Prosperity depends on cost of oil linked to war
Optimal Strategy of Major Powers

Sankarshan Acharya

January 30, 2006

1. True price of oil and falsehood of global economic growth

Global output is measured by prices of products and services.  Prices are expressed in units of artificially created fiat money like dollar, euro and yen.  Net output measured by price minus cost is roughly economic growth.  Labor cost depends on demand and supply for labor.  But the current global market price of oil reflects only the costs of extraction, refining, distribution and selling.  It does not include any natural cost of oil itself.  The tacit presumption is that this resource is free. 

But hereafter the natural cost of oil will include at least the cost of waging war to control oilfields.  The true global price of oil will then reflect the cost of war for oil as well as the cost associated with extraction, refilling, distribution and selling.   The war in Middle East is a part the natural cost of oil that must be reflected in the true price of oil. 

The number of people killed in war and other war related costs to be incurred to take control of oilfields will determine the true global price of oil.  Subtracting the true global price of oil from the value of output will lower the currently reported positive measures of economic growth.  The enhanced price of oil will make the true global output growth very negative.  The currently reported positive global economic growth is based on an artificially low price of oil that does not include the cost of war for extraction of oil.

2. How to avoid war for oil?

Global powers are now fighting to minimize the costs of oil used as input to their economies.  Rising costs of oil will slow down growth in jobs and economic output.  If a country cannot maintain economic growth or create jobs, it will face internal instability and riots.  Instability will choke its banking system and make it impossible to protect wealth stored as credits to people bonded with debt service.

Can war over oil be avoided?  The only option to war is pursuit for collectively optimal policy through a fair global market system protected by all nations.  The current global market system is not fair.  It cannot be fair because self-interested national agents bargain for unfair benefits using military might.  Schools have indoctrinated students around the world with a dogma for self-interested economic pursuits.  Such dogma is antithesis of collective rationality and universal fairness.  Universal fairness is not a philosophy of decreed equality as in communism.  It is rather equal opportunities based on talents and perseverance within a competitive and fair global market system.

3. Inevitability of war for oil

Global war for oil is thus inevitable, unless CFD’s advice is heeded by global powers: balance the curricula on self-interested economic models in economics departments and business schools with paradigms on collective rationality. 

Individual rationality presumes that economic agents pursue goals in their narrow self interests. The baser individual instinct generally induces humans to pursue self interests.  Schools and universities around the world hammer on the minds of their students that such baser instincts are optimal.  They remain totally oblivious of long-run welfare of humanity.   Those who bargain on behalf of global powers are indoctrinated with such dogma of individual self-interests.  They fail to think of collective rationality for their own nations, let alone a fair global market system.  The failure to think of collective welfare has made the humanity vulnerable to the threat of 50000 nuclear warheads.

4. Optimal strategies of various nations

The collective failure is the reason for the war in Iraq and the impending problems with respect to Iran. 

USA and EU are tacitly aligned together to face a potential threat from Russia and China.  India and Pakistan are wild cards.  No one wants to wage a global war over oil.  Every power wants to keep the ME oilfields under its own control.  China and Russia are prepared to do whatever it takes to keep USA from controlling Iran or any other ME oilfields. 

It is not in the interest of Russia or China to have a nuclear powered Iran.  This is consistent with the best interests of EU, USA, Japan, India and Pakistan.  Despite this common interest to keep Iran non-nuclear, there is a bigger game.  It is the rational fear of USA-EU about being checkmated by Russia-China-India-Pakistan in taking control of ME oilfields in a potential confrontation.  This rational fear optimally induces USA-EU to woo India and Pakistan. 

India and Pakistan are economically weak global players, but their involvement can make either rival (China-Russia or USA-EU) stronger.  Economically, USA and EU have lost the global game to China, Japan, South Korea and to some extent India.  Japan and China have been accumulating dollar reserves by eliminating a lot of competition from USA and Europe except in aircraft and defense craft.   EU and USA are selling unprecedented number of aircraft to Asia.  But this is not balancing the trade. 

EU and USA have to sell nuclear power plants and defense craft to balance their trades.  If they have to sell defense products to China (Russia does not need), then the game is over with China becoming the superpower.  EU and USA are therefore eager to sell these products to weaker players like India and Pakistan, provided the latter remain friendly.  This is why USA wants India and Pakistan to accede to its demands like canceling the Iran gas pipeline deal or withdrawing natural gas investments from Syria or subjecting nuclear installations to international scrutiny as a prelude to elimination of bomb making in South Asia. 

The American request to India to keep most of the nuclear reactors under international safeguards is not due to a fear for Indian nuclear bombs.  It is more to do with its desire to test which side India is on: Iran (i.e., China-Russia) or USA-EU. 

5. Optimal South Asian Strategy

What is optimal for India and Pakistan?  First, they should stop fighting.  Second, they should reform their own systems of governance and induce people to work harder without depending on dollars and euros printed in the West.  They should inspire people to not look for rupees falling as manna from Reserve Bank of India or Pakistan. 

No nation is waiting to invade India or Pakistan.  If India and Pakistan can get rid of the mentality of encroaching each other, there will be no need to buy defense equipment.  Even Western civilian nuclear power plants are expensive.  South Asians would rather live in dark than have the costly nuclear electricity they cannot afford.  They have the habit of making their governments borrow to provide such things freely.  But that thought process has to stop. It is optimal for them to wait until the reformed system of governance induces them to work harder to pay for such luxuries as nuclear powered electricity.

It is optimal for India to vote with the international proposals that will bar Iran from making nuclear bombs. 

6. Optimal American Strategy towards India

It seems optimal for USA to supply civilian nuclear power technology to India even if India does not comply with the demand to put most of its current nuclear reactors under IAEA safeguards.  USA will, of course, optimally like to extract all the concessions to keep India under its domain.  My belief is that India will optimally not cave into these demands.  This will not make a difference to USA because of its perception that India never was and never will be a threat to it. 

It seems optimal for USA to take out Pakistani bombs.  Pakistan will not like to do it at any cost unless the Army loses control to al Qaeda and MMA (religious parties).  Then USA-EU-Israel will optimally be compelled to take out Pakistani bombs.  India in such a case will find it optimal to not oppose that strategy.  It is, however, optimal for India to remain a friend of Pakistan and Pakistanis.  India will, therefore, optimally not encourage any nation to go on war against Pakistan.  This optimal Indian strategy will convince Pakistanis that Indians and Indian government are not hostile towards them and India has no ability to stop any Western strategy to take out Pakistani bombs. 

Pakistanis will be happier with a smaller Army without bombs.  They will also be happier with a friendly India than with a nuclear powered Army on a perpetually losing war with India.  This will also be optimal for the West to keep the Indian subcontinent in its domain of influence that it always wanted to have. 

The West keeping Indian subcontinent in its domain of influence may sound like loss of sovereignty for India.  But if the colonial system of government is repealed to induce people to work harder and make India prosperous there will be no loss of sovereignty at all even if the subcontinent remains close to West with the latter perceiving to keep the former under its domain. 

Without a reform of the system of governance, most productive Indians will be emigrating to the West or working from India for the West.  In such a scenario, India will truly have lost its independence.  This does not make the West as strong as it would be when India prospers with increasing purchase power. 

Our honorable finance minister has complained in the World Economic Forum yesterday that capital from India is emigrating and that the West is responsible for it.  It is true that human and monetary capital is emigrating from India.  But the West is not responsible for it.  The responsibility rests with the system of our governance, stupid!  We have to reform it to be independent, prosperous, and stable.  This is also in the best interest of humanity all over the world.