May 20, 2008 | FDD Policy Briefing

The High Cost of Oil Dependence

With the price of oil over $125 a barrel and U.S. gasoline prices hovering around $4 a gallon, our nation’s energy dependence has been a top news headline. Although the economic effect of these surging prices has been most prominent, the high cost of oil dependence extends far beyond that. As former CIA director R. James Woolsey and Institute for the Analysis of Global Security co-director Anne Korin have noted, our oil dependence means that we are essentially “paying for both sides in the War on Terror.” The vulnerability of our energy supply to a terrorist attack also creates an obvious Achilles’ heel. And other visible problems that the world is currently confronting, such as rising food prices, are intimately linked to the skyrocketing price of oil.

Woolsey and Korin are correct that the U.S.’s oil dependence causes it to fund both sides of the terror war. This can be seen in the purchasing power that petroleum gives to oil-rich Middle Eastern states like Iran and Saudi Arabia.

Iran’s oil sector accounts for 85% of its government revenues. One thing Iran has done with this money is provide weapons, training, funding, and safe haven to a variety of terrorist groups. Iranian support for anti-U.S. violence has been particularly problematic in Iraq: Ambassador Ryan C. Crocker made this clear in April 8 Senate testimony, where he stated that “Iran continues to undermine the efforts of the Iraqi government to establish a stable, secure state through the authority and training of criminal militia elements engaged in violence against Iraqi security forces, coalition forces and Iraqi civilians.” One weapon that Iran has been responsible for providing to insurgents in Iraq is the explosively formed projectile (EFP), which has been described as uniquely dangerous because “when it detonates, the concave end blows outward and melts into a bullet-shaped fragment that slices through armor and flesh.” Iran provides as much as $200 million a year to Hizballah—as well as tens of millions of dollars and militant training to anti-Israel Palestinian terrorist groups.

The connection between oil revenues and terrorist funding is less direct for Saudi Arabia. Its most prominent contribution to the terrorist threat has been ideological—through the funding of charities, mosques, and preachers who propagate an extreme form of Islam. Shortly after the 9/11 attacks, former New York Times Middle East correspondent Youssef M. Ibrahim wrote in the Washington Post: “The money that brought Wahhabis to power throughout the Arab world … financed networks of fundamentalist schools from Sudan to northern Pakistan.” These networks have perceptibly tilted the practice of Islam in a more violent and anti-social direction in many places beyond those mentioned by Ibrahim, including the Balkans, the former Soviet republics, Southeast Asia, and parts of sub-Saharan Africa. Saudi-funded institutions that promote an extremist form of Islam have also been active in Europe and even America—as I have written about in my book My Year Inside Radical Islam, which documents my time inside a Saudi-funded charity in Oregon that the U.S. Treasury Department has named a specially-designated global terrorist entity. Beyond the Saudi state, financiers and charities from that country have been significant sources of funds for the insurgency in Iraq and Palestinian terrorist groups. Though the U.S.’s relationship with Saudi Arabia is complex and it would be overly simplistic to declare the two countries enemies, a significant portion of the oil revenue that flows into Saudi Arabia clearly works against U.S. strategic interests.

But the impact of oil dependence on terrorism extends beyond the financial windfall it entails for terrorist groups and the ideology that drives them: terrorists also understand that our oil dependence is our greatest strategic vulnerability.

Although Osama bin Laden initially declared Saudi Arabia’s oil resources off limits as a military target because they were “a great Islamic wealth,” his thinking on the matter shifted as he came to understand how much the U.S.’s fortunes were tied to its access to cheap oil. In a mid-December 2004 audiotape, he instructed al-Qaeda operatives:

One of the main causes for our enemies’ gaining hegemony over our country is their stealing our oil; therefore, you should make every effort in your power to stop the greatest theft in history of the natural resources of both present and future generations, which is being carried out through collaboration between foreigners and [native] agents. . . . Focus your operations on it [oil production], especially in Iraq and the Gulf area, since this [lack of oil] will cause them to die off [on their own].

Since then, other prominent voices within al-Qaeda have affirmed the group’s desire to strike the oil supply. In a December 2005 video, Ayman al-Zawahiri stated: “I call on the holy warriors to concentrate their campaigns on the stolen oil of the Muslims, most of the revenues of which go to the enemies of Islam.” Sawt al-Jihad, Al Qaeda in the Arabian Peninsula’s online magazine, noted in February 2007 that “cutting oil supplies to the United States, or at least curtailing it, would contribute to the ending of the American occupation of Iraq and Afghanistan.”

Actual terrorist targeting has made clear that this is not empty rhetoric. After a September 2005 shootout between militants and Saudi police in the seaport of al-Dammam, police found forged documents that would have provided the terrorists access to some of the country’s key oil and gas facilities. Saudi interior minister Prince Nayef told the daily newspaper Okaz that the cell had planned to attack these facilities. In April 2007, Saudi Arabia announced that “it foiled an al Qaeda-linked plot to attack oil facilities and military bases.” Indeed, former CIA agent Robert Baer warned back in 2003 that tactics in which al-Qaeda already had a demonstrated proficiency could succeed in taking a great deal of Saudi oil off the market instantaneously. He stated that “a single jumbo jet with a suicide bomber at the controls . . . would be enough to bring the world’s oil-addicted economies to their knees” if crashed into a major offshore loading facility.

Sawt al-Jihad may have been correct: diminished access to the military’s lifeblood could spell doom for the U.S. ventures in Afghanistan and Iraq.

While economists debate whether the U.S. is officially in a recession, nobody can seriously dispute the country’s weakened economic situation. It is not difficult to recognize that high energy prices are a primary driver: indeed, it would be shocking if oil prices could rise from around $50 a barrel in early 2007 to over $125 a barrel today without a significant economic impact. The U.S. depends on long supply lines to transport agriculture and all other products to consumers. Prices have been universally pushed upward as oil prices have risen.

Gal Luft, the executive director of the Institute for the Analysis of Global Security, noted in a March 20 op-ed for the Miami Herald that “the path to economic recovery will be compromised as long as America is dependent on imported oil to the degree that it is while oil continues to hover over $100 a barrel.” He explained:

At current oil prices, this country sends overseas $460 billion per year to finance the daily buying of 12 million barrels of imported oil. This amount of money is about the size of our defense budget and three times the size of the “economic stimulus” package recently passed by Congress. But the real economic impact of oil dependence is hidden to most Americans. Energy economist Milton Copulos … calculated last year that the grand total of all external costs associated with foreign oil dependence—including the cost of oil-related defense expenditures, amortized cost of supply disruptions, and lost economic activity and tax revenues—stands at $825 billion per year.

In addition to the drag on our economy, this massive wealth transfer could have grave geopolitical implications. Plainly, many OPEC countries do not have our best interests in mind. To understand this, one need look no further than Iranian president Mahmoud Ahmadinejad or Venezuela’s Hugo Chávez, who famously boasted in his opening address at an OPEC conference in 2006 that “the American empire will be destroyed . . . inshallah.”

The recent buyout by foreign governments of chunks of America’s prime symbols of economic prowess—like Citigroup, Merrill Lynch, Morgan Stanley, Blackstone Group and Bear Stearns—is only the preview to what is yet to come should the petrodollar fueled transfer of wealth continue. If oil prices climb to $200, as President Hugo Chávez of Venezuela recently warned, this wealth would double again. While the value of the dollar and the U.S. economy is shrinking, OPEC’s monumental wealth enables its countries unprecedented buying power. As an illustration, at current oil prices it would take OPEC just six days to buy GM and three years to buy a 20 percent voting block in every S&P 500 company. It is hard to see how such buying power amassed by oil producers would not upset the West’s economic and political sovereignty.

The current worldwide food-price crisis is also linked to the sharply rising price of oil. According to the U.S. Agency for International Development, “37 countries throughout every region of the world are experiencing localized food insecurity, lack of access to food, or shortfalls in food production or supplies.” World food prices have doubled in the past three years, and the International Monetary Fund found that they have risen by 43% in the past year alone. The social unrest sparked by skyrocketing food prices has been a depressing spectacle, with violent protests spanning several continents—including such countries as Burkina Faso, Cameroon, India, Mauritania, Mexico, Senegal, and Pakistan. Rising food prices are also being felt in the United States, which has experienced “[t]he worst food inflation in 17 years.” In a bleak portrait of the situation published in late February, Time noted that “bringing down food prices could take at least a decade.”

While many factors have caused these rising food prices (including increased demand in China and India, among other countries), the spike in oil prices has made a palpable contribution. As Time notes, high oil prices have “pushed up fertilizer prices, as well as the cost of trucking food from farms to local markets and shipping it abroad.”

Some commentators claim that increased production of biofuels like ethanol is driving the rise in food prices. Trying to put this into perspective, White House economic advisers recently estimated that corn-based ethanol has accounted for “just 2-3 percent of the overall increase in global food prices.” In contrast, rising oil prices appear to be a much larger factor. Then-acting agriculture secretary Charles F. Conner noted in October 2007 (even before oil hit $100 a barrel) that the rising price of oil “translates into higher packaging costs, higher transportation costs, all the things that go into taking a product from the farm to the grocery shelf.” Moreover, oil is used to plant and harvest agricultural crops. Thus, Conner concluded that the price of oil “is having a much, much greater impact than higher grain prices as a result of ethanol.”

Certainly there is no inherent conflict between food prices and biofuel production. Biofuels (including ethanol and methanol) can be made from substances other than food crops—including from coal, natural gas, plants, crop residue, and even municipal waste. As policymakers attempt to fashion a solution to the energy crisis, they must bear in mind how their proposals will affect the food needs of the most vulnerable. But food prices would be rising with or without biofuels—and the situation will only grow worse if we remain so dependent on oil.

Our dangerous dependence on foreign oil is, at this point, the most serious problem that our nation confronts. Oil dependence is intimately related to many of the other pressing issues of the day—including our national security, our economy, and worldwide food prices. In the coming weeks and months, FDD’s policy briefings and other publications will explore alternatives to our dependence on oil. A critical first step is recognizing the gravity of the problem.

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