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 dollars.

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 time.

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.