2. End our petroleum addiction
3. Develop a list of partner and non-partner states based on whether they tolerate the ideology of Islamic extremism, not just whether they chase AQ. Obvisouly, Saudi Arabia, Egypt, Pakistan and others would be non-parnters. End aid to, immigration from, and visas to the citizens of non-partners. Do not renew the visas of citizens of non-partherns.
4. Approach cyberspace as a key battlefield. Currently, it is the ultimate "ungoverned space." Consider hosting web sites or transmitting information which advocates violence as a hostile act. Take action against it. In other words, don't allow the extremists to hide behind the importance we place on free speech and the transnational nature of information.
5. Launch spoiling raids as necessary against hostile groups.

Steve Metz:

Are you recommending a cordon sanitaire around the whole Islamic world? Who would you have police cyberspace?

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Originally Posted by SteveMetz

Several of the ongoing threads have inspired me to capsulize what I think are the flaws of current U.S. grand strategy, and what I would propose.

Here are what I consider the flawed assumptions of our current strategy:

1. It assumes that spreading liberalism is feasible. (It's not just democracy. Illiberal democracies are possible).

It's even doubtful if it's beneficial. Demacratic Arab states could become nationalistic, merge and strong nation south of the NATO and pallied with Russia for many practical purposes. Dictators are notorious for not giving up their rule, so do never merge with other states.

2. It assumes that we can succeed with half way measures, specifically without making major changes in our systems of rights and prerogatives, and without changing our petroleum addiction.
3. The criterion is uses for identifying strategic partners is too narrow. We base partnership on whether another state pursues AQ rather than whether they tolerate the ideology of Islamic extremism.

So, my grand strategy has five components:

1. Disengage as much as possible from the Islamic world

I guess you mean physically, not diplomatically?

2. End our petroleum addiction

Oil prices as high as 50 $/bl make synthetic petroleum based on coal economically feasible. The plant-based solutions occupy too much agricultural area.

3. Develop a list of partner and non-partner states based on whether they tolerate the ideology of Islamic extremism, not just whether they chase AQ. Obvisouly, Saudi Arabia, Egypt, Pakistan and others would be non-parnters. End aid to, immigration from, and visas to the citizens of non-partners. Do not renew the visas of citizens of non-partherns.

I disagree on Egypt. It's one of the most promising Arab states. They actually improve the living standards of their people without much oil ressources. Furthermore they're a key to make conventional war against Israel (im)possible and a long-term friend of the USA (they received modern military tech and had joint exercises).

4. Approach cyberspace as a key battlefield. Consider hosting web sites or transmitting information which advocates violence as a hostile act. Take action against it. In other words, don't allow the extremists to hide behind the importance we place on free speech and the transnational nature of information.

Waging war in the internet would be similar to waging war in space - many nations are intent to have a peaceful zone there. Furthermore, pushing extremists into the underground just makes surveillance much harder.

5. Launch spoiling raids as necessary against hostile groups.
This is too general to be understood. What kind of attacks?

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Actually, I don't think it's a grand strategy. Grand strategy should involve much more, this one is just a strategy of how to deal with a specific foe.
It's furthermore very unilateral and -I'm sorry- quite simplistic in some regards. Isolating yourself from some states won't help much.
Musharraf probably needs some intelligence service's aid to keep himself in power in his domestic struggles with Islamists. You don't want Islamists to take over the nuclear power Pakestan, don't you? So it would be more wise to keep him in power and not to cut all ties.
Quite the same applies to Saudi-Arabia, although on a lesser scale.

And what did you mean with spoiling attacks?
Attacking enemies everwhere with bombs or commandos would often violate other nation's sovereignty and I believe it's understandable that this does not help. Imagine Some third world coutnry killing dissidents in the USA - that would certainly upset some people...

Islamists aren't a solic bloc, but a huge crowd that communicats with each other but co-ordinates largely through what their ideology allos or not (afaik). So it would be a possible strategy to reduce the level of threat by spreading disunity and let factions oppose each other. Other than islamist factios could be strengthened (not so much with compromising direct aid, but otherwise) in important regions. National leaders and faction could be allowed to humiliate the west on some occasions to strengthen them in comparison to Islamists.

What you propose is a slightly isolationist policy with some offensive actions that do not involve large contingents abroad. It sounds a lot like a collection of "that will make us feel better" measures.
Nevertheless, it could evolve into something that would convince me if this strategy would include more co-operation with partners and more specifically tailored solutions to specific problems.

What are your goals/objectives/ends?

How do you propose to achieve them? For example, how do you propose to end petroleum addiction? And what instrumentality is achieved by doing so?

What are the means/resources required to achieve the goals of your grand strategy? and how will you apply them?

I'd certainly like to see this grand strategy fleshed out as it seems to have some promise.

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Originally Posted by Lastdingo

Actually, I don't think it's a grand strategy. Grand strategy should involve much more, this one is just a strategy of how to deal with a specific foe.
It's furthermore very unilateral and -I'm sorry- quite simplistic in some regards. Isolating yourself from some states won't help much.
Musharraf probably needs some intelligence service's aid to keep himself in power in his domestic struggles with Islamists. You don't want Islamists to take over the nuclear power Pakestan, don't you? So it would be more wise to keep him in power and not to cut all ties.
Quite the same applies to Saudi-Arabia, although on a lesser scale.

And what did you mean with spoiling attacks?
Attacking enemies everwhere with bombs or commandos would often violate other nation's sovereignty and I believe it's understandable that this does not help. Imagine Some third world coutnry killing dissidents in the USA - that would certainly upset some people...

Islamists aren't a solic bloc, but a huge crowd that communicats with each other but co-ordinates largely through what their ideology allos or not (afaik). So it would be a possible strategy to reduce the level of threat by spreading disunity and let factions oppose each other. Other than islamist factios could be strengthened (not so much with compromising direct aid, but otherwise) in important regions. National leaders and faction could be allowed to humiliate the west on some occasions to strengthen them in comparison to Islamists.

What you propose is a slightly isolationist policy with some offensive actions that do not involve large contingents abroad. It sounds a lot like a collection of "that will make us feel better" measures.
Nevertheless, it could evolve into something that would convince me if this strategy would include more co-operation with partners and more specifically tailored solutions to specific problems.

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On Egypt, this is an interesting essay:

...In May and June, Egyptian State Security arrested Amr Tharwat, Ahmed Dahmash, Abdelhamid Mohamed Abdelrahman, Ayman Mohamed Abdelrahman, and Abdelatif Sayed, who are all members of the "Quranist" network. On June 21, they were charged with "insulting Islam."

These Quranists promote a reformist view based entirely on the Koran (www.ahl-alquran.com) and are committed to religious freedom and an open society. They oppose a penalty of death for apostasy since the Koran nowhere mentions it. Amr Tharwat had coordinated the monitoring of Egypt's June Shura Council elections on behalf of the pro-democracy Ibn Khaldun Center, headed by prominent Egyptian democracy activist Saad Eddin Ibrahim. Former Jemaah Islamiya member Tawfik Hamid told me that it was Quranists who gave him the space to develop critical thinking and so helped wean him away from jihadism.

State Security has now also leveled charges against Quranist founder Ahmed Subhy Mansour, who formerly taught Islamic history at Cairo's Al-Azhar University, the major center of Sunni learning. He was fired because of his views and imprisoned in 1987. Subsequently he found asylum in the United States and lives in Virginia. Also charged is Dr. Othman Mohamed Ali, who lives in Canada.

These arrests are part of the Egyptian government's double game in which it imprisons members of the Muslim Brotherhood when the latter appear to become too powerful, while simultaneously trying to appear Islamic itself and blunt the Brotherhood's appeal by cracking down on religious reformers, who are very often also democracy activists. A similar strategy was followed in the February 22 arrest of blogger Abdel Kareem Nabil, who was sentenced to four years in prison--one year for insulting President Hosni Mubarak, and three for "insulting Islam..."

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Originally Posted by John T. Fishel

What are your goals/objectives/ends?

How do you propose to achieve them? For example, how do you propose to end petroleum addiction? And what instrumentality is achieved by doing so?

What are the means/resources required to achieve the goals of your grand strategy? and how will you apply them?

I'd certainly like to see this grand strategy fleshed out as it seems to have some promise.

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The goals are the same as during the Cold War: thwart the opponent while preserving our prosperity, democracy, and way of life. Just as communism faltered once it could no longer expand, Islamic extremism will, I believe, collapse if its ability to scapegoat is removed.

The petroleum addiction clearly will take a broad approach of incentives for lessening the use of petroleum and developing alternatives, and disincentives for using petroleum. Maybe start with $8 a gallon gas, initially a break for diesel until the rail system can be revived.

Of course, this ain't fleshed out at this point. I just thought of it about two hours ago, smoking an H. Uppmann in the hammock.

http://pictures-i-like.com/Albums/Al...ge/Respite.jpg

I once attended a talk by a crusty old admiral which he started by saying, "I do my best thinking in the shower. If I had a bigger hot water heater, I'd be a lot smarter." Same with me, but I'd be a lot smarter if I could afford longer cigars.

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Originally Posted by John T. Fishel

What are your goals/objectives/ends?

How do you propose to achieve them? For example, how do you propose to end petroleum addiction? And what instrumentality is achieved by doing so?

What are the means/resources required to achieve the goals of your grand strategy? and how will you apply them?

I'd certainly like to see this grand strategy fleshed out as it seems to have some promise.

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I agree with John T. Fishel; I think that a grand strategy should include some greater vision of the end state as the start point... How does the world at the end of the day under this grand strategy? What is the role of the United States and its allies in this new vision?

The end state depends a great deal on how you perceive the world today: as a Thomas P.M. Barnett "core" and "non-integrating gap"; as Huntington's "civilizational" divide; as the Toffler's "three waves"; as Kaplan's "anarchy" at the seams; as Friedman's "Lexus and the Olive Tree" (globalization vs. localization); or some other characterization. The grand strategy should have a baseline view of the world and then envision how to change that worldview to a different reality.

Once the end state is clearly envisioned, then move on to the specific COAs to get there (ways) and the resources to be applied (means) to achieve those ends.

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Originally Posted by SteveMetz

Just as communism faltered once it could no longer expand, Islamic extremism will, I believe, collapse if its ability to scapegoat is removed.

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I believe the socialistic system rather collapsed once it had accumulated enough problems over time. The primary problem being that they competed on even level in the arms race with much less economic power from the beginning. The Soviet Union spent about a quarter of its GDP on military, while the western nations spent never more than one tenth. Imagine the west playing total war for fourty years and you'll see why the Warsaw Pact had to collapse.
It's indeed a huge accomplishement that the held out for so long, the planning economy and one-party dictatorship must have been a huge success (in the wrong direction), very different from our usual perceptions.


I don't believe that the Islamists need the scapegoat function - it's likely necessary to direct energies against the west, but not for keeping islamism prospering. After all, gaining power in a nation has primarily to do with domestic problems. The Persian Shah was not removed from power for his relationship with the USA - he was removed for domestic reasons.
The strongest alternative to Islamism in the Arab world is afaik nationalism - not much better if viewed from our perspective.

Response to the Grand Strategy

Steve I really enjoyed your white paper titled Rethinking Insurgencies, but in the end disagreed with your recommendations. I agree with Kilcullen's statement when he said, "if this was easy, we would have figured out the answer by now".

1.

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Disengage as much as possible from the Islamic world

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That implies leaving that global segment of the market open to Chinese, Russian, and French influence for economic gain (I only listed three of several countries), and put our corporations at a competitive disadvantage. We can't afford to the Middle East into another Cuba, hell we can't afford to do it in Cuba.

2.

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End our petroleum addiction

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Easier said than done, it is not only big business interests that encourages the addiction, it is the limits of science that makes this part of the strategy infeasible, so it also discredits number 1 above in my mind.


3.

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Develop a list of partner and non-partner states based on whether they tolerate the ideology of Islamic extremism, not just whether they chase AQ. Obvisouly, Saudi Arabia, Egypt, Pakistan and others would be non-parnters. End aid to, immigration from, and visas to the citizens of non-partners. Do not renew the visas of citizens of non-partherns.

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Here we go again with our Cuban approach, which has failed miserably. If we allowed our business men to work in Cuba, and tourists to go there, Castro would have become a nobody. Isolation doesn't work. Nixon opened the doors to China through engagement, not isolation. Where has it ever worked?

4.

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Approach cyberspace as a key battlefield. Currently, it is the ultimate "ungoverned space." Consider hosting web sites or transmitting information which advocates violence as a hostile act. Take action against it. In other words, don't allow the extremists to hide behind the importance we place on free speech and the transnational nature of information.

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We can assist the market with this, but if the government tries to do it, instead of encouraging others better atuned with how people outside the military think and respond to cyber stimuli, it will be a wasted effort. On the other hand I think there is huge potential here. I think there is a quiet majority that has yet to be mobilized that clearly realize AQ type terrorism cannot be justified, yet they seem to have no voice in the media that many folks listen to.

5.

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Launch spoiling raids as necessary against hostile groups.

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Amen to this one. Getting involved in an insurgency, counterinsurgency, regime change, etc. should only be undertaken under extreme circumstances, and if certain elements are identified present that make victory possible. In many situations we'll just to have to realize we can't make the world the way we want it to be, and further realize it isn't that big of deal if we don't in most cases. We need to relearn to think strategically again.

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Originally Posted by Bill Moore

Response to the Grand Strategy

Steve I really enjoyed your white paper titled Rethinking Insurgencies, but in the end disagreed with your recommendations. I agree with Kilcullen's statement when he said, "if this was easy, we would have figured out the answer by now".

1.

That implies leaving that global segment of the market open to Chinese, Russian, and French influence for economic gain (I only listed three of several countries), and put our corporations at a competitive disadvantage. We can't afford to the Middle East into another Cuba, hell we can't afford to do it in Cuba.

2. Easier said than done, it is not only big business interests that encourages the addiction, it is the limits of science that makes this part of the strategy infeasible, so it also discredits number 1 above in my mind.


3.

Here we go again with our Cuban approach, which has failed miserably. If we allowed our business men to work in Cuba, and tourists to go there, Castro would have become a nobody. Isolation doesn't work. Nixon opened the doors to China through engagement, not isolation. Where has it ever worked?

4.

We can assist the market with this, but if the government tries to do it, instead of encouraging others better atuned with how people outside the military think and respond to cyber stimuli, it will be a wasted effort. On the other hand I think there is huge potential here. I think there is a quiet majority that has yet to be mobilized that clearly realize AQ type terrorism cannot be justified, yet they seem to have no voice in the media that many folks listen to.

5.

Amen to this one. Getting involved in an insurgency, counterinsurgency, regime change, etc. should only be undertaken under extreme circumstances, and if certain elements are identified present that make victory possible. In many situations we'll just to have to realize we can't make the world the way we want it to be, and further realize it isn't that big of deal if we don't in most cases. We need to relearn to think strategically again.

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I'm just not buying the Cuba analogy. We've had massive economic engagement with Saudi Arabia for decades and look what it's got us--the society which provides the most ideological and financial support for transnational terrorism today. In fact, I think the China comparison supports my idea: we are able to trade with that nation without influencing their politics or claiming to "spread democracy" there.

I'm not seeing how American political and military disengagement from the Islamic world is going to leave "that global segment of the market open to Chinese, Russian, and French influence for economic gain." They don't produce much of value except oil anyway. In terms of being a customer of America, I'm not seeing that there is a great preference to "buy American" in the Islamic world anyhow. And even when there is, it isn't because we are politically and militarily engaged there. It's because a specific product or service we are selling is better. Political and military disengagement won't change that.

And I didn't say "isolation." I said separation. We--and I'm speaking of the West here--allow our enemies to migrate to and travel within our countries. They take advantage of our freedoms to harm us.

I have two problems with the idea that "here is a quiet majority that has yet to be mobilized that clearly realize AQ type terrorism cannot be justified, yet they seem to have no voice in the media that many folks listen to." First, I'm not sure it's true. While it's probably true that most Muslims do not favor terrorism, I believe most are willing to overlook it so long as it is targeted against the West. It's a very different thing to not favor terrorism and to take action to oppose it. Second, even if your statement is true, how are we to mobilize this silent majority? Mobilizing it would challenge the elites--the Mubaraks, the Sauds, and the Musharaffs--who are our friends. The Palestinian Authority gives an indication of what a real democracy looks like in that part of the world. As I argued above, it is illiberal democracy.

I don't have a comprehensive, well thought out, strategy in my back pocket that I can pull out here. Before tackling grand strategy, the Small Wars Council might want to start another parallel thread for the desired post-war situation. Identifying where it is that we are trying to go needs to be clarified in this war, before coming up with a proper strategy on how to get there. If you don't know where you are going, any old road will do.

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Originally Posted by Lastdingo

I believe the socialistic system rather collapsed once it had accumulated enough problems over time. The primary problem being that they competed on even level in the arms race with much less economic power from the beginning. The Soviet Union spent about a quarter of its GDP on military, while the western nations spent never more than one tenth. Imagine the west playing total war for fourty years and you'll see why the Warsaw Pact had to collapse.
It's indeed a huge accomplishement that the held out for so long, the planning economy and one-party dictatorship must have been a huge success (in the wrong direction), very different from our usual perceptions.

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I can't prove that, but this seems a pretty believable explanation of the collapse of the USSR. Or at least a one paragraph explanation. Since communism was a transnational movement that ulltimately had to be defeated in the minds of those working for it, it is natural to look to the Cold War as an example on how to deal with the challenge from an international movement like Al Qaeda.

But since containment by means of keeping an army in Western Europe and falling back on mutually assured destruction seems ill-suited to deter this foe, the Cold War might not give us any useful clues.

Can anybody think of any other conflicts with international movements in history that might provide some insight? Some have invoked the Anarchist movement, but are there any others that come to mind? We shouldn't be too proud to borrow or adapt a strategy from those who came before us, if one already exists. I know history never exactly repeats itself, but as Mark Twain said, it sure does seem to rhyme.

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Originally Posted by Tacitus

Can anybody think of any other conflicts with international movements in history that might provide some insight? Some have invoked the Anarchist movement, but are there any others that come to mind? We shouldn't be too proud to borrow or adapt a strategy from those who came before us, if one already exists. I know history never exactly repeats itself, but as Mark Twain said, it sure does seem to rhyme.

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There were some ideological movements, but most were too easy to defeat to give much insight.
The Boxer uprising was interesting, for example.

In Cuba our isolation policy empowered Castro as a leader, but as you said you wrote separation, not isolation, so perhaps the analogy was poorly choosen. If you're allowing trade such as we have in China, but limiting government interface, then I think that might be an acceptable approach. However, I wonder how long the current Saud Regime would last without U.S. government assistance?

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They don't produce much of value except oil anyway.

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Their oil is essential to the global economy, so the reality is we need to continue to finace our enemies for the forseeable future.

The majority of Muslims may be apathetic about terrorist attacks on the West, but with the exception of a few major attacks such as 9/11, the Madrid bombins, and the London attacks, there have been few terrorist attacks of signifance on the West. The majority of Muslim terrorist attacks are directed against fellow Muslims, so I do think there is a majority looking for a way to put these psychopathic killers out of business. I'm not talking about implementing democracy, which would as you stated result in the overthrow of our friends, but more of a information program that explains why they should and how they can help their nation's security forces put these clowns out of business and into their Jihad Paradize or jail. Some countries are doing this, and we saw a recent success with the rewards for justice program in SE Asia. I'm looking more at the "dead or alive" poster model than social/political reengineering.

Like most readers on this site I don't believe we can wage war on terrorism. Islamic extremist terrorism is a social movement for the most part, so declaring war on it basically translates well into their propaganda, because they change it from war on terrorism to war against Islam, and we push more people into their camps. Save the war rhetoric for Iran and North Korea. For this conflict mobilize money and political will where it will work, and allow the black arts for places it won't. Send the Army home, and allow our covert forces to quietly disrupt the enemy. We'll take away their catalyst for recruiting when they don't have videos of Army and Marine vehicles being blown up.

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Originally Posted by Bill Moore

Their oil is essential to the global economy, so the reality is we need to continue to finace our enemies for the forseeable future.

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According to CIA World Factbook, the U.S. had a net import of about 12 million bbl/day in 2004. Using 75 $/bbl, this is 328.5 billion US-$ per year.
That's considerably less than the DoD budget and not all oil imports are from Arab countries.

Lastdingo,

We get our oil from numerous countries such as Nigeria (another stable garden spot), S. America, Mexico, Canada, the Middle East, etc. You can't compare the impact on the U.S. by determining which countries the U.S. buys it oil from today, because all countries buy from the global market. For example, if Saudi provided 30 bbl/day, Nigeria 10, Canada 15, Iraq 15, Mexico 10, Venezula 20, and terrorists reduced Saudi output by 50% (not that hard), that would equate to a 15% global decrease in oil production. I pulled these numbers out of you know where, so I think the real impact would be much greater than 20%, which is very significant. Most oil production countries listed cannot increase production to make up for the short fall. Many blame Saudi now for not producing more oil to lower the price (supply and demand), but several experts think it is physically impossible for Saudi to produce more. Regardless less output, less supply, greater demand, then greater prices. Oil prices impact every aspect of the economy to include foo production and distribution. The impact on emerging economies would be devastating. The loss of those markets for U.S. products due to inflation would hurt several U.S. businesses, and the nightmare scenario continues. This won't happen overnight, it can take up to 18 months for the 2d order effects to be realized. Our experts in the government realize this and are now taking aggressive measures to find alternative fuel sources such as nuclear, solar, etc. (bio fuels will prove to be a flop). Yet it takes 10 years to build a nuclear power plant. Right now we're the hostage.

The fact is that our global economy consists of several rapidly developing nations (not just China and India), and their demand for oil is increasing. The oil production system has little excess production capacity, so disruptions are serious economic events. Some disruptions are psychological, for instance if extremists take over Saudi, then oil prices will spike until the market determines if the extremists will still do business as normal. If they do then prices will settle back down, but the bottom line is the vast majority of the global oil supply comes from the Middle East and that is an unescapable strategic national interest whether we like it or not, and it means until we have another viable form of energy we'll have to continue to make deals with the devil.

A couple of thoughts about the oil market.

Bill is right to note that correct thinking about oil requires thinking about the global market.

Buyer boycotts of specific producers may or may not have effects on a global commodity market. Because it is the less intuitive outcome, here's the "may not" scenario in a nutshell:

Suppose there are an equal number of red and green barrels of supplied oil coming from all producers globally (think "good guy" and "bad guy" oil) and that initially all buyers are indifferent about the color of barrels. Now let any one buyer, call her US, who represents less than half of the demand for barrels announce that they will only purchase green barrels. Because the rest of buyers are more than half of world demand, and because we assume here that they remain color-blind, they will be happy to absorb red barrels no longer acceptable to US, freeing green barrels for US. Assuming that there are many competititive non-US buyers, barrel color arbitrage amongst those many color-blind buyers will guarantee that there can be no price differential between green and red barrels in the world market. So in this highly stylized, perfectly competitive world market without transport costs, the unilateral boycott of red barrels by US has no effect whatsoever on the world price of either red or green barrels of oil. It is thus economically costless to the boycotter, but also has zero effects on red barrel producers. It is without consequence--except perhaps that the red producers call the US buyer a jerk, which could be a real political consequence.

(The basic logic above is well-known, is the nub of the problem with unilateral sanctions in any highly competitive product market, and is also the reason that Wall Street can cook up "social awareness" mutual funds that perform for all intents and purposes identically to other mutual funds.)

There are some minor stylizations above that really don't matter. But it does leave out transport costs and oil type. In reality, "the price of oil" doesn't exist: When an oil price is quoted, it is for oil of a particular type from some particular location delivered to a particular port on a particular day. There's still useful information in such prices, because all local oil markets are so heavily interlinked by easy substitutions, with the exception of transport costs and oil type (not all refineries are designed to handle every oil type). If you were to factor in the effects of transport costs and oil type, the unilateral one-buyer boycott of the red barrels would cost the boycotter a bit--but not a whole lot.

To my mind, the real problem with "separation" is a global supply shock brought about by the fall of a currently friendly big producer, like the Saudis, due to a withdrawal of our support (rather than not buying their oil). That problem is correctly noticed by Bill and others above.

And you cannot use the current price to guestimate the economic impact of such shocks. Say we take Bill's 15% reduction in world supply in some kind of Saudi crisis. Typical estimates of the responsiveness of world oil demand to changes in prices ("price elasticity") in the short run imply about .05% change in quantity demanded due to a 1% change in price; inverting that, the accommodation of a 1% change quantity demanded requires a 20% increase in price. So a 15% reduction in world supply would require a 300% increase in world prices, in order to clear world markets. This is how you get $300 a barrel oil from today's roughly $75 price.

And it doesn't stop with oil. Because all energy prices will shoot up with such an increase in oil prices as buyers who can substitute other energy sources increase demand in those markets for substitutes.

Remember that these are all short-run effects: They happen very fast, and as Bill correctly notes, they are a temporary spike. Allow enough time, and long-run price elasticity governs the response, and these are not so severe...on the order of about a .33% change in quantity demanded due to a 1% change in price. Assuming world supply stayed permanently lower by 15%, we'd be talking "only" about a 50% long-run increase in prices, say to around $120. But new sources of supply would come online over time as producers respond to the newly higher price. All of this is well-known from past experience and theoretically expected.

But it all takes time, and in the meantime a shock of that magnitude would definitely cause severe recessions around the world. And remember, recessions kill people, statistically speaking: That is also a well-known result. We aren't simply talking about delaying the purchase of salad shooters and jetskis. And it is also the poor who really take it on the chin; there's also a powerful equity argument against preventing these sorts of events.

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Originally Posted by Bill Moore

Lastdingo,

We get our oil from numerous countries such as Nigeria (another stable garden spot), S. America, Mexico, Canada, the Middle East, etc. You can't compare the impact on the U.S. by determining which countries the U.S. buys it oil from today, because all countries buy from the global market. For example, if Saudi provided 30 bbl/day, Nigeria 10, Canada 15, Iraq 15, Mexico 10, Venezula 20, and terrorists reduced Saudi output by 50% (not that hard), that would equate to a 15% global decrease in oil production. I pulled these numbers out of you know where, so I think the real impact would be much greater than 20%, which is very significant. Most oil production countries listed cannot increase production to make up for the short fall. Many blame Saudi now for not producing more oil to lower the price (supply and demand), but several experts think it is physically impossible for Saudi to produce more. Regardless less output, less supply, greater demand, then greater prices. Oil prices impact every aspect of the economy to include foo production and distribution. The impact on emerging economies would be devastating. The loss of those markets for U.S. products due to inflation would hurt several U.S. businesses, and the nightmare scenario continues. This won't happen overnight, it can take up to 18 months for the 2d order effects to be realized. Our experts in the government realize this and are now taking aggressive measures to find alternative fuel sources such as nuclear, solar, etc. (bio fuels will prove to be a flop). Yet it takes 10 years to build a nuclear power plant. Right now we're the hostage.

The fact is that our global economy consists of several rapidly developing nations (not just China and India), and their demand for oil is increasing. The oil production system has little excess production capacity, so disruptions are serious economic events. Some disruptions are psychological, for instance if extremists take over Saudi, then oil prices will spike until the market determines if the extremists will still do business as normal. If they do then prices will settle back down, but the bottom line is the vast majority of the global oil supply comes from the Middle East and that is an unescapable strategic national interest whether we like it or not, and it means until we have another viable form of energy we'll have to continue to make deals with the devil.

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All true, but there are other sides as well. By the way, I'm macro economist by trade to date.

The global oil market means that if Saudi Arabia decided not to deliver oil to state A, but instead to state B, state A would simpl buy the oil it needs from states wehre state B does not buy anymore. The overall ability to stage an oil embargo against the west is therefore limited. The prices would rise a bit, but the necessary oil would be available nevertheless.

Another aspect is that we're talking about grand strategy, and that should better be about the next 10 to 15 years, not short-sighted.
The oil price is already well above the price of substitutes like coal-based petroleum. The overall supply shortage in combination with expectation of rising demand means that the risk for investors is low when they invest in substitue production facilities.
It will happen, and can influence the situation in as little as five years. It takes two years to build the copy of an already existing chemical plant once planning stage is done.
There's always a reaction to an external shock, in civilian economy as in military affairs. We should not assume hat things will go on as they do today plus only bad shocks.
Finally, the state could simply lower taxes on mineral oil - that would translate external price shocks into budget deficits, thereby additional debts and this in turn would make people bear the load of the external shock who actually give lend money voluntarily. The shock wouldn't have the oil price-specific effects on the economy anymore.

Furthermore do I believe that you overestimate the potential impact of terrorists on oil supply. Have a look at the history of Algeria in the 90's. They had an overall supply reduction of max. about 30% despite a fierce civil war.
50% in the case of Saudi-Arabia would require demolition experts to blow up one or two oil ports despite the guards. And such damages could be repaired within few months, with even stronger guarding afterwards.

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Originally Posted by Lastdingo

if Saudi Arabia decided not to deliver oil to state A, but instead to state B, state A would simpl buy the oil it needs from states wehre state B does not buy anymore. The overall ability to stage an oil embargo against the west is therefore limited. The prices would rise a bit, but the necessary oil would be available nevertheless.

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Just indicating agreement; this is roughly the "seller boycott" mirror image of my red/green barrels story above.

Exactly what sort of supply shock would occur, and for how long, in some Saudi crisis is anyone's guess. Your points about synthetic supplies being feasible at current prices is well-taken, and we can safely assume that $200 or $300 oil would create political pressures easily strong enough to sweep aside green objections. Still, two years would be long enough to create some serious recession worldwide, I suspect.

None of this is meant to argue against developing our energy independence and downgrading our oil consumption; I think almost any good long-term plan involves that. But it will take time, and I suspect doing it abruptly is likely to be unacceptably costly.

There will be a recession in the next couple of years anyway. Several nations have accumulated enough problems to guarantee that. An oil crisis would not completely add up to that, as a corporation can only be killed once.

The effect if Saudi-Arabia would reduce its oil deliveries to specific countries would be quite analogous to the mechanics in 1973/74, whereas a overall supply reduction would largely be an extension of the present situation, but with stronger incentives for substitution and savings.

What I wanted to point at as subtle as possible some posts ago is that when someone fomulates grand strategy, he needs to consider the costs of several options.
And there's clearly a choice between paying high prices for raw materials and trying to make raw materials cheap by means of financing and using forces to that end.
If someone for example believed that half of the DoD budget wis necessary for oil issues alone, he would be incorrect. The oil price would certainly not rise enough due to a halved DoD budget (completely hypothetical case - I know about the problems of downsizing such a budget). And even if he did, the half DoD budget spent on actually productive projects or not raised from the taxpayer in the first place would yield additional income that would make expensive oil even more affordable.
Simply paying the price for goods instead of using force ("bullying others" from another point of view) is also commonly considered as being the more ethical choice.

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Originally Posted by Lastdingo

All true, but there are other sides as well. By the way, I'm macro economist by trade to date.

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I'm a counter-insurgency fighter and commander of combat troops. I believe my operational relevancy is up to date.

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Originally Posted by Lastdingo

Furthermore do I believe that you overestimate the potential impact of terrorists on oil supply. Have a look at the history of Algeria in the 90's. They had an overall supply reduction of max. about 30% despite a fierce civil war.
50% in the case of Saudi-Arabia would require demolition experts to blow up one or two oil ports despite the guards. And such damages could be repaired within few months, with even stronger guarding afterwards.

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Demo experts? Really? It would be that complicated? I'm sure all the guards are adequately paid and have a high job satisfaction. There are no chances any of them are Wahabbists.....

Oh, I forgot. The Saudi are doing such a good job in the counter-terrorism department. :rolleyes: