Tuesday, May 18, 2010

The Costs to American Taxpayers of the Israeli-Palestinian Conflict: $3 Trillion

The Costs to American Taxpayers of the Israeli-Palestinian Conflict:
$3 Trillion

By Thomas R. Stauffer

Conflicts in the Middle East have been very costly to the U.S., as
well as to the rest of the world. An estimate of the total cost to the
U.S. alone of instability and conflict in the region—which emanates
from the core, Israeli-Palestinian conflict—amounts to close to $3
trillion, measured in 2002 dollars. This is an amount almost four
times greater than the cost of the Vietnam war, also reckoned in 2002

Even this figure underestimates the costs because certain classes of
expenditure remain unquantified. In particular, no reliable figure is
available for the costs of "Project Independence," Washington's
lavishly promoted effort to reduce U.S. dependence on oil from the
Middle East. That effort, which was subverted early on by diverse
local special interests, was designed primarily to insulate Israel
from any new "Arab oil weapon" after 1973/74, and may easily have cost
$1 trillion. Even though the outlays were rationalized in the interest
of "national security," however, they contributed little or nothing to
reducing U.S. strategic dependence upon imported oil from the Middle
East. Similarly, aid to Israel—and thus the regional total—also is
understated, since much is outside of the foreign aid appropriation
process or implicit in other programs. Support for Israel comes to
$1.8 trillion, including special trade advantages, preferential
contracts, or aid buried in other accounts. In addition to the
financial outlay, U.S. aid to Israel costs some 275,000 American jobs
each year.

The major components in this minimum estimate of the costs are
summarized in Table One; the detailed breakdown is displayed later in
Table Two:

Total identifiable costs come to almost $3 trillion. About 60 percent,
well over half, of those costs—about $1.7 trillion—arose from the U.S.
defense of Israel, where most of that amount has been incurred since
1973 (see later section and Table Three).

Oil Crises

The largest single element in the costs has been the series of six oil-
supply crises since the end of World War II. To date these have cost
the U.S. $1.5 trillion (again in 2002 dollars), excluding the
additional costs incurred since 2001 during the build-up toward the
second war with Iraq. Until 1991, each crisis was triggered by a
conflict among two or more Middle Eastern states, usually with the
active involvement of at least one extra-regional power. The nature
and impact of the oil crises changed over time, becoming more serious
and implying greater risk to the oil-consuming world.

The several earlier Mideast oil crises, in 1956 and 1967, actually had
relatively little effect on the United States. Indeed, the U.S.
profited from exporting surplus oil in 1956 when Mideast supplies—
especially of "sterling oil"—were interrupted. The second such crisis,
in 1967, did have a longer-term impact. Initially, only the cost of
shipping was raised when the Israelis interdicted the Suez Canal. The
splitting of oil markets between east and west of Suez, however, was
the catalyst for an overall price increase which otherwise would have
been unlikely, if not impossible. Several OPEC states were successful
in exploiting the closure of the Suez Canal to increase oil prices
across the board after 1968. Again, the effect on the U.S. was
relatively small, because U.S. oil imports were still at a low level.
Nonetheless, those increases between 1970 and 1973 did cost the U.S.
some $40 billion (in 2002 dollars).

The period before 1973, therefore, had little effect on U.S. oil
costs, and the burden of aid to Israel was modest, so the overall cost
of Middle East conflicts remained modest. The major cost prior to
1973, in fact, was support for Turkey as part of Cold War operations
to contain the Soviet Union.

This changed with 1973, and costs escalated rapidly thereafter.
Starting with the Arab-Israeli war of 1973, the costs to the U.S. of
regional crises and aid programs began to increase beyond any original
expectations. Since 1973, protection of Israel and subsidies to
countries willing to sign peace treaties with Israel, such as Egypt
and Jordan, has been the prime driver of U.S. outlays or the trigger
for crisis costs. The 1973 war proved to be dear. At a minimum, it
cost the U.S. between $750 billion and $1 trillion. This was the price
tag for the rescue of Israel when President Richard Nixon agreed to
resupply Israel with U.S. arms as it was losing the war against its
neighbors. Washington's intervention triggered the Arab oil embargo
which cost the U.S. doubly: first, due to the oil shortfall, the US
lost about $300 billion to $600 billion in GDP; and, second, the U.S.
was saddled with another $450 billion in higher oil import costs.

A third factor added to the oil-related cost of the 1973 war (over and
above the multi-billion dollar aid package to Israel which began in
that year). Deciding to act preventively, as it were, the U.S.
created, after some travail, a Strategic Petroleum Reserve ("SPR")
designed to insulate Israel and the U.S. against the wielding of a
future Arab "oil weapon." It was destined to contain one billion
barrels of oil which could be released in the event of a supply
crisis. To date the SPR, which still exists and is slowly being
expanded, has cost $134 billion—since much of the oil was bought at
high prices, and because the salvage value is relatively low. Thus,
the 1973 oil crisis, all in all, cost the U.S. economy no less than
$900 billion, and probably as much as $1,200 billion. Ironically,
military costs themselves were negligible. The 1973 war illustrated
the new dimension of Middle East conflicts, where the burdens are
economic rather than military.

The next regional oil crisis was relatively less dear, although costly
nonetheless. The Iranian revolution and the subsequent Iran-Iraq war
cost the U.S. $335 billion in terms of higher oil import prices. There
were two stages. First, 5 million barrels per day (b/d) of Iranian oil
exports were suspended when the revolutionaries closed the oil
terminals in 1978. The resulting shortfall in oil supply, compounded
by speculators, doubled oil prices. Then, just two years later, in
1980, began the Iran-Iraq war, which interrupted oil exports from both
warring countries, causing prices to more than double once again. The
joint effect of the two crises cost the U.S. consumer $335 billion in
terms of higher prices for imported oil. It also caused a rise in
prices of domestic energy—oil, gas, and coal. These "knock-on" effects
are not included, however, so that the figure of $335 billion is
indeed a lower bound for the actual costs of those two, back-to-back
crises. The total consumer cost is likely to have been more than
double that figure.

The 1990/91 Gulf war, on the other hand, proved to be almost a
bargain. It did cost American consumers approximately $80 billion in
higher oil prices, including both imported and domestic oil, again
excluding the resulting "knock-on" effects. The military costs of
conducting the war itself were all but nil, however, because virtually
all the other costs were passed on to Washington's willing or
reluctant allies through "burden-sharing." The Germans, Japanese, and
some Gulf states contributed cash and kind to the pursuit of the war,
with the result that the net military cost to the U.S. was essentially
zero. Officially reported "burden-sharing" contributions amounted to
$45 billion, compared to officially reported U.S. military costs of
$49 billion. Given the inherent imprecision in the budgeted figures,
the net effect was a wash. In fact, the U.S. government actually
showed a fiscal profit from the crisis, because it collected at least
an additional $10 billion in taxes and royalties from the higher
prices of domestically produced oil and gas.

Economic and Military Aid

This category includes only those amounts which flow through the
conventional foreign aid appropriations process. Ad hoc and special
aid is discussed later. The total for the Middle East is $867 billion,
which includes the official "Near East" category, plus Greece and
Turkey, which are classified as part of Europe for purposes of U.S.
statistics. Greece is included because the Greek lobby has ensured
that Greece receives roughly 70 percent as much aid as Turkey as a
condition for acquiescing in the appropriations for Turkey. Thus the
outlays for Greece are necessary conditions for the outlays for
Turkey, given the U.S. domestic political dynamic, and thus are
causally linked to the Middle East.

The official reports are incomplete. First, it is necessary to
estimate the ad hoc and special aid for Israel, which is reported
differently, if at all (see below). Secondly, it is necessary to
include such special, but related, transactions as U.S. support for
insurgents in the Sudan, or the U.S. share in multilateral aid to
Turkey, in order to flesh out the full picture. "Humanitarian aid" to
the revolutionaries in the southern Sudan has aggregated to some $2
billion, while the U.S. share of recent multilateral aid to Turkey
from the IMF and World Bank can be estimated at $7 billion. It can be
argued that this money was made available to Ankara as a result of
U.S. pressure, intended to reward Turkey further for its alliance with
Israel and as an incentive for further cooperation against Iraq.

Increasingly, aid to the periphery is part of U.S. involvement in the
Middle East. Ethiopia, Somalia and Eritrea are viewed as integral to
geopolitical planning for the Middle East, and, more recently, aid to
the Central Asian "emergent democracies" is linked in part to Middle
East politics, related to efforts to encircle and isolate Iran. That
increasing flow of aid is also part of the larger picture of aid to
the Middle East.

Another element is ad hoc support for Israel, which is not part of the
formal foreign aid programs. No comprehensive compilation of U.S.
support for Israel has been publicly released. Additional known items
include loan guarantees—which the U.S. most probably will be forced to
cover—special contracts for Israeli firms, legal and illegal transfers
of marketable U.S. military technology, de facto exemption from U.S.
trade protection provisions, and discounted sales or free transfers of
"surplus" U.S. military equipment. An unquantifiable element is the
trade and other aid given to Romania and Russia to facilitate Jewish
migration to Israel; this has accumulated to many billions of dollars.
Lastly, unofficial aid, in the form of transfers from the Diaspora
resident in the U.S. and net purchases by U.S. parties of Israel
Bonds, adds at least $40 billion to the total. A rough estimate, again
a minimum, for such additional elements is more than $100 billion
since 1973.

U.S. jobs and exports also have been affected, adding to costs and
losses. "Trade followed the flag" in the area—but in the reverse
direction. As U.S. relations with Mideast countries deteriorated,
trade was lost. Worsening political relations resulted in the loss of
hundreds of thousands of U.S. jobs. Some disappeared as a consequence
of trade sanctions, some because large contracts were forefeited,
thanks to the Israel lobby—as in the case of foregone sales of
fighters to Saudi Arabia in the 1980s—and still others due to a
dangerously growing trade-aid imbalance vis-ˆ-vis Israel.

Sanctions alone have caused U.S. jobs to disappear. The trickle of
U.S. trade with Iran, Iraq, Libya and Syria—compared to what would
have been expected had relations been "normal," let alone "good"—
currently costs the U.S. some 80,000 to 100,000 jobs each year. The
figure is probably higher, in fact, because it does not reflect the
lost opportunities for U.S. farmers to export their products into the
growing markets of the sanctioned countries.

"Good" relations, however, do not necessarily mean employment gains
for Americans. In the case of Israel, the striking trade-aid imbalance
vis-ˆ-vis Israel costs the U.S. almost as many jobs as the sanction
regimes. Israel exports to the U.S. much more than it imports, while
it pays for only a fraction of what it does import from the U.S.
Specifically, Israel buys little from the U.S. in relation to U.S. aid
levels, and the trade-aid imbalance of $6 billion to $10 billion each
year costs about 125,000 jobs. One aspect of U.S. government policy in
the region, however, does create American jobs: the states of the
southern Gulf incrementally buy large quantities of U.S. arms and
related services. That relationship, primarily with Saudi Arabia, has
translated into an extra 60,000 jobs in recent years. This gain, due
to the special status of Saudi Arabia, partly offsets the jobs lost
through Israeli pressures or contracting policies.

Another large element in cost has been the push for energy autarky—
specifically, "Project Independence." This clutch of programs has been
extraordinarily costly since it was initiated as a policy objective in
the 1970s. Oil imports are higher today than before, in spite of the
imposing array of subsidies or forced technologies designed to
increase U.S. energy production and cut consumption. No overview of
these costs has been compiled. Identifiable costs come to $285
billion, but the grand total is certainly very much higher. A
reasonable estimate is at least one trillion dollars, but only part of
that can be documented. While the subsidies were inevitably justified
in the interests of national security, the projects and programs were
in most cases captured and co-opted by domestic lobbies. Since the
national objective was reducing dependence upon Mideast oil, however,
the costs should be subsumed within the costs of coping with regional
conflicts, even if the programs were largely ineffectual.

"Defense" of the Gulf—often cited as a major cost factor—in fact has
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 about $30 billion to $40 billion per year.
That figure is misleading, however. 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, so those
outlays, which represent the largest component in the reported "cost,"
are not substantively tied to U.S. policies in the Gulf itself. The
U.S. presence itself has entailed relatively modest incremental costs—
on the order of $2 billion (net) per year, exclusive of any new costs
tied to the new mobilization against Iraq.

Lastly, a large part of the costs have been inextricably tied to U.S.
protection of or support for Israel. It is therefore useful to pull
together the various elements linked to that policy:

Direct costs, excluding crisis costs, have amounted to about $800
billion. This figure includes budgeted U.S. aid for Egypt and Jordan,
since that flow of aid is so closely correlated with their postures
toward Israel—i.e., that aid is part of the cost of buying peace for
Israel on two of its borders. It also includes the flow of dollars
from private Jews or Jewish organizations in the U.S. to Israel, which
are drains on the U.S. balance of payments, analogous to official aid
transfers. The rescue of Israel in 1973 cost another $1 trillion, so
total direct costs, including the costs of the results of support for
Israel, are some $1.8 trillion.

There have been further costs where the causal linkage is less clear—
aid to the states of the periphery (Ethiopia, Central Asia, etc.), the
"defense" of the Gulf, and the costs of Energy Independence. Although
some part of those costs of $300-plus billion are attributable to U.S.
support for Israel at the core, any allocation is beyond the scope of
this discussion.

A last element is a contingent cost: the cost to the U.S. of the Oil
Supply Guarantee which Secretary of State Henry Kissinger proffered
the Israelis in 1975. If Israel's oil supply is affected, Israel in
effect gets a first call on any oil available to the U.S. The
opportunity cost of that oil depends upon the crisis scenario—a
plausible scenario would entail costs to the U.S. of $3 billion per
month in terms of lost GDP if the U.S. were embargoed at the same

Expensive Unrest

Unrest in the Middle East has proven to be very expensive for the U.S.
It is known that most of American foreign aid goes to Egypt and
Israel, but it is clear that the total costs to the U.S. of conflict
in the region are very much higher than the aid bill itself. The total
costs of supporting Israel are some six times the official aid, for
example. Oil price crises have been particularly expensive—a sobering
lesson from the history of the Middle East over the last 30 years.
Future "burden-sharing" is unlikely—while successful in eliminating
much of the cost of the 1990/91 Gulf war, it will become much more
difficult. Mercenary allies, such as Turkey, moreover, are likely to
demand compensation "up front," since, they argue, they never received
the aid promised to them during the prior Gulf war. Ankara is
especially likely to demand considerable rewards, since it protests
that it received little to offset the $30 billion it claimed it lost
in the last affair.

Israel, too, is demanding more aid—$4 billion in extra military
support and a further $10 bn in loan guarantees, over and above the
current level of appropriated aid. Conflicts in the Middle East have
become expensive indeed for the American taxpayer.

It is worth noting, however, that the burden shared by the other oil-
consuming states has, in fact, been much higher. Even though they do
not share in policy formation, they do indeed share in the costs of
the consequences. While not greatly drained by foreign aid to the
region—unlike the $800 billion borne by the U.S.—they bear much more
of the costs of oil crises because, collectively, they import much
more oil than the U.S. Thus the total bill—the total burden shared by
default—is two to four times higher than that for the U.S. alone. All
states—not just the U.S.—have borne the burden of conflicts in the
Middle East.

Thomas R. Stauffer is a Washington, DC-based engineer and economist
who has taught the economics of energy and the Middle East at Harvard
University and Georgetown University's School of Foreign Service.

Peter Beck - Additional cost to American
Israel has cost the American taxpayer far more than the Israel/
Palestinian conflict. We could add the cost of the Iraq war, which was
conducted at the behest of Israeli agents (Paul Wolfowitz & Co.) in
the Bush administration. How do you quantify the cost of thousands of
American lives? We were justified in going into Afghanistan, but Iraq
was clearly a gift for Israel. We could also add the cost of the USS
Liberty, rarely mentioned any more because it was covered up by Lyndon
Johnson. You remember him- the first US President to put Israeli
interests before our own.