War in Iraq May Torpedo America's Wealth, Says New Stanford Business School Study

[James_F]

http://www.gsb.stanford.edu/news/research/econ_iraqwar.shtml

The study, coauthored by Justin Wolfers and Eric Zitzewitz of the Stanford Graduate School of Business, and Andrew Leigh who is a doctoral student at the John F. Kennedy School of Government at Harvard, examines the impact of the looming war on oil prices, the economy, and the stock market. To gauge the financial market's point of view on these impacts, the trio used a novel financial instrument — the Saddam Security — an Ireland-based online exchange at www.tradesports.com that pays $10 per share if Saddam is ousted by June 30, 2003. The price of the security indicates the market's estimate of the probability of war at any given time. Using trading prices, the authors examine how the market responds to daily increases and decreases in the risk of war.

Being an economist, this study was very interesting reading. I was happy to see how balanced these researchers where. I did not see any self serving comments or numbers by either of the researchers.

One interesting note is, ""Those hardest hit by the war include Turkey, Israel, and several European nations".

I encourage all those who are interesting in economics or finance to download and read this report.

The 44 page study is available here (http://faculty-gsb.stanford.edu/zitzewitz/Research/iraq.pdf).

[Mike123abc]

I read the first few pages, but I think the markets are already proving them wrong. Oil has already dropped to $26/barrel and OPEC is now conserned that it will keep dropping since US now controls the oil fields in the South. The stock market has also rallied 15% instead of dropping 15% as they predicted.

It just shows it is hard to predict the economic effect of the war. It more depends on popular opinion than mathmatical formulas.

[James_F]

You didn't read the article all the way. Here is what they said about the oil.

If no war: Saddam disarms or is replace by internal coup, $24 in 2003, $18 in 2004.

Benign Case: Invasion is quick and no serious damage to oilfields, $26 in 2003, $22 in 2004.

Intermediate Case: Relatively quick war, but there is sabotage and Iraqi oil is held off the market for 6 months, $37 in 2003, $40 in 2004.

Worse Case: Iraq attacks Israel with Chemical Weapons and Israel responds and all Arab world is tense. Oil fields are set on fire and other fields in other countries are sabotaged, $60 in 2003, $40 in 2004.


Looks like they got that one right on.

[firephoto]

I bet the Saudi's are pumping oil like crazy right now before Iraq starts shipping more than they have been.

[James_F]

The problem is that all the refining operations in the US are at capacity. We need more refining to support the additional oil that is comming our way or we will still have a shortage.

[lastmanstanding]

James,

I have not read the article in full detail, but I find their approach as entirely too Keynesian for my taste. Some of the assumptions they use for their calculations run well into hyperbole. I have to conclude that their bias is against the conflict, and they have fashioned an economic argument to match.

As an illustration, the authors may well have added:
Beyond Worst Case: Saddam nukes Israel, Irsael lays waste to all Arab states. Russia and China join in. Oil hits $150 a barrel in 2003, and everybody dies in 2004. Market recovers but nobody is around to enjoy it.

Over the top, forgive me, but I hope you see my point.

Personally, I believe we are going to see a period of really inexpensive oil in the next 18 months, along with continued high liquidity. Barring a tax increase, we can expect a significant surge of growth through the economy. . . someday. Soon, I hope.

Academics make really poor money managers. My rule is not to listen to them unless they are substantially wealthy by their own hand. I will research these authors further.

Lastly, with enough people making enough predictions long enough, some of them are going to be right, eventually.

Thank you for bringing this article to light.

[James_F]

Oh I agree with your assessment.

I really just felt the way they came up with their assessments was very interesting.

BTW, good call on the Keynesian politics. Both schools have many professors who subscribe to that.

[BobMurdoch]

As an Econmonics major in College, I remember the first words my professor uttered during my first Introduction to Macroeconomics class.

"Every economist's graph you've ever seen is bull-hit."

Quite the attention grabber actually.

He went on to point out that anyone can come up with a theory and then frame the information in such a way to support their "hypothesis".

The dirty little secret is that there all always assumptions Economists have to make to make their numbers work. If ANY of these assumptions fall apart, so does the main thrust of their argument.

[James_F]

Very true, but I'm sure you found it as interesting reading as I did. I love making assumptions like this... That is why I became an economics major. :D Of course I don't really do this anymore in my "new" job, but Planning is Planning.