Monday, October 20, 2008

US Cost Of Conflict In The Middle East Since 1956 Totals $3 Trillion, Says Stauffer

US Cost Of Conflict In The Middle East Since 1956 Totals $3 Trillion, Says Stauffer

The cost of conflict in the Middle East since the 1956 Suez Crisis has been estimated at some $3 trillion by Dr Tom Stauffer in a paper in ‘Middle East Policy’ entitled The Cost of Conflict in the Middle East 1956-2002: What the US Has Spent.* The paper assesses the cost to the US of periodic oil crises; direct intervention in Middle East conflicts; attempts to reduce reliance on volatile oil imports from the region; and support for Israel, by far the largest single area of spending representing about 60% of total costs or $1.85 trillion. Since support for Israel is a key determinant of US policy towards the Middle East, Dr Stauffer’s paper devotes a large part of his report to detailing the cost of this support which has been borne by the US economy. However, in tackling such a complex and convoluted subject, he warns that the different estimated costs can not be added together to provide neat overall figures. Most cost figures are given inflation-adjusted in 2002 dollars and taking into account a putative opportunity cost of capital. However, in the final analysis, the estimated costs given in the paper can only illustrate an order of magnitude, and they will no doubt be subject to much disagreement, especially given the sensitivity of some of the subject matter.

Crisis Costs

Dr Stauffer focuses first on the costs to the US of the six oil supply and pricing crises which occurred between 1956 and 1991, beginning with the 1956 Suez Crisis, through the 1967 Six-day war between Israel and her neighbors, the 1973 October war, the Iranian revolution and oil strike, the 1980-88 Iran-Iraq war and supply interdictions, and up to the 1990-91 Gulf war. Also scrutinized is the cost of the Strategic Petroleum Reserve (SPR) and the Emergency Sharing Plan (ESP) run by the International Energy Agency (IEA). Dr Stauffer estimates total crisis costs at $1,220-1,529bn.

The oil crises brought about by the 1956 Suez conflict and the 1967 war had a relatively limited impact on the US. In 1956, oil prices jumped only briefly, but as a result of the closure of the Suez canal supplies of ‘sterling’ oil from the Gulf to Europe were interrupted resulting in increased exports of ‘dollar’ oil from the US and Venezuela. ‘Dollar’ oil therefore replaced ‘sterling’ oil in the market, inflicting further pressure on the British pound already weakened by the war, and ultimately forcing a devaluation of the currency. The US may even have profited from the crisis, and the episode highlighted the crucial role the US would come to play in world oil markets.

The 1967 war left Israel in control of Egyptian onshore and offshore oil fields in and around the Sinai peninsula, closed the Suez canal to all shipping, and also had a longer-term impact on oil markets. The canal closure resulted in higher delivery costs from the Gulf as tankers had to be diverted around the Cape of Good Hope, doubling the length of the journey to European and American markets. Demand for tankers increased by a factor of three, increasing freight rates, and in turn globalizing tanker charges as tankers from other regions were lured to the more lucrative Gulf routes. More significant, however, was the splitting of oil markets between east and west of Suez, giving OPEC members the leverage to increase overall oil prices which would otherwise have been difficult to achieve. At this time US oil imports were at a low level and therefore the cost to the US was relatively small, but the price increases nevertheless cost the US some $40bn between 1970 and 1973, says Dr Stauffer.

The cost of the October 1973 war far exceeded that of the preceding two crises, and is estimated at $750-1,050bn. In response to initial Arab gains over Israel, Israel demanded, and US President Nixon provided, rearmament for the Israeli forces, resulting in an oil embargo by Arab oil producers focused primarily against the US. This halved US imports and led to a shortfall of some 2mn b/d. The move triggered a quick recession and inflationary pressures, dented travel and tourism and ‘impacts cascaded through the economy’. Dr Stauffer estimates the loss in GDP resulting from the oil shortage at $300-600bn. The effect on the US economy of oil prices ratcheted higher by the embargo is put at $450bn. The costs of the embargo ‘were systematically concealed from the US public’, says Dr Stauffer.

The Iranian revolution and 1980-88 Iran-Iraq war is estimated to have cost the US a total of $355bn in higher oil prices. In 1978, Iranian revolutionaries seized and closed down the country’s export terminals thereby withdrawing 5mn b/d of oil from the world market. The impact was exacerbated by speculators, and oil prices spiked, but exports were soon restored by the new regime in Iran. The outbreak of the Iran-Iraq war caused oil liftings to plummet once more as export terminals in both countries came under attack. Again, the oil price more than doubled. The US and Israel helped to prolong the conflict by feeding both sides with weapons, says Stauffer, and the burden of higher oil prices was borne by consumers. Dr Stauffer estimates that the extra cost (over and above the ‘equilibrium’ price of $18/B) came to $335bn in year 2002 dollars.

The 1990-91 Gulf war was relatively cheap in terms of costs to the US. The cost to US consumers is estimated at $80bn, but the US government actually made a fiscal profit of $10bn as a result of increased taxes and royalties from the higher prices of domestic production of oil and gas. Oil prices rose sharply from $14.50-16/B before the war to a peak of $35/B in October 1990, but dropped back to $18/B when Kuwait was recaptured in February 1991. The cost in terms of US intervention to drive Iraq out of Kuwait was minimal as Washington persuaded various allies to take on most of the financial burden of the war. The gross outlay came to $55bn, with contributions in cash from allies of $49bn, and in kind of $6bn. Furthermore, says Dr Stauffer, the contributions from Saudi Arabia ($13.5bn), Kuwait ($13.5bn) and the UAE ($3bn) have been covered by subsequent increased volumes of oil exports at the expense of Iraq which has been restricted by sanctions; and the United Nations Compensation Commission (UNCC) has provided a source of compensation for Kuwait, Turkey and the Kurds financed by Iraq itself. Dr Stauffer suggests that both the UN sanctions regime and the UNCC have been manipulated by the US so as to pay the full cost of the war for the US and its allies, making the Gulf war an unusual, if not unique, event.

The Strategic Petroleum Reserve

The SPR was initiated to provide a strategic stockpile of oil that could be used to blunt any future use of the Arab “oil weapon” against Israel, since the 1973 embargo had proved to be devastatingly effective. The SPR was functioning by 1977, and targeted a volume of 1bn barrels, although this has never been achieved, and the SPR peaked at 595mn barrels in 1995. At present levels the SPR would cover less than 2 months’ worth of imports. The total cost for the oil in the SPR and the facilities to store it is reported in the US budget at $21.9bn. However, according to Dr Stauffer, this figure is misleadingly low since it ignores the effect of inflation and the opportunity cost of capital. Taking these into account brings the cost of the SPR to a minimum of $146bn, he says. Adjusting for the salvage cost of the oil of $9bn (calculated as if drawn down over eight years, with a discount rate of 7%, and a constant real oil price of $20/B), would bring the net cost of the SPR to $137bn.

“Project Independence”

Energy autarky – “Project Independence” – was a goal spurred, like the creation of the SPR, by the 1973 oil crisis. Through a range of subsidies or forced technologies designed to increase US energy production and cut consumption, the aim of “project independence” was to reduce reliance on oil imports from Arab countries. According to Dr Stauffer, this policy has been extraordinarily costly but largely ineffective. The total cost of “project independence” is estimated at a minimum of $235bn, but Dr Stauffer says that a “reasonable” estimate is at least $1 trillion, only part of which can be documented. Elements of the project have included: subsidies for Gasohol (a mixture containing 90% derived motor fuel and 10% ethanol) which has saved less than 100,000 b/d at a total cost of $25bn; subsidies in the form of tax credits for the production of unconventional gas which “had no material impact upon oil dependence” but cost a minimum of $20bn; requirements for utilities to buy high-cost “alternative” energy from sources such as wind and solar power at a possible cost of $10bn per year for 20 years, although actual costs were not traced; and other subsidies which are estimated by DOE/EIA at a total cost of $100bn. Dr Stauffer also includes a figure of $90bn for the cost of other federal subsidies.

Despite the efforts of “project independence” oil imports grew from 6.6mn b/d in 1973 to 11.4mn b/d in 2000. Better fuel economy has resulted in the reduction of oil imports by about 1.5mn b/d (ie imports would have been around 13mn b/d in 2000), but this has been “the result almost entirely of higher prices, not government policies,” according to Dr Stauffer. He also notes that “while the subsidies were inevitably justified in the interests of national security, the projects and programs were in most cases captured and coopted by domestic lobbies. Since the notional objective was reducing dependence upon Middle East oil, however,” he says, “the costs should be subsumed within the costs of coping with Middle East conflicts, even if the programs were largely ineffectual.”

Economic And Military Aid

Total economic and military aid to the Near East, Turkey and Greece since 1946 is estimated at $808bn adjusted for inflation and including a 3% opportunity cost for US capital. About two thirds of this has been dispersed since 1973, and the beneficiaries have been Israel ($247bn), Egypt ($139bn), Jordan ($25bn), Turkey ($159bn), Greece ($125bn), the West Bank and Gaza ($1bn), and peacekeeping missions ($2bn). Other regional economic and military aid has come to $110bn. Dr Stauffer classifies the aid given to Egypt and Jordan as indirect support for Israel, since both of these countries have concluded peace treaties with Israel and their receipt of aid is seen as payment for their reduced threat to Israel. Also included in the cost of US foreign policy in the Middle East is aid to states on the periphery such as Sudan, Ethiopia, Eritrea, Somalia, the Caucasus and Central Asia, and other South West Asia states, the total of which is $32bn. The US share of multilateral aid to the region is put at $10bn - $7bn to Turkey and $3bn to the United Nations Relief and Works Agency (UNRWA).

Most of the aid to Turkey dates from before 1989 and the costs are therefore “artifacts of the Cold War.” Since 1989 the rationale for US aid to Turkey has changed – instead of being a key ally on the southwestern flank of the USSR, it is now a close ally of Israel and a useful base from which to put pressure on Iraq. While Turkey has only received some $8.2bn from the US since 1989, most of it in the form of loans, it is set to receive a much larger amount for its continued support of Israel and the use of its territory as a platform to attack Iraq in the impending war to topple Saddam Husain. US aid to Greece has become “inextricably part of the broader Middle East picture and the turbulent rivalries and temporary alliances between the Jewish, Greek and Armenian lobbies within the US.” As a result of pressure on the US government from the Greek lobby a formula evolved whereby Greece was to receive $7 for every $10 given to Turkey.

Aid To Israel

US aid to Israel is made up largely of ‘Foreign Military Financing’ (FMF), which has plateaued at $1,800mn, and ‘Economic Support Funds’ (ESF) which have recently dropped from their historic level of $1,200mn to $720mn. However, only two thirds of aid to Israel is budgeted, says Dr Stauffer, and much is camouflaged to hide it from ready scrutiny for political reasons. US budget reported aid to Israel stands at $88bn. Adjustment for inflation and the opportunity cost of capital at 3% brings the total to $247bn. Private Jewish remittances of around $30bn and net purchases by US parties of Israel bonds of some $10-14bn drain a further $40-50bn from the US economy, says Dr Stauffer.

Ad hoc grants and special aid, such as the $1.2bn Israel received at the Wye Plantation meeting in 2000, are another important source of funds. These are not budgeted, and no comprehensive overview of these payments has been publicly released, says Dr Stauffer, but he estimates that Israel has received a total of $56bn+. Ad hoc and special aid includes (a so far unused) oil supply guarantee for Israel estimated at potentially up to $3bn/month;(1) a SPR for Israel estimated at a cost of $3bn; loan guarantees for $10bn between 1992 and 1998; $3bn in support for the Lavi fighter and Arrow missile projects; preferential contracting worth $40bn; discounted sales or free transfers of “surplus” US military equipment (officially designated as “Excess Defense Articles” or EDAs – cost not traced); ‘offsets’ and weapons technology, special contracts for Israeli firms, and covert and indirect support. Additional known items include legal and illegal transfers of marketable US military technology, de facto exemption from US trade protection provisions. An unquantifiable element is the trade and other aid given to Romania and Russia to facilitate Jewish migration to Israel.

Aid to Israel is particularly costly, says the report, due to peculiarities in the way it is delivered – aid comes as a lump sum, loans have with increasing frequency been commuted retroactively into grants, and money is dispersed without the usual trade ‘offsets’ requiring that a proportion of the money be spent on donor country goods. Israel (through US Congress) has actually succeeded in reversing the tying of aid – US firms are required to purchase from Israel about sixty cents worth of Israeli goods for every $1 which the US provides in military grants. And as Israel’s largest trade partner, the European Union benefits from US aid which helps to finance its exports to Israel.

Costs to US of Support for Israel: Summary Overview (Since WWII)

Type or Source
Estimated Amount ($Bn)

Official Foreign Aid

Rescue Costs (1973)

Collateral Costs (Aid)¹

Private and Ad Hoc Support

Trade & Job Losses
275,000 jobs /yr



Linked Aid To Periphery (NIS²) and Multilateral Contributions

Energy Autarky
235 minimum

“Defense” of the Gulf


324 minimum

Contingent Oil Supply Guarantee
$3bn/month³ (not implemented)

Total Cost

¹ The sum of aid to Egypt, Turkey, Greece, Jordan, West Bank and Gaza, and peacekeeping missions.

² Newly Independent States.

³ Figure is scenario specific. See full report for details.

Source: Compiled by Dr Stauffer.

“Defense” Of Gulf Oil

The defense of the Gulf – often cited as a major cost factor, according to Dr Stauffer – has in fact been but a minor element of cost. Excluding the buildup for war against Iraq in late 2002, the official figure for operations and presence in the Gulf is around $30-40bn per year. That figure is misleading, however, says Dr Stauffer, since most of the equipment and troops, and the operations of the carrier task force at Diego Garcia would be maintained in support of other geopolitical objectives. These outlays, therefore, which are the largest component in the reported cost, are not substantively tied to US policies in the Gulf itself. The US presence itself has entailed relatively modest incremental costs – of the order of $2bn (net) per year, excluding any new costs tied to the current mobilization against Iraq.

Lost Trade And Employment

US policy towards the Middle East has also had an effect on trade and employment through trade imbalances with stipendiary states (particularly Israel); trade losses resulting from US sanctions against Iran, Iraq, Libya and Syria; blocked or lost contracts; and lost investment opportunities and income. The striking trade-aid imbalance vis-à-vis Israel costs the US almost as many jobs as the sanction regimes, according to Dr Stauffer. Israel exports to the US much more than it imports, while it pays for only a fraction of what it does import from the US due to the high level of US aid to Israel, he says. The resulting imbalance of $6-10bn each year costs about 125,000 jobs. A similar effect is observed in the case of Egypt, but the magnitude is minimal. Conversely to the case of Israel, southern Gulf states (primarily Saudi Arabia) incrementally buy large quantities of US arms and related services which has translated into an extra 60,000 jobs in recent years and partly offset the jobs lost through Israeli pressures or contracting policies. The dollar value of trade is translated into the number of jobs using the study from the International Trade Administration (US Department of Commerce) from 1997.

US sanctions on trade with Iran, Iraq, Libya and Syria, have cost the US currently some 80,000-100,000 jobs each year, although the figure is probably higher, notes Dr Stauffer, because it does not reflect the lost opportunities for US farmers to export into the growing markets of the sanctioned countries. Using trend analysis Dr Stauffer illustrates the sharp drop in US exports to Iran following the Islamic revolution there, and says that the US share of Iran’s imports is only 2-3%, whereas under normal trading relations the US would likely account for 16-18% of Iran’s imports. In addition to the loss of export opportunities must be considered the loss of investment opportunities and income as a result of legislation such as the Iran Libya Sanctions Act (ILSA – See MEES, 29 July 1996 for full text of the law), which prevents US companies from investing more than small sums in the these countries’ oil and gas sectors. The deadweight loss of this legislation in Libya since the early 1980s comes to some $10bn, according to Dr Stauffer. Added to this is the potential business that has been lost through reduced contact with clients and the loss of incremental exports from the US which would have resulted. Dr Stauffer also picks out the Great Man-Made River project in Libya, and the Yamamah defense project in Saudi Arabia which were both lost to foreign firms as a result of intense lobbying by Israeli interests, and which lost the US some $20-40bn or between 500,000 and one million man years.

Breakdown of Costs To US Of Middle East Conflicts Since World War II

Type of Cost
Cost (2002 $Bn)

Political or Military Crises
1956 War

1967 War

1973 War

- GDP Loss

- Import Price Impact

1978 Iranian Revolution and Iran-Iraq War

Gulf War 1990-91



Economic and Military Aid





Other Regional

West Bank and Gaza




Ad Hoc Support for Israel
Preferential Contracting
40 (est)*

Discounted Arms Sales
Not traced

Israel’s SPR (1975 MOU)

Loan Guarantees

Oil Supply Guarantee
Up to $3bn/month**

Support for Lavi and other Projects



Budgeted Aid – Periphery

Ethiopia and Eritrea

Caucasus and Central Asia


Other SW Asia



Private U.S. Aid to Israel


US Share of Multilateral Aid




Lost Trade and Domestic Jobs
Embargoes and Sanctions

Trade-aid Imbalance: Israel

Blocked Trade Opportunities
650,000 man-years

- Great Man-Made River
50,000 man-years

-“Yamamah Project”
600,000 man-years

Known Investment Losses


$10bn+ 275,000 jobs/yr

Energy Autarky Strategic Petroleum Reserve

“Project Independence”
235 (min)


-Estimated State Subsidies

-Unconventional Gas
20 (est)

-Unconventional Energy
Not traced

-Other Federal Subsidies


381 (min)

“Defense” of Gulf Oil Supplies
Presence and Preparedness in the Gulf

Estimated Total (min)

2.6-2.9 trillion (min)


* According to Dr Stauffer, this figure is elusive and may be very low.

** Figure is scenario specific. See full report for details.

Source: Compiled by Dr Stauffer.