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November 20, 2007

Comments

Jason A. Lefkowitz

OK, I read the article and I don't see the connection SM makes between the Iraqi insurgents and the narcos.

Assume the story is true and both are "pecuniary" in the sense that they motivate their people with money. They're still qualitatively different.

The narcos are responding to basic supply and demand, which, in a globalized capitalist economy, is like gravity; with enough expense and effort you can work around it somewhat (as I'm about to prove by getting on an airplane), but you can never repeal it.

The Iraqis are responding not to supply and demand, but to a temporary distortion of the market. Our presence there brings with it a torrent of money: oil princes who want to throw some money at killing Americans, rich bounties for kidnapped Westerners, and so forth. When we leave, that money will leave too, and with it most of the criminal opportunities identified in the article.

In other words, while demotivating narcos is hard, demotivating pecuniary insurgents should be easy: all we have to do is leave and the river of money that has been funding them will dry up.

No? What am I missing?

John Robb

Actually, there is a HUGE market for kidnapping locals, smuggling fuel, and all types of rackets (from real estate to extortion). Further, the money will continue to flow even when we are not there (to fight Shiites).

fester

Jason --- I think your read of the market situation in Iraq is interesting but a little bit off. You said the following:

Our presence there brings with it a torrent of money: oil princes who want to throw some money at killing Americans, rich bounties for kidnapped Westerners, and so forth. When we leave, that money will leave too, and with it most of the criminal opportunities identified in the article

My response:
What about oil princes who want to make sure there is no sudden new production surges of reasonably light and sweet crude available on the export market? I went into this scenario some more at my blog. [Link at bottom]

A reasonable stable, or at least reasonably peaceful Iraq that is sufficiently calm to allow for the Kirkuk-Ceyhan pipeline to reopen at near maximum sustained capacity throws roughly 1 mbd on the export market. That is slightly more than 1% of current global supply. Assuming short run price elasticity of demand ranges from .03 to .15, allows us to make a static estimate of prices dropping by 7% to 30% all else being equal, most likely between 7% to ~12%. Assuming 7% drop in crude prices and continued inability of OPEC to increase production past depletion replacement, means $250 million dollars per day less is flowing to the top 15 oil exporters, or roughly $90 billion dollars in the first year; all else being equal.

Sending $1 billion dollars a year into Iraq to subsidize instability and continued shut-in of Kirkuk can give a crude ROI of 8,000% if that chunk of change was spread between the top 15 exporters, or more likely an ROI of 1,000% to 2,000% if the cost is borne by only a few exporters. Not a bad deal at all, and an eminently sustainable business model.

http://cernigsnewshog.blogspot.com/2007/11/incentives-for-chaos-revisted.html

Tangurena

I'm currently reading Blood to Stones. I'm not sure just how much to believe of it, but it makes the claim that AQ had (still has?) acquired a large financial income from smuggling diamonds out of Liberia and neighborhood. Victor Bout appears in the picture as well.

http://www.amazon.com/Blood-Stones-Secret-Financial-Network/dp/0767915623

a517dogg

Tangurena - I believe what happened was that Al Qaeda put its assets into diamonds before the 9/11 attacks, because that way the US could not freeze its assets. It used the Lebanese ex-pat community in West Africa through Hezbollah links to buy lots of diamonds very fast, inflating prices, AQ actually lost quite a bit of money doing this. However they were only storing money in diamonds - I don't believe they acquired any income through trading diamonds.

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