@TBPInvictus here.

Things have not been going well of late for the ideologues who also wax economic regarding inflation, interest rates, austerity, etc. They’ve been wrong at every turn. Luskin, Ferguson, Bowyer, Laffer, Kudlow, the WSJ editorialists, and so on. Been a bad five or so years.

As Barry has repeatedly pointed out, it is not good to mix your politics with your investing. Money loser every time. I continue to be amazed that folks who can be so devastatingly wrong, for so long, on such a broad array of topics, can continue to hold sway. Perhaps some research can be done on that front.

Interestingly, these same folks were stunningly wrong about a decade ago about when they banged the drum for war against Iraq. Overthrowing Saddam, of course, was a high priority for the neocons, and they needed to drum up broad support to get folks on board. What better lever to pull than to claim that oil prices would drop through the floor once Saddam was out of the picture and Iraqi oil flowed freely?

I was blogging in 2006 at my good friend Don’s site, blah3.com. Very regrettably, he (or his host) had a major meltdown and virtually all of the content was lost (which is a shame, because I had done some really good work there that I’d really like to revisit). I have reviewed some of it from time to time at archive.org, but the site wasn’t crawled enough for me to recover most of my stuff. This piece, however, was picked up at another site and seems relevant to the implosion of a certain way of thinking.

Here was the conservative line on what would happen to oil prices after we ousted Saddam (sans the links I had in the original, all emphasis mine):

Rand Corp (by recollection):

Under a free market [ed. note: The author's article was all about our liberation of Iraq], oil prices would probably fall to between $8 and $12 per barrel over the next 10 years — down dramatically from today’s price of about $25 per barrel.

A major decrease in petroleum prices would boost U.S. and global economic activity. Home heating oil prices would drop by at least a third. Gasoline prices would drop to less than $1 a gallon. As a result, people and business in the United States and throughout the world would spend far less for fuel. From an economic perspective, the United States and many nations around the world would clearly win.

Fortune:

No one knows for sure which way things will go. But if you have to make a bet, the most likely scenario is that a year from now, with a new regime in Baghdad and long-dormant Iraqi wells finally pumping out crude, oil prices will be back in the mid-20s. “All expectations are that prices will come down,” says Kuwait Petroleum’s Sultan. “The only gray area is when.” Deutsche Bank analyst Adam Sieminski is bolder: If the war is short and Saddam doesn’t set fire to his fields, crude will hit $22 a barrel by this summer.

Heritage Foundation:

An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win–win game: Iraq will emerge with a more viable oil industry, while the world will benefit from a more stable and abundant oil supply.

National Review:

“…markets clearly expect lower prices. On the eve of hostilities, oil was selling for about $37 per barrel. At this price, Americans would be paying $270 billion per year for oil. But once it became clear that Iraq’s liberation was at hand, the price quickly dropped to about $28 per barrel, cutting our annual oil bill by $70 billion. With full Iraqi production, the price might drop to $20 per barrel or less, giving us the equivalent of an annual tax cut of about $120 billion per year. And this is a tax cut the entire world benefits from.”

WSJ:

Of course, the largest benefit–a more stable Mideast–is huge but unquantifiable. A second plus, lower oil prices, is somewhat more measurable. The premium on 11.5 million barrels imported every day by the U.S. is a transfer from us to producing countries. Postwar, with Iraqi production back in the pipeline and calmer markets, oil prices will fall even further. If they drop to an average in the low $20s, the U.S. economy will get a boost of $55 billion to $60 billion a year.

The Journal went for the Daily Double and vehemently argued that the cost associated with “containment” of Saddam would be multiples of the cost of simply toppling him:

But none of this answers the real question: Is the cost reasonable given the goal? To answer that you also have to consider the cost of the main alternative to war–continuing containment of Saddam. Such an examination was done recently by economists at the University of Chicago’s business school. Steven Davis, Kevin Murphy and Robert Topel added up the military expense of containment. The direct costs of troops and equipment come to about $13 billion a year, but they haven’t got Saddam to bend to U.N. mandates. The authors assume, therefore, that efforts to contain Saddam might have to be increased by 50%, raising the cost closer to $19 billion a year.

The economists estimate that containment would have to be in place for 33 years–the period that a Saddam-like regime could endure (optimistic considering the lifetimes of the Soviet Union, Eastern Europe, North Korea and Cuba). In sum, when the expected value of containment is discounted to the present, the cost estimate comes to $380 billion. And don’t forget more for homeland security, bringing the total cost to $630 billion. Simply put, containment costs a lot more than war–even if one doubles Mr. Bush’s estimate to $120 billion.

Moral of the story: Keep your politics out of your investing.

Category: Commodities, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Wrong Like It’s Their Job”

  1. chartist says:

    I was one of the first day traders the IRS had ever seen. I didn’t start losing real money till I followed the so-called market gurus.

  2. TrainStation says:

    “Overthrowing Saddam, of course, was a high priority for the neocons, and they needed to drum up broad support to get folks on board. What better lever to pull than to claim that oil prices would drop…”

    The neocons are clueless. Most of them wouldn’t be able to pinpoint Iraq on a map of the Middle East.

  3. Chad says:

    The people at Rand Corp should know better, as they are probably trained intel analysts. Anything with the scale and unpredictability of a full scale invasion makes forecasting short-term impacts on something as large and complex as a world economy difficult. Attempting to predict something like this long-term is analyst folly and a well trained intel analyst would understand.

    It’s even difficult to use hindsight for complex issues on this scale. A good example is the Arab Spring. Some people (probably a lot of the same people referenced above) credit the invasion of Iraq with the resulting “democracies” forming throughout the middle east. While, it may have had some influence, it’s impossible to tell if it was significant with so many other factors (internet knowledge, social networks, aging dictators, etc.).

    The moral should be to keep your politics out of everything. Beliefs are the bane of our current culture.

  4. strawman2 says:

    So experts making predictions about the price of oil based on historical evidence and simple supply & demand principles was purely politically motivated? Seems to me that, although proved to be wrong, the predictions were not wild or out of the realm of possibility. Predictions about Obamacare bringing Healthcare costs down however… Now there’s an article you could have written that is more relevant to our current situation, but it would paint the other political party in a bad light. Moral of my comment: keep politics out of your investing commentary.

    • Domby says:

      The were out of the realm of possibility & Health care costs are down dramatically, were you paying attention; and the relationship between the two is non existent. Yours is a purely partisan comment with no relationship to the story.

      • TrainStation says:

        “Health care costs are down dramatically” ?????? What????

        Every small business owner I know has been going through 20% annual medical premium increases.

        Maybe what you are referring to are decreases in the number of doctor office visits. Most doctors I know (socially and related to) are concern with decreases in patient visits. Many businesses, to keep healthcare costs down, have opted for higher and sometimes much higher co-pays and deductibles. The higher co-pays are causing patients to reduce their number of doctor visits.

      • Domby says:

        I was talking about overall costs which have been down surprisingly. It has been in the news a lot; that’s why I said if you had been paying attention. I will not comment further on this. Look it up if you wish.

      • TrainStation says:

        Overall costs are not down. It is the rate of growth that is down. Overall costs and the rate of growth are two different things.

        http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/22/heres-why-health-care-costs-are-slowing/

        “It’s growing slower now…” -The Washington Post- 4-23-2013

        “In 2009 and 2010, spending also increased by 3.9 annually. These rates are much slower than in the past.” -Robert Samuelson- The Washington Post 1-8-2013-

        http://articles.washingtonpost.com/2013-01-08/opinions/36207353_1_health-costs-private-health-insurance-providers

    • Frilton Miedman says:

      “Experts” promoting unrealistic oil prices to build public support for a fraudulent war was politically motivated.

      I’ll refer to Eisenhower’s Military-Industrial Complex, and the lucrative role Cheney’s Halliburton had in Iraq, Cheney made one hell of a “lucky” bet on Halliburton stock in 2002.

  5. martin66 says:

    “Perhaps some research can be done on that front.” It has.

    See http://www.amazon.com/dp/159420411X The Signal and The Noise who liberally cites research into this very topic by Philip Tetlock http://press.princeton.edu/titles/7959.html.

    Bottom line, expert talking heads are no better, and often worse, at predicting outcomes than random choice.

  6. Malachi says:

    The Bush White House estimated war in Iraq would cost 50 to 60 billion.

    US News March, 2013 reports, “As of 2013, the Cost of War Project estimates the war has cost $1.7 trillion—nearly 30 times the pre-war estimate. That cost doesn’t factor in future costs of veterans’ care, which push the total to more than $2.1 trillion. ”

    Off just a little bit.

  7. Pantmaker says:

    Libertarian here. Obama’s Iraq will be his policy towards TBTF insolvent banks and the equity erectile dysfuction device known as the Zirp-o-rama. Everyone is walking around with a glorious new 12 inch portfolio penis, backslapping and high fiving each other in congratulatory celebration. The cold water of mean reversion will show up to this adolescent circle-jerk and put things back into perspective.

  8. Moss says:

    They have an audience, so it is their job.

  9. ZevCapital says:

    The failure during the entire build up to the invasion of Iraq was with the press. They assumed they were the smart ones and that the politicians were the fools, so they never bother to ask the right questions. A more mature press corps might have prevented the Administration from going down the road of deception in the first place. But the press made themselves too easy to fool.

  10. Malachi says:

    Well Strawman2 I would be surprised if the price projections of Obamacare turn out to be accurate. And while that would be worthwhile focusing on it is not the focus of this post – the focus of this post is that the neocons were wrong about the cost of the war and the impact on the price of oil / economy.

    I guess my takeaway would be the more strongly partisan someone (including myself) is the more likely they are to be fooling themselves in critical ways.

  11. Concerned Neighbour says:

    I agree. Paradoxically, the central bank pump-a-thon many of these entertainers (because that’s what most of them are) rail against has benefited them and their wealthy colleagues the most, while consigning grandma and grandpa to eating cat food. I am a liberal that thinks the perpetual and ever-increasing QE policy is terrible policy, but I must also recognize that it means that our “free-markets” will never (be allowed to) fall ever again.

  12. Joe Friday says:

    Invictus,

    They’ve been wrong at every turn. Luskin, Ferguson, Bowyer, Laffer, Kudlow, the WSJ editorialists, and so on. Been a bad five or so years.

    Five years ?

    These clowns and their fellow travelers have a LONG track record of being disastrously wrong. In 1993, after the Clinton administration got their tax and budget legislation through the Congress (which consisted primarily of increased taxation of the Rich & Corporate), KUDLOW famously told Lou Rukeyser that it would be a job killer and lead to a recession, LAFFER predicted Doom! Doom! Doom!, and STEPHEN MOORE (then at Cato, now with the WSJ), predicted that, “Clinton’s plan will torpedo the economy“.

    Of course, exactly the opposite rather dramatically occurred.

    • Frilton Miedman says:

      I was going to make the same comment, going back to 1980, the point where consumer debt began to placate lack of wage growth….all the while neo-cons ignored consumer debt growth and credited supply-side policies that only served to exacerbate the problem until household debt had reached 130% of disposable income in 2007.

      Then, the obvious happened, now they want us to believe the problem is anything but wages, fighting tooth and nail for the benefit of their corporate masters.

  13. Irwin Fletcher says:

    You are right on the money. They were all wrong.
    Interestingly, the U.S. is now producing more oil than ever, yet the prices
    are still not seriously declining. Why?

  14. Chad says:

    @Strawman2

    “,,,simple supply & demand principles”

    That’s where the stupid is. It’s not SIMPLE supply in demand.