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Opportunities seized and opportunities squandered: the impact of the Iraq war on global oil prices: address to the Gorton Federal Electorate Council of the\nAustralian Labor Party: Melbourne: 19 August 2006.



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OPPORTUNITIES SEIZED AND OPPORTUNITIES SQUANDERED

The Impact of the Iraq War on Global Oil Prices

An address to the Gorton Federal Electorate Council of the Australian Labor Party

Delivered by Kevin Rudd MP Shadow Minister for Foreign Affairs, Trade & International Security

19 August 2006 Melbourne

A key question in Australian politics is the how governments use the mandate they are given by the Australian people.

Whether a government seizes the opportunity it is given by the Australian people to carve out a long-term future for our country.

Or whether a government squanders those opportunities by yielding always to the politics of the present.

Opportunities seized and opportunities squandered - the core underlying narrative of our history and our future.

One is leadership. The other is “issue management”.

There is a world of difference between the two.

When Labor has been in government, we have sought to provide leadership.

The history of Labor’s national security and foreign policy shows this - chapter after chapter.

Curtin showed leadership in 1941 when he looked to America - rather than yielding to the conventions of 150 years of this country’s settled history during which we always saw our security as indivisible from that of the British Empire.

Curtin showed leadership when he defied Churchill and ordered Australian troops home from the Middle East to fight the Battle for Australia.

Curtin showed leadership by defying both London and Washington when they argued for the European War to be fought first and the Pacific War last.

Chifley and Evatt showed leadership when they supported the Indonesian independence movement against the Dutch colonial power after the war.

Evatt showed leadership at the San Francisco Conference when he carved out a role for small and middle powers in the drafting of the UN Charter and the United Nations Organisation which would come from it.

Whitlam showed leadership in the diplomatic recognition of the Peoples’ Republic of China.

Hawke, Keating and Evans showed leadership by leading the UN initiative to bring peace to Cambodia; by being the first ally of the United States to commit to the First Gulf War after Iraq’s invasion of Kuwait; and by establishing APEC and the ASEAN Regional Forum as the first pan-regional economic and security forums to bring together the disparate countries and economies of the Asia-Pacific region.

All of these actions of government require leadership. Many were opposed by the conservatives of the day. And most involved the burning of hard-won political capital in order to advance the interests of the nation.

Labor has also demonstrated leadership in carving out a long-term future for our economy.

We saw this with Chifley and the enormous challenge of post-war reconstruction.

We saw this with Whitlam’s decision to begin dismantling the tariff war which then rendered our manufacturing industry uncompetitive and without reform incapable of long-term survival.

We saw this most spectacularly with the Hawke and Keating Governments and the far-reaching economic reforms introduced during their thirteen years in office.

The floating of the dollar, the deregulation of interest rates, the reform of the financial sector, the further tearing down of the tariff wall, labour market reform, the introduction of National Competition Policy together with the introduction for the first time in this country’s history of the nationals superannuation policy.

These reforms yielded unprecedented productivity growth for the Australian economy.

They underpin so much the prosperity that we have enjoyed over the last decade.

And most critically, they fire-proofed the Australian economy from the external shocks delivered by the Asian financial crisis in the late 1990s.

Had Labor not reformed the economy in the 1980s, we, like so many other regional economies during the late 1990s, would have suffered the ravages of deep and enduring recession, unemployment and social dislocation.

Once again, all these decisions by Labor in government required leadership. Very few of them of were popular. All of them were hard. And all of them cost hard-won political capital.

These were opportunities seized. Not opportunities squandered.

And the nation, rather than the Party itself, has been the long-term beneficiary.

A Decade Squandered

If we apply these benchmarks of leadership to the business of government over the last decade, any objective analysis finds Mr Howard’s Prime Ministership to be sorely lacking.

Some commentators point to gun control, the introduction of the GST and now the new industrial relations laws.

Gun laws we may grant him - but any government worth its salt would have acted in the aftermath of the Port Arthur Massacre.

But where is the nation building in a consumption tax?

Where is the nation building in the Americanisation of our industrial relations system?

These decisions are not about leadership. They are not about nation building. Rather they are about the prosecution of a partisan ideology.

In national security the pattern is much the same.

How have our long-term national security interests been advanced by our support for and participation in the invasion of Iraq?

How have they been advanced by Mr Howard’s decision to cut and run from Afghanistan in 2002 before the job had barely begun? Let alone before the job had been done.

How have our national security interests been advanced in East Timor when once again we exited the field before the task was complete - only having to rejoin the field later and at much greater expense?

Rather than engaging in an integrated, substantive long term strategy against terrorism in our region, our neighbourhood, our own backyard, instead the opportunity has been squandered through the extraordinary diversion of our national security and foreign policy resources to Iraq.

Once again opportunities squandered, not opportunities seized.

The reason for this is that Mr Howard, first and foremost, is a clever politician. But he is not a leader.

Mr Howard’s first instinct in politics is how to “manage the issue”, soothing words here, linguistic manipulation there, and a policy bandaid here and there to get him through the next electoral cycle.

Above all, Mr Howard is a politician through and through. It seems to rarely cross his mind to use the great opportunity he has been presented with by the Australian people to carve out a long term vision for Australia’s national security and economic future.

Commentators in the past criticised Mr Howard for being small-minded. Any objective analysis of his decade in office causes us to conclude that they are right.

Mr Howard has been so contemptuous of the idea of a “vision” for the nation’s future in the years following the Keating Government, that this contempt has reinforced his natural predilection to wrap himself tight in the micro-political management of the day.

But what is Mr Howard’s vision for Australia’s economy for the decade ahead?

Are we to have our a vision for ourselves larger then just being China’s quarry and Japan’s beach? What about the transformation of Australia into a knowledge economy of the twentieth century? We have nothing from Mr Howard on this.

Where is Mr Howard’s roadmap for the decade ahead to navigate our future with the rise of China and the rise of India - the biggest single shift in geo-politics and the global centre of economic gravity in a century. I follow these debates closely and I see nothing. Why not at least set for ourselves a vision of Australia becoming the most Asia-literate, the most China-literate economy in the collective West?

And what is Mr Howard’s vision for the decade ahead on the all encompassing challenge of global climate change? All I see is day to day “issue management”. How to get it off the front page. How to apply policy bandaids here and there in order to convey the impression that the Government has a plan. When in fact it has no such thing.

In these great challenges of our age, leaving aside others in education, health and poverty, we see little evidence of leadership. We see little evidence of a coherent vision for the future. We see little evidence of a coherent path of action.

All we see is a continuing pattern of opportunities squandered, not opportunities seized.

The historians will record Howard’s decade as Australia’s lost decade - a decade squandered. All about the politics of incumbency. Little about our nation’s long-term future.

Lost Opportunities on Energy Policy

When it comes to opportunities that have been squandered over the last decade, the Howard Government’s failure to produce a national energy strategy for Australia looms large.

This was the decade in which Australia needed to develop a strategy to reduce our chronic dependence on imported oil. A decade in which to develop a strategy to guarantee this country’s long-term energy security. A decade to enhance the development of alternative fuels.

Important for our energy future. Important for our environment future. But also important for our trade future given the impact of oil imports on our record trade deficit.

Instead we have had the deafening silence of political indifference and policy inertia.

No substantive strategy has been developed.

No leadership has been given.

But Mr Howard, always the clever politician and ever vigilant when it comes to fluctuations the political mood, in the last few weeks has cobbled together a grab bag of initiatives that he ostentatiously describes as an “Energy Statement”.

This is not an energy strategy. It is a political fig leaf. And it is designed to give the Prime Minister some key lines and themes to talk about when confronted by hostile telephone calls on talkback radio programs. It is a Clayton’s strategy - designed for its short-term announcement effect rather than doing anything substantial about Australia’s long-term energy security.

As Shadow Ministers Martin Ferguson and Joel Fitzgibbon stated this week: “The Prime Minister’s Energy Statement on Monday will cost taxpayers $1.6 billion, but did nothing to reduce Australia’s reliance on foreign oil or put downward pressure on petrol prices tomorrow, next week, next month or even next year.”

Mr Howard’s Energy Statement is another example of an opportunity squandered - rather than an opportunity seized for Australia.

But the problem does not stop here. Not only has the Howard Government failed to provide leadership for Australia’s long term energy future. The Howard Government has also damaged the interests of Australia’s long-sufferring motorists in the short-medium term by its advocacy for and participation in the Iraq war - because of the impact of that war on global oil prices.

Impact of Iraq on Global Oil Prices

The time has come to shine a light on the impact of the Howard Government’s support for the Iraq war - not just on Australia’s national security interests, not just on our foreign policy interests but on our economic interests as well - through the impact of the Iraq war on global oil prices.

Put in its simplest terms it is this: the failure of Australian and US policies in Iraq have made petrol prices for motorists higher than they would have otherwise been.

In December 2002, the Australian Government’s commodities forecaster ABARE forecast an average price of $23.75 a barrel for world oil in 2003. ABARE stated:

“In the absence of major market disrupting events, the average world trade weighted price of crude oil in 2003 is forecast to be around $US23.75 a barrel.”

We know, however, there was one major disruption in 2003 - and that was the decision of the United States, the United Kingdom and Australia to invade Iraq.

In the aftermath of the war, the price of oil in 2003 averaged not $23.75 a barrel as predicted by ABARE but $31 a barrel.

Since then the price of oil has continued to rise averaging $US41.30 in 2004; $US56.60 in 2005; and $US68.50 to date in 2006.

The question which arises is what factors have been at work causing this rapid increase in oil and petrol prices since 2003.

To answer this question in part, it is important to note the contribution of Nobel Prize winning economist Joseph Stiglitz of the National Bureau of Economic Research in Cambridge Massachusetts. In a major working paper entitled: “The Economic Costs of the Iraq War: An Appraisal Three Years after the Beginning of the Conflict” dated February 2006, Professor Stiglitz calculates the impact of the war on oil prices as one of the contributing factors to the overall economic cost of the war for the United States.

Professor Stiglitz poses the question in stark academic terms when he states (using oil prices as they stood six months ago):

“We have to ascertain to what extent has the increased price from US$25 a barrel before the war to around US$50 today - ignoring the spike associated with Hurricane Katrina when prices rose to US$60 - has been a result of the war itself… To what extent is the rise in price due to the war, and to what extent is it due to other factors?”

Stiglitz goes on in his paper to argue that before the Iraq war, futures markets were forecasting that oil prices would remain in the range they had been - between US$20 and US$30 per barrel. Stiglitz emphasises that futures markets:

“take into account growth in demand in China and elsewhere as well as changes in supply. They do so on the basis of ‘business as usual’, that is, on the basis that nothing out of the ordinary happens. The war in Iraq was the most noticeable event, and it is hard to identify any other which can be given as much credit for significant change in demand or supply.”

Stiglitz noted that what was striking about present prices (ie February 2006 prices) was that they were significantly higher than what most analysts believed to be the long run price and that “futures markets expected that such prices would persist for

at least another two years”.

Stiglitz here refers to futures market predictions of global oil prices remaining in the mid-US$60 range throughout 2006/07 before falling in 2008. Right now the price is US$70 per barrel. But most critically for our purposes here, Stiglitz concludes definitively in his important paper that:

“The war in Iraq provides the critical explanation.”

Stiglitz goes on to argue two principal reasons why the Iraq war has significantly impacted on global oil prices: first, it has added significantly to wider stability in the Middle East with a flow-on effect to the risks in investing in oil exploration, extraction and production in that region; and second, the fact that Iraq’s oil production itself had dropped to less than half its output compared with pre-war production levels.

On the first point, he argues that had there been no war, whatever would have happened with Iraq’s own production levels it was likely that production elsewhere in the Middle East would have increased to keep pace with rising global demand. Specifically Stiglitz states that: “The instability in the Middle East which has been brought about by the Iraq war has increased the risk of investing in that region.” In other words, the Iraq War has had the effect of actively discouraging investment in expanded production capacity across the wider region.

As for Iraq’s own oil production, Stiglitz concedes that while Iraq as of March 2003 was not an oil producer on the scale of Saudi Arabia and Russia, its production of around 2.6 million barrels per day in March 2003 was similar to that of Kuwait, Nigeria and the UK. Stiglitz also notes that at the time of writing in February, Iraqi production had fallen to 1.1 million barrels per day.

According to the US Energy Information Administration, part of the US Department of Energy, by mid-2006 Iraqi production was averaging around 1.9 million barrels per day. The US Energy Information Administration however continues:

“Most analysts believe that there will be no major additions to Iraqi production capacity for at least 2-3 years, with Shell’s Vice President recently stating that any auction of Iraq’s oil fields was unlikely before 2007.”

According to a US Council on Foreign Relations report of June 2006 entitled “Iraq’s Faultering Infrastructure”, the principal problem lies with the continuing insurgency within Iraq itself and the Government’s inability to bring that under control:

“…the Iraqi Government has been unable to fully secure the country’s pipelines, which has led to looting, sabotage, insurgent attacks…high government subsidies have also artificially lowered gas prices - at least compared to some of Iraq’s neighbours - which has encouraged smuggling… ‘there is a mafia in the country that controls the distribution of oil products’, an oil official told the Kuwaiti News Agency”.

Most critically, Professor Stiglitz concludes that these two sets of factors have had a direct and measurable impact on global oil prices. It is worth quoting this important paragraph in full:

“…we believe, accordingly, that the best estimate of the cost of Iraq on oil prices is a very large proportion of the $25 a barrel or more increase in the price of oil (and looking forward, we can extrapolate this cost for the next two years). We provide a conservative calculation based on the assumption that only 20% of that amount - $5 - is due to Iraq. In our moderate estimate, we assume $10 is due to Iraq”.

This is a most significant finding because it seeks to quantify the impact of the folly of the Iraq war on oil prices.

The question then arises as to what impact all of that has had on long-suffering motorists at the petrol bowser. And here we rely on Australia’s very own Industry Minister Ian MacFarlane who has stated:

“As a general rule, a dollar rise in the price of a barrel of crude oil produces a $0.01 rise in the price of a litre of petrol in Australia.”

Therefore, using Professor Stiglitz’s methodology and applying Minister MacFarlane’s conversion formula from crude oil prices to retail petrol prices in Australia, the Iraq war has been costing Australian motorists somewhere between five and ten cents per

litre extra.

The challenge lies with the Australian Government to respond to Professor Stiglitz’s paper - bearing in mind once again that Professor Stiglitz is a Nobel Prize-winning economist. We await with interest to see what the Government’s response might be.

One final footnote on Stiglitz (where once again the Australian Government’s response will be of more than passing interest) is his analysis of the impact of higher oil prices on inflationary pressures and interest rates in the US and elsewhere. On this, Stiglitz states:

“The oil price increase generates some inflationary pressures, and especially among central banks focusing on inflation, this leads to higher interest rates, exacerbating the slowdown of the economy.”

Applying Stiglitz’s logic, a failed war in Iraq produces a significant increase in global oil prices, producing in turn a significant increase in Australian retail petrol prices, producing in turn inflationary pressure within the Australian economy, producing in turn upward pressure on Australian interest rates.

The full economic impact of John Howard’s participation in the Iraq war therefore needs to become a part of our national debate on this Government’s flawed decision to support and participate in the war in the first place. Remember, the Howard Government was a cheerleader for this war. It did not urge caution on our American ally. It did precisely the reverse.

So far in our national debate on the failure of the Howard Government’s Iraq policy we have focused on:

• intelligence failure;

• the dishonesty of the Government’s public justification for the war concerning Iraq’s non-existent stockpiles of WMD;

• the impact of the Iraq war on increasing rather than reducing the overall terrorist threat;

• the impact of the Iraq war on the emboldening of Iran both within southern Iraq itself and more broadly across the Arab and Muslim world;

• the fact that Iraq itself now is either in, or teetering on the edge of, a full blown civil war and most recently; and

• the failure of the Howard Government to act on 27 separate warnings regarding the AWB’s involvement in $300 million wheat for weapons scandal; whereby the Howard Government allowed Saddam Hussein to receive illegal Australian bribes with which to buy bombs, guns, and bullets for later use against Australian troops.

These are spectacular policy failures in their own right of which any Australian Government should be ashamed.

And that is before we begin to calculate the financial and economic costs of this war.

The Iraq war by year’s end will have cost the Australian taxpayer $2 billion and by then it will have run for nearly four years - with an Australian military deployment

having originally been promised by our Prime Minister for a matter of “months”, not “years”.

But as with the Stiglitz paper on the US economy, the time has come for a full and frank debate on the impact of the Iraq war not just on the cost to the Australian taxpayer but also on the Australian economy as a whole through the agency of higher oil prices.

I do not argue that Iraq is the sole cause of increased global oil prices. Nor is that Professor Stiglitz’s contention either. His argument is that they are part of the cause.

There are of course a range of other supply and demand factors at work, including: low investment levels in exploration and refinery capabilities during the 1980s and 1990s in response to lower oil prices at that time; and, on the demand side, the emergence of China and India as larger importers on the global oil market.

It is certainly to be hoped that changes in these other supply-side factors in the period ahead begin to exert a downward pressure on global oil prices - irrespective of what happens with the future security situation in Iraq and Iraq’s wider impact on the Middle East.

But Professor Stiglitz’s central contention and conclusion remains that in explaining increases in global oil prices from 2003 until now, these other supply and demand factors should not be allowed to mask the significant role played by the Iraq war on rising global oil prices post-2003.

Conclusion

Of course, Prime Minister Howard wants to run a million miles away from accepting any such responsibility. When asked this week in Parliament about the connection between the Iraq war and the current price of oil, Mr Howard squirmed that the high price of world oil was:

“. . . overwhelmingly due to the massive demand that is coming out of China and, to a lesser extend, India, to the underinvestment in refining capacity and to some of the impact of the situation in the Middle East”.

But on this score the Government can’t even run a consistent script because in May 2004 Treasurer Costello explicitly blamed the price of oil on Iraq when he said:

“…there’s not much we can do about it. It’s related to events in Iraq, as you know, and until things are stabilised there, I think that will be a difficulty”.

Once again we appear to have an example of Mr Costello and Mr Howard having radically different versions of the truth - and we know for a fact we have a Prime Minister who runs from the truth when it is not politically convenient for him to confront it.

So let the debate now begin on how the Howard Government’s policy failure in Iraq has not just damaged Australia’s national security and foreign policy interests - but our economic interests as well, including petrol prices for Australia’s long-suffering motorists.

ENDS