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Wall Street Journal Market Watch

 

An Unfinished Job In Iraq Will Cost America Dearly

June 19, 2014

By Diana Furchtgott-Roth

The U.S. military's widely publicized capture of Benghazi suspect Ahmed Abu Khattala cannot alter the increased danger America faces from hostilities in Iraq. With swathes of Iraq under the control of the Islamic State of Iraq and Syria (ISIS), America faces rising oil prices, increased chances of terrorist attacks at home and abroad, and additional uncertainty that harms investment decisions.

Many people questioned President George W. Bush's decision to get involved in Iraq. But America has seen fewer attacks on U.S. soil than were expected after the attacks of Sept. 11, 2001. In the aftermath of the attacks, people were advised to prepare for future attacks by storing supplies at work and at home. Workplaces in the D.C. area held drills and designated safe locations for employees to congregate. Fortunately, attacks never came. America fought terrorism abroad and has seen some terrorist incidents, but not another 9/11.

President Obama's hasty exit from Iraq, without leaving a military presence with training and intelligence capabilities, will have significant global consequences. The president is now relying on Iran, the sponsor of global terror, to sort out the Iraq mess. Nothing could be more absurd than leaving our safety in the hands of Iran, which calls us “The Great Satan.” With terrorism, one cannot just declare victory and leave.

The increased terrorism resulting from the new geopolitical map will affect oil prices, expenditures on security, and consumer and investment confidence.

Some people say that hostilities in Iraq will have no effect on oil prices and the American economy. The story goes as follows: Iraq produces 3.3 million barrels of oil per day and exports 2.58 million. Most of the fighting in Iraq is in the northern part of the country , where oil has not been exported since March. While the north produces some oil — Kurdistan has around 17% of Iraqi oil sales, though Kurdistan is largely away from the fighting — three-quarters of Iraqi oil production and all of the country's exports come from the south in areas close to the Persian Gulf, which has not been affected by the fighting.

Michael Lynch, president of Strategic Energy and Economic Research, argues that hoarding, which is driven by the fear that a disruption in production will spread to other areas, can cause major price increases in oil. He attributes the current rise in oil prices to uncertainty rather than diminished supplies. Excessive hoarding is not likely in the current situation, since the instability in the northern part of the country probably won't spread to the oil-producing south. However, if the militants capture Baghdad and effectively seize control of the whole country, then “all bets are off” and $150 per barrel for oil would be “a possibility.”

Offsetting OPEC's power is U.S. oil production, which has risen 50% since 2008, to 7,443 thousand barrels a day . Hydraulic fracturing has opened up previously known reserves that were either inaccessible or too cost-prohibitive for drilling. As the price of oil rises, more shale reserves will become profitable and come on the market.

Despite the optimism, oil prices are not only affected by current supplies, but also by perceptions of the future. Brent crude is trading at $114 a barrel, up from $109 two weeks ago. Gas prices hit a six-year seasonal high this week (to $3.686/gallon), which is widely attributed to uncertainty over the instability in Iraq. Phil Flynn of Price Futures Group said: “If it weren't for the situation in Iraq, gasoline would be coming down by now. This will probably keep it elevated all summer.”

Part of this is psychological. But psychology plays a part in investment decisions, and also the administration's decisions.

Hostilities in Iraq diminish the prospects for oil exports from the United States. Many companies were hoping that the administration would allow exports of crude oil. This would help oil production in the United States by broadening export markets and funding more infrastructure development, such as pipelines. Few Americans feel rationally about oil, especially when it is summer driving season and the price of gasoline is approaching $4 a gallon.

If the administration continues to take a strong stand against oil exports, reasonable people might believe that President Obama might be more likely to approve Keystone XL. The pipeline would bring Canada's crude oil down to refineries in Texas and Louisiana, substituting for Middle Eastern oil.

In contrast, Canada has just approved the construction of the Northern Gateway pipeline, which will run from Alberta to oil-export terminals on its west coast. Asia will get the jobs from refining and Canadian oil, rather than the United States. Oil has a global price, but refining jobs are local.

With the midterm elections approaching, and the environmental lobby strong, it is unlikely that even the situation in Iraq will pressure the president to approve Keystone XL.

What is certain is that safe havens for terrorism in Iraq will impose costs on Western economies. With the rebuilding of terrorist networks, it is likely that the West sees more attacks. Tourism, investment and consumer confidence will all be affected. Freedom is not free — it takes continued investment.

Original Source: http://www.marketwatch.com/story/an-unfinished-job-in-iraq-will-cost-america-dearly-2014-06-19

 

 
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