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Iraq Withdrawl Won't Bring $9/Gal Gasoline

By Dean Baker, Center for Economic and Policy Research


Nevada Representative Jon Porter just got back from a quick trip to Iraq and told the public that everyone there said that if the U.S. withdrew, we would have $9 a gallon gas. It sounds as though Mr. Porter did not speak to anyone who knows anything about world oil markets while in Iraq. This would not be surprising, since much of Iraq's professional class has fled the violence, so there are probably not many people who do know much about world oil markets still in Iraq.

In fact, Iraq is currently exporting close to 2 million barrels of oil a day. This is less than its pre-war rate, primarily because insurgents continually attack the pipelines. Even if post-withdrawal violence led to a complete cutoff of Iraqi production, this would only reduce world supply by a bit more than 2 percent. Demand for oil is relatively unresponsive to changes in price in the short-term, but it does fall. An demand elasticity of 10 percent (the fall in demand is equal to 10 percent of the change in price) would be a conservative estimate of the short-run elasticity. This means that if oil supply fell by 2 percent, a 20 percent increase in price should be sufficient to reduce demand enough to bring supply and demand back into balance.

A 20 percent increase in prices from current levels would push the price of a gallon of gas close to $3.40. This would be unpleasant, but it is still quite far from $9.00 a gallon.