How the Current War Affects Economics Term Paper

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War and Effects

The War of Terror is a campaign which was initiated by the U.S. And its Allies to end international terrorism after the deadly September 11 Attacks. The first attack was launched in Afghanistan in October 2001 to oust the Taliban and to find Osama Bin Laden. The U.S. was aided by its allies from various countries. This invasion happened because the U.S. wanted to punish the Taliban government for aiding Al-Qaeda. This was followed by the war in because the U.S. wrongly believed that Saddam Hussein had ties to Al-Qaeda. The U.S. government believed that overthrowing Saddam would lead to democracy in the Middle East and reduce terrorism.

The Iraq War has been the most problematic for the global economy especially the Iraq War. It has resulted in oil prices going up and creating a number of problems for the global economy. The U.S. Economy has been the most affected as it has spent a large amount of money on the war on terror. The Iraq War has proven to be very expensive for the U.S. economy. Economists estimate the total cost of the war to top around $2 trillion at its peak.

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The U.S. has spent around $379 billion dollars on the Iraq war as of September 29,2006. The United States spends around $6.4 Billion dollars per month in Iraq. $4.5 billion of this amount is spent on operating costs. The total cost of the war would cost the U.S. Economy around $1-2 trillion dollars. Congress has already approved spending of around $204.4 billion dollars and a fund of $45.3 billion dollars to cover operating costs. If the costs are broken down it comes to around $727 per person and it would make the Iraq war the most expensive military operation ever. The wars in Iraq and Afghanistan are estimated to double the federal deficit over the next ten years. Around 210,000 of the National Guard's 330,000 Soldiers have been called up for duty. Studies have shown that these reservists and National Guards suffer a loss of income when they go on duty. Their loss of income has a bad effect on the economy. The U.S. has to spend a large sum of money on recruiting for the war.

Congress has allocated around $357 billion for the war on terror. The money is utilized for Military operations, reconstruction, security at U.S. bases and foreign aid for Iraq and Afghanistan. The costs include $251bn for military operations in Iraq,$82bn for Afghanistan and $24bn for related foreign operations.

There are also some other additional costs to the government which include making disability payments to veterans, military equipment, medical treatment, transportation costs. Recruitment costs include huge bonuses for new enlistees as well as special bonuses and benefits. The government also provides benefits to troops who re-enlist for the war. Then there are also interest costs on the money which has been borrowed to finance the war. The U.S. already has a public debt of around $8.6 Trillion dollars and a deficit of around 500 billion dollars. There have been no taxes imposed to raise money for the war so its safe to assume that the funding for the war has been borrowed which in turn adds more burden to the U.S. deficit. Even if the money has been borrowed at a good interest rate and repaid within the next 5 years there would still be a deficit over the next 20 years.

Oil prices and Growth

Oil and gas prices have a lot to do with the growth of an economy. Price hikes can lead to a slump in the economy and can depress it for a long period of time. Oil prices play a big role in shaping up the economy. Oil prices used to be sold for fewer than 25 dollars per barrel in 2003. Prices went up to around 60 dollars per barrel in 2005 and topped 78.40 dollars on July 13, 2006. Factors such as the North Korean and Iran Nuclear Crisis, Drop in U.S. Oil Reserves, War in Iraq and conflict between Israel and Lebanon have contributed to the hike in oil prices. Natural disasters such as Hurricane Katrina were responsible for Oil Prices going up to an all time high in September 2005. Hurricane Katrina was responsible for shutting off oil supply from off shore rigs in the gulf coast; which ended up affecting 10% of the nation's oil supply. However it was not as bad as the effect the Iraq war had on the economy. Oil prices were affected by the instability in the Middle East which is the largest oil producer in the world. This is not the first time that an oil crisis has affected economic activity negatively. International conflicts have played a huge role in affecting oil supplies. Oil prices have gone up historically during the First Gulf war, Desert Strike, Libyan operations, and the Iraq-Kuwait border conflict.

The American attack on Iraq has led to an increase of oil prices all over the world. The attack led to a shortage of oil supplies from Iraq which has one of the largest oil supplies in the world. Americans are the biggest consumers of oil as they use around 25% of the world's total oil production. The current Iraq war is in sharp contrast to the first gulf war where Iraq invaded Kuwait. The first Gulf war set off a recession which was caused by an increase in oil prices. Prices went up from $15 a barrel to $40 a barrel in October 1990. History repeated itself during the 2003 invasion as oil prices increased further and affected the outlook of the economy.

Increasing the number of Oil supplies would help to decrease the price of oil. A barrel of crude went from $30 a barrel in 2004 to around $60. The U.S. relies on importing oil to fulfill its needs. Most of the oil increases have followed post-war recessions. The first oil recession occurred in 1973-1975 during the oil embargo, and then it was followed by the double dip recession in 1980-1982, the Iran-Iraq War, The gulf war recession and the 2001 recession. A spike in oil prices leads to a loss of consumer confidence which affects various sectors.

Oil has played an important role in shaping up the global economy. It has triggered inflation to record highs and has prompted the Central banks of Europe and America to lift the interest rates. The U.S. economy is affected by Iraq and oil because all global oil contracts are in U.S. Dollars. The world has to pay more for oil whenever the value of the dollar goes up while the U.S. is not affected by it at all. Iraq had started its own oil exports under the UN oil-for-food program. Iraq had asked to have its transactions conducted in Euros. This benefited them as them got more for their exports when the Euro appreciated its value. A similar move by other countries would hurt the U.S. By weakening its currency and economy. The U.S. depends on foreigners as they own most of their treasury bonds. Oil price increases have resulted in inflation and led to higher interest rates. There is always pressure on the central banks of European and American countries to cut the interest rate to reduce inflation.

The Iraq War has severely disrupted oil supplies in the world. 60% of the oil imports come from the Gulf Region. There has been a lot of turbulence in the Middle East which occurred after the September 11 Attacks. These were prompted by the U.S. Invasion of Iraq and various other problems in the Middle East. The U.S. is very dependent on oil supplies from the Middle East. They need to have a steady supply of oil in order to maintain stability in the country. It needs to stop depending on The Middle East which has oil reserves of around 450 Billion barrels.

Iraq's total oil output was around 3 million barrels per day before the Iraq War. The U.S. administration predicted that the oil output would return to its normal level by the end of 2003. The total output is now around 1 million barrels per day as of January 2006. The low output can be contributed to the attacks launched on Iraq's oil facilities by the Iraqi resistance. The loss of oil output has not been made up other oil producing countries which have led to the price of oil going up. This is reminiscent of the time when oil prices went up to $95/barrel during the Iran-Iraq War. The world also saw a decline of oil from 63 million barrels a day in 1979 to around 55 million barrels a day in 1983.

US Economy

The U.S. Economy is dependent on cheap oil prices as it was their way of life. Oil does a lot of things such as providing fuel for motorists, generating electricity at thermal plants, keeping houses and buildings warm in the… [END OF PREVIEW] . . . READ MORE

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