Getting Out of the Gulf

In January 1980, U.S. President Jimmy Carter used his State of the Union address to announce that in order to protect “the free movement of Middle East oil,” the United States would repel “an attempt by any outside force to gain control of the Persian Gulf.” Carter and his successors made good on that pledge, ramping up U.S. military capabilities in the region and even fighting the Gulf War to prevent Saddam Hussein’s Iraq from dominating the region’s oil supplies. Although Washington has had a number of interests in the Persian Gulf over the years, including preventing nuclear proliferation, fighting terrorism, and spreading democracy, the main rationale for its involvement has always been to keep the oil flowing.

For decades, this commitment has stirred remarkably little controversy. Even those who criticize U.S. alliances in Europe and Asia as too costly usually concede that Washington must defend the Persian Gulf, given that it accounts for roughly a third of global oil production. But the world has changed dramatically since the United States adopted this posture in the region. During the Cold War, the biggest threat to U.S. interests there was the Soviet Union. U.S. policymakers worried that if Moscow cut off the flow of oil, the gas-guzzling U.S. military might not be able to win a major war in Europe. But since the demise of the Soviet Union, the nature of U.S. interests in the reliable flow of oil has shifted. Where once both national security and prosperity were at stake, now only prosperity is.

That has stark implications for U.S. policy. For one thing, the lack of a national security imperative raises the threshold for military involvement in the Persian Gulf, since most Americans would find it less palatable to put U.S. soldiers in harm’s way to defend economic interests. For another thing, since it is hard to put a value on security, it becomes easier to assess the tradeoffs of a U.S. military commitment to the Persian Gulf when only economic risks are at play. So one must ask: Is Persian Gulf oil still worth defending with American military might?

Is Persian Gulf oil still worth defending with American military might?

Answering that question requires grappling with four others. First, if the United States ended its commitment, how much likelier would a major disruption of Gulf oil be? Second, how much damage would such a disruption inflict on the U.S. economy? Third, how much does the United States currently spend on defending the flow of Gulf oil with its military? Finally, what nonmilitary alternatives exist to safeguard against a disruption, and at what price? Answering these questions reveals that the costs of preventing a major disruption of Gulf oil are, at the very least, coming close to exceeding the expected benefits of the policy. So it’s time for the United States to give itself the option of ending its military commitment to protecting Gulf oil, by increasing its investment in measures that would further cushion the U.S. economy from major oil disruptions. And in a decade or so, unless the region becomes far more dangerous, the United States should be in a position to actually end its commitment.

THREATS TO GULF OIL

Before one can accurately assess the current policy, a common misconception must be put to rest. Politicians and pundits often contend that in order to reduce its vulnerability to oil disruptions, the United States needs to escape its reliance on imported oil by producing more domestically, thus becoming “energy independent.” But this argument fundamentally misunderstands how the global oil market works. In fact, independence is a meaningless concept when it comes to a fungible commodity. Because oil is sold on a global market, its price in the United States is inextricably linked to its price everywhere else. Picture the global oil market as a bathtub with many spigots (producers) and many drains (consumers). It doesn’t matter how much oil from a particular spigot flows into a particular drain. What matters is the global oil price, which depends on worldwide supply and demand. Any disruption that sharply reduces supply—lowers the level in the bathtub—hurts all consumers drawing from the tub. So even if U.S. oil imports from the Persian Gulf fell to zero, the United States would still be affected by disruptions there that influenced the global price of oil.

If the United States withdrew from the region, it’s possible to imagine how such a disruption might occur, but none of the scenarios seems likely. Consider the prospect that a Gulf country might consolidate control over enough of the region’s oil to manipulate the global price, perhaps by conquering its neighbors. Theoretically, doing so could give a hostile power enough leverage to coerce oil consumers such as the United States and its allies. The problem with this scenario is that there is no such regional hegemon on the horizon. Iraq has been devastated by the U.S. invasion and the ensuing chaos. Iran has been weakened by Western sanctions, and its leaders remain fixated on internal threats. Saudi Arabia, for all its meddling in Yemen’s civil war, has shown no interest in territorial conquest.

A second hypothetical risk is that an extended war for regional dominance could disrupt the supply of oil by damaging the Gulf’s oil infrastructure and making shipping too risky, even if no hegemon emerged. But many of the factors that make the previous scenario unlikely also apply to this one. Because none of the region’s powers has a reasonable shot at establishing hegemony, all are likely to be reluctant to start a large war with the goal of dominating the region. One of them might try to conquer another major power, but even that would prove difficult. Iran and Saudi Arabia do not make easy targets for each other, separated as they are by the Gulf. Iraq is more vulnerable, given its internal divisions and border with Iran, but Iran faces its own challenges and has likely learned from the American example how difficult conquering Iraq would be. Besides, the region’s oil infrastructure might survive even a massive war in reasonably good shape; the combatants continued to export oil all through the bloody Iran-Iraq War in the 1980s, for example, albeit at reduced levels. After a brief spike at the war’s onset, prices returned to prewar levels, and the war didn’t prevent an oil glut in the mid-1980s that generated a dramatic drop in prices.

The United States should position itself to end its commitment to the Gulf eventually.

A third possible danger is that Iran might disrupt the flow of oil through the Strait of Hormuz in order to coerce the United States and its allies. Just 21 miles wide at its narrowest point, the strait is a critical chokepoint through which 17 million barrels of oil pass every day—roughly 20 percent of global production. Although Iran almost certainly lacks the military capabilities to close the strait completely, it does have some ability to interrupt tanker traffic through the strait—by laying mines and firing antiship missiles, for example—although experts disagree on how much.

What’s far less clear is whether Iran would actually choose to close the strait. After all, doing so would damage its own oil revenues and generate fierce opposition from neighboring states. Indeed, Iran has shown little inclination in the past to make such a move—even during its war with Iraq. Admittedly, terminating the U.S. military commitment would so upend the regional environment that Tehran might rethink its past reluctance. It is conceivable that, in a post-American Gulf, Iran might violate the nuclear deal and then, if the West attacked or reimposed sanctions, try to cut the flow of tanker traffic through the strait. Such a scenario is not likely, but its probability would increase if the United States abandoned its pledge to protect the strait.

The final major risk to the flow of oil from the Gulf is that a major oil-exporting country might fall victim to massive internal instability that interfered with its oil production. Saudi Arabia represents the nightmare scenario. Not only does the country produce more than ten percent of global output, but it also possesses spare capacity that could be used to offset disruptions elsewhere. For the time being, however, Saudi exports appear safe. Saudi security forces protect critical nodes in the country’s oil infrastructure, and the other components of the system can be repaired quickly, so sabotage by a terrorist group would likely fail. Although Saudi Arabia faces many difficulties, there is little prospect of the types of events that would cause massive disruptions for an extended period, such as a civil war or a revolution. The Saudi royal family is widely perceived as legitimate, much of the population benefits from the country’s oil wealth, and the regime’s security forces are highly capable—all of which explains why Saudi Arabia managed to skate through the Arab Spring. Moreover, in the unlikely event of a civil war or revolution, any new regime would almost certainly continue to sell the country’s oil, given how heavily the economy depends on it. And even if the United States did end its direct military commitment to the Gulf, it could still continue to discreetly shore up Saudi domestic security, by training the country’s internal security forces, sharing intelligence, and selling the government weapons and equipment.

In short, if the United States did decide to abandon its military commitment to the Gulf, the probability of a major disruption of oil from the region would increase somewhat, chiefly in the Strait of Hormuz, but would remain small. But how costly would such a disruption prove?

THE COST OF A CUTOFF

Experts’ predictions about the economic losses an oil disruption would cause vary widely, but the best current estimates suggest that a one percent reduction in supply would result in an eight percent increase in the global price of oil. Using that math, a disruption on the magnitude of roughly ten million barrels per day—which would represent a complete loss of Saudi exports or about a 60 percent drop in exports through the Strait of Hormuz—would cause the price of oil to roughly double. The world has never experienced such a massive disruption, however, so the actual impact on prices from such an event is difficult to gauge, and there is the risk it could be larger.

Assessments of the U.S. economy’s sensitivity to oil prices also vary widely, but a reasonable estimate is that a doubling of the price of oil would shrink U.S. GDP by three percent—or approximately $550 billion. Of course, smaller disruptions would result in smaller economic losses, and the most catastrophic disruption—a long, complete closing of the Strait of Hormuz—would cause larger ones.

But the actual costs to the United States would be far smaller, because Washington could draw on the Strategic Petroleum Reserve, its emergency underground oil stockpile, to relieve the pressure on prices. The roughly 700 million barrels currently stored in the SPR form part of the more than four billion barrels held by members of the International Energy Agency (IEA), an organization founded in 1974 to coordinate collective responses to major oil disruptions. Those four billion barrels are enough to replace the oil that would be lost during a complete, eight-month-long closure of the Strait of Hormuz. During the first months of a crisis, the United States could release some 4.4 million barrels per day from the SPR, and the other countries in the IEA could release an additional 8.5 million barrels per day from their reserves. China, which is not a member of the IEA, could tap into the strategic petroleum reserve that it is building, which is expected to have the capacity to replace 90 days’ worth of China’s oil imports.

What all of this means is that if the world experienced a massive disruption of oil from the Persian Gulf, a coordinated international release of various reserves could initially replace the vast majority of the daily loss. In all but the worst-case scenarios—far more severe than anything seen before—the impact of a severe disruption would be greatly cushioned.

CARRYING COSTS

To complete the economic cost-benefit calculation of ending the U.S. military commitment to protect Persian Gulf oil, one must also tally the costs of keeping it. Much of those costs come from buying and operating the forces that support U.S. war plans. Since the end of the Cold War, Pentagon force requirements have called for the U.S. military to have the ability to deter, defeat, and deny two regional aggressors in different theaters at nearly the same time, one of which is typically planned as the Persian Gulf. The idea behind the two-war standard is to rule out the possibility that the United States could become so tied up fighting a war in one region that it could not confront an opportunistic aggressor in a second. 

If the United States stopped preparing for a war in the Gulf, it would have two broad options. The first would be to maintain its current approach, continuing to plan to prevail against two aggressors but elevating a new regional theater to replace the Gulf. The second would be to shift to a one-war requirement. Given that for now, no other region poses a sufficient threat to dislodge the Persian Gulf from the two-war construct, the United States should find itself able to adopt the latter option if it ended its commitment to protecting the flow of Gulf oil.

In terms of national security, a cutoff of Gulf oil no longer poses a serious threat to the United States.

Estimating the cost of meeting U.S. military requirements for the Persian Gulf is complicated because many of the forces that would be used for contingencies there can also be used elsewhere. Although experts have offered a range of figures, the best estimate—arrived at by considering the forces the United States deployed in the Gulf War and changes in regional powers’ militaries since then—is that if the United States moved to a one-war requirement, it would save roughly $75 billion a year, or about 15 percent of the U.S. defense budget. The savings would be achieved by moving toward a smaller force, down by two aircraft carrier strike groups, two army divisions, and a few hundred air force fighter jets and bombers.

But the costs of the commitment to the Persian Gulf go beyond mere force requirements; the United States has also fought expensive wars that were either directly or indirectly related to protecting U.S. oil interests in the region. The United States launched the Gulf War primarily to protect the flow of oil. And although the 2003 Iraq war wasn’t fought for oil, the presence of oil explains why policymakers thought it was so important to bring stability and democracy to the region and why they worried so much about a nuclear-armed Iraq. Ending the military commitment to the Gulf would thus yield still larger savings, in both dollars and American lives.

A BETTER WAY?

Finally, it’s worth asking what alternatives to relying on the military to protect Gulf oil are available. If a military commitment to the Persian Gulf were the only way to reduce the economic risks of an oil disruption, then there would be a stronger case for maintaining the current policy. In reality, however, the United States could pursue a wide range of nonmilitary options for increasing supply and reducing demand, which would enhance its ability to weather a major disruption.

On the supply side, the United States could improve its ability to replace blocked oil by increasing the size of the SPR. If, for example, the United States expanded the SPR by 50 percent, it would be able to offset its share of global demand during a major oil disruption for several more months. Assuming prices stayed in the range they have been in during the past decade, from $35 to $115 per barrel, this expansion would cost anywhere between $10 billion and $40 billion.

On the demand side, the key is to further reduce how much oil the U.S. economy consumes, thereby insulating it from price increases. The transportation sector accounts for roughly 70 percent of U.S. oil consumption, so this is the natural place to look for reductions. Dating back to George W. Bush’s presidency and continuing through Barack Obama’s, the U.S. government has repeatedly raised fuel-efficiency standards for cars and light trucks, but it could do more to reduce consumption. Increasing taxes on gasoline would encourage people to drive less and spur manufacturers to develop still more efficient vehicles. The government could also offer additional incentives for consumers to purchase vehicles powered by electricity or natural gas and subsidize the construction of the infrastructure for fueling them. And it could invest more in research and development in such areas as hydrogen-powered cars.

Some of these demand-side investments—especially those in research and development—offer uncertain returns, but taken together, they would do much to reduce the damage inflicted by a large disruption of Gulf oil supplies. If the United States spent between $100 billion and $200 billion on a mix of these efforts, it could cut its oil consumption in half by 2035. An investment at the upper end of this range—roughly $10 billion per year—although certainly a great deal of money, would represent just a fraction of the approximately $75 billion that Washington spends annually to defend the Gulf.

The United States could also pursue a variety of international efforts to further reduce the economic effects of oil disruptions. In addition to expanding the SPR, the country should work to convince its IEA partners and other major oil-consuming countries to make comparable increases in their reserves. Otherwise, in the event of a massive disruption in supply, the United States would be left trying to provide more than its fair share of the cushion, reducing the effectiveness of its own investments. Washington should also pressure Gulf states—above all, Saudi Arabia—to reduce their vulnerability to a closure of the Strait of Hormuz by increasing the capacity of their pipelines bypassing the strait. Although some such capacity already exists, these states can afford to add more.

THE BEGINNING OF THE END

An accounting of the costs and benefits of the U.S. military commitment to the Persian Gulf shows that the current policy is not drastically misguided: it is often appropriate to hedge against low-probability, high-cost events. Nevertheless, the case for ending that commitment is far stronger than the conventional wisdom assumes. In terms of national security, a cutoff of Gulf oil no longer poses a serious threat to the United States. And economically speaking, the country is well cushioned against all but the worst oil disruptions and has options for further reducing its vulnerability.

For now, therefore, the United States should maintain its military commitment to the Gulf but take steps to position itself to end that commitment eventually. Over the next couple of decades, the United States should invest in further reducing its vulnerability to oil shocks on both the supply and the demand side. Taken together, some combination of a larger SPR, improvements in fuel efficiency, and additional pipelines that bypass the Strait of Hormuz would yield substantial gains within a decade.

Once its greater resilience to oil disruptions is in place, the United States should be prepared to adjust its commitment to the Gulf in accordance with the threats in the region, particularly those posed by Iran. The nuclear deal raises the possibility that the Iranian threat will diminish down the road. With sanctions on its oil exports lifted, Iran has more reason not to act aggressively and to keep Gulf oil flowing, since it has more revenue to lose from a disruption. Moreover, because the country is now less likely to acquire a nuclear deterrent, the prospect that it would feel emboldened to menace the Strait of Hormuz has diminished. If Iran indeed becomes less threatening, and if U.S. investments in nonmilitary alternatives significantly reduce the U.S. economy’s vulnerability to an oil disruption, then Washington will be well positioned to end its military commitment to protect the flow of Gulf oil.

But if Iran grows more threatening, or if another significant danger in the region emerges, then the United States will face a harder choice. On the one hand, it could decide to end its military commitment despite the increased probability of oil disruptions, taking comfort in its improved resilience and directing the savings toward other priorities. On the other hand, it might decide that its best option is to maintain its military commitment to the Gulf, benefiting from a reduced sensitivity to large disruptions but nevertheless continuing to spend large sums to protect the flow of Gulf oil. Of course, the decision would also depend on the other factors behind the U.S. military commitment to the Gulf, nuclear proliferation chief among them.

What is striking, however, is that decision-makers have for decades refused to question the necessity of protecting Persian Gulf oil, even as the foundation for this commitment has weakened considerably. Failing to make further investments in resilience and failing to rethink that commitment would be serious mistakes, guaranteeing that the United States will forgo hundreds of billions of dollars in potential savings and run the risk of sending its forces into the region for an unnecessary fight.