Following the horrific events of September 11, 2001, libertarian-republican Congressman Dr. Ron Paul spoke out against an American military invasion of Iraq, estimating that it could cost in excess of US$5 trillion. The subsequent invasion toppled dictator Saddam Hussein, who had once protected religious freedom in Iraq, where Christians could freely worship in their churches and without fear of attack or persecution from adherents of other faiths. Following the American exit from Iraq, commentators have suggested that the misguided American invasion and occupation of Iraq led to the formation of the group now known as ISIS (the Islamic State of Iraq and Syria, also known as ISIL or IS).
Iraq’s post-invasion head of state oppressed a segment of Iraq’s population, behaviour that fueled the formation and justified the existence of ISIS, which subsequently initiated armed aggression against Iraq’s armed forces. ISIS supported rebels that opposed the oppressive political behaviour of Syria’s Assad regime and became actively involved in the Syrian armed struggle. As the ISIS-led armed struggle against Iraq’s standing army expanded, ISIS gained control over a region of Iraq that is home to oilfields. ISIS subsequently began to sell oil at reduced prices to interested customers located outside of Iraq.
ISIS gaining control over oilfields gave Western free-market economists the opportunity to evaluate the economic implications of an independent and unregulated entity selling oil at bargain prices. The lure of cheap oil allowed ISIS to attract customers in the same way as customers who choose to buy banned goods inside the borders of nations that enforce prohibition. But the drug trade in countries such as Mexico has shown that prohibition can fail despite armed action by state authorities. Armed aggression against ISIS has so far had little effect in terms of stopping ISIS from selling oil at bargain prices.
Foreign economic and military analysts perhaps underestimated the ability of ISIS to gain control over substantial oilfields and to sell some of the output of those oilfields at reduced prices and over an extended duration. It is perhaps the threat of ISIS expanding oil sales that may have prompted OPEC to maintain oil production even as the world price of oil falls, thereby providing some competition to ISIS and curtailing their oil sales. It is possible that without ISIS selling oil at bargain prices, OPEC would have cut production and world oil prices would have rebounded.
The unexpected decline in the world price of oil has had an economic impact in Canada, where provincial and federal governments depend on oil selling at a high price to ensure high tax revenues from the oil-producing regions of Alberta and Saskatchewan. A lower world oil price reduces the oil tax revenues and fiscal flexibility of governments that depend on them. A major oil-producing nation such as Saudi Arabia may be able to temporarily endure lower world oil prices due to low production costs compared to Canada.
Some Middle Eastern countries stand to gain from plans to build pipelines across Asia to carry oil and natural gas from the Middle East to China (and Japan) from producers such as Russia and Iran. A reduction in world oil prices may prompt several Canadian oil producers with high production costs to suspend operations until world oil prices increase, reducing overall Canadian oil production. Such reduction could delay construction of the Keystone XL-pipeline across the United States and reduce oil tax revenues.
Major theological differences between Iran’s religious rulers and ISIS leadership may prevent an oil pipeline from connecting eastern Iraq and Iran. ISIS presently controls a region of Iraq located above an estimated ocean of oil, but may only sell comparatively small amounts of that oil and at bargain prices.
The world business media have widely broadcast how lower world oil prices have adversely impacted the Canadian oil industry and related oil tax revenues. A well-run commercial enterprise never lets competitors discover its areas of vulnerability. If competitors’ actions inadvertently impact those areas, managers need to discretely initiate corrective action. A drop in world oil prices has revealed Canada’s economic vulnerability to Middle Eastern competitors involved in the production and sale of oil. Lower world oil prices may bestow economic benefit upon several nations across Asia and Europe that may want those oil prices to remain low.
The UK, America and European nations that presently participate in air strikes against ISIS targets also stand to benefit from lower oil prices, as would their Asian trading partners and the trade between them. It would be in their best economic interests not to bomb Iraqi oil fields as such action could send the world price of oil to new highs, perhaps up to $200 per barrel, and inflict harm on their own national economies.
* Harry Valentine is a free-marketeer living in Eastern Ontario.