BURDEN SHARING Allied Protection of Ships in the Persian Gulf in 1987 and 1988 142164 United States General Accounting Office GAO Washington, D.C. 20648 National Security and International Affairs Division B-240294 September 6,199O The Honorable Pat Schroeder Chairwoman, Subcommittee on Military Installations and Facilities Committee on Armed Services House of Representatives The Honorable Andy Ireland House of Representatives This report is the unclassified version of our classified report. It summa- rizes and updates the information provided to your staffs during our April 5, 1990, briefing on the major activities of the allies and Persian Gulf states to sustain open navigation in the Persian Gulf between March 1987 and August 1988. Specifically, our objectives were to (1) identify the countries involved in sustaining open navigation and the role each played, (2) analyze the value of the contributions provided by those countries, and (3) assess the potential economic impact of the dis- ruption of Gulf oil imports on Gulf states and industrialized countries. In late 1986, Iran began attacking ships in the Persian Gulf, In the spring of 1987, the President announced that the United States would reflag and escort Kuwaiti ships. In May 1987, he extended U.S. protec- tion to neutral ships on a case-by-case basis, under an operation called Earnest Will. The United States also called upon its allies to protect shipping in the Gulf. Section 1 of this report provides a historic perspec- tive of non-Gulf countries’ presence in the region. Belgium, France, Italy, the Netherlands, the United Kingdom, and the Results in Brief United States escorted and monitored their flagged ships and helped keep the Persian Gulf shipping lanes clear of mines. Only three of these countries provided GAO estimates of the incremental costs they incurred in these naval operations. These cost estimates ranged from $100 million to $240 million, E3ecausesome of the participating countries did not report cost estimates for their naval operations in the Gulf, we assigned a daily cost-based on U.S. operating costs- to each type of ship supporting operation Ear- nest Will and derived a relative value of the contribution of each of the non-Gulf countries. Based on our analysis of the types and duration of naval assets provided, we believe the United States accounted for about Page 1 GAO/NSIAD-90-282BR The Persian Gulf B-240294 40 percent of the assets, followed by France (34 percent), the United Kingdom (10 percent), Italy (7 percent), and the joint Belgium/Nether- lands operation (9 percent). Three other non-Gulf countries provided indirect assistance. West Germany interpreted its constitution as prohib- iting it from providing a naval presence in the Gulf. Alternatively, it fulfilled a U.S. commitment to NATO to provide naval forces in the Medi- terranean, thereby freeing U.S. ships for the Gulf operation. In calcu- lating its contribution, Japan claimed credit for $500 million in loans to Oman and Jordan, Japan also paid $9 million for a precision navigation system installed in the Gulf. Luxembourg, which has no Navy, provided $400,000 for the upkeep of other countries’ forces during the operation. The Gulf states provided vital access to their ports, bases, and facilities as well as other assistance, including fuel for U.S. ships and aircraft. Section 2 provides details on countries’ contributions to keeping the Per- sian Gulf open to navigation, and section 3 provides a burden sharing analysis of these contributions. One objective of operation Earnest Will was to maintain the free flow of oil from the Persian Gulf area. During the conflict, oil disruptions did not occur, and Persian Gulf oil production actually increased slightly. Section 4 provides an overview of oil prices and production during the conflict. The Department of Energy disruption impact simulator pro- jected that if a disruption had occurred, crude oil prices would have more than doubled. Moreover, the oil market would have distributed price changes to both imported and domestically produced oil, thereby affecting all industrialized countries dependent upon oil or its products. The allied countries involved in maintaining open navigation in the Gulf and 12 other countries belong to the International Energy Agency (IEA). During an oil disruption, these countries agree to share their oil reserves. This agreement is designed to spread the short-term impact of an oil disruption to all member oil-consuming countries. In addition, countries that are less dependent on Persian Gulf imports, like the United States, will lose some of their imports from other market sources, such as Mexico, as other oil-dependent countries compete for available resources, Section 5 provides a detailed analysis of the economic impli- cations of an oil disruption on oil prices and consuming countries. Page 2 GAO/NSJAD-QO-282BR The Persian Gulf B-240294 Our objectives, scope, and methodology are in appendix I. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Secretaries of Defense and State and to other interested congressional committees. Major contributors to this briefing report are listed in appendix II. If you have any questions, you may reach me at (202) 276-4128. Joseph E. Kelley Director, Security and International Relations Issues Page 3 GAO/NSIAD-80-282BR The Persian Gulf Contents Letter 1 Section 1 6 Allied Commitment to Summary 6 Several Countries Have Maintained a Lengthy Presence in 6 the Gulf Region the Region U.S. Objective Is to Ensure Regional Security and 6 Maintain Oil Flow U.S. Forces Vary as Threat Increases and Subsides 6 Operation Earnest Will Begins 7 Section 2 8 Overview of Country Summary 8 Nine Non-Gulf Countries Provided Support 8 Involvement Six Gulf States Supported the Effort 9 Section 3 10 Assessment of Burden Summary 10 Cost of Contributions Is Difficult to Measure 10 Sharing Not All Countries Provided Cost Data 10 Non-Gulf Countries Assessed in Relation to Naval Assets 12 Provided Section 4 14 Overview of Oil Prices Summary 14 Non-Gulf Countries’ Presence Demonstrated the 14 and Production During Importance of Gulf Oil the Conflict Operation Facilitated the Continued Free Flow of Oil 14 Little Increase in Worldwide Oil Prices Resulted 16 Section 5 17 Analysis of Potential Summary 17 IEA Members Did Not Have to Share Reserves 17 Impact of a Persian Potential Impact of a Disruption on Oil-Dependent 18 Gulf Oil Disruption Economies Impact of a One-Quarter Oil Disruption on the United 21 States Potential Impact of a Disruption on Gulf Oil-Producing 22 Nations Page 4 GAO/NSIAD-BO-2S2BR The Persian Gulf Content8 Appendixes Appendix I: Objectives, Scope, and Methodology 24 Appendix II: Major Contributors to This Report 25 Tables Table 3.1: U.S. Incremental Costs of Persian Gulf 11 Operations Table 3.2: Relative Value of the Contributions of the Six 13 Countries With Ships Operating in the Persian Gulf (Between October 1987 and August 1988) Table 6.1: 1987 OECD Oil Statistics 18 Table 5.2: Estimated Losses From a Total Disruption in 20 Persian Gulf Oil Supplies Table 6.3: Estimated Losses Due to a Disruption in the 21 Strait of Hormuz Table 6.4: The Potential Effect of a Disruption of 22 Petroleum Shipments Through the Strait of Hormuz Table 5.5: Gulf States Oil Statistics (1987) 23 Figures Figure 4.1: Oil Production 1986-89 (First Quarter 1987 16 Through Third Quarter 1988 Covers Operation Earnest Will) Figure 4.2: Quarterly Oil Prices (March 1987 Through 16 September 1988) Abbreviations AWACS Airborne Warning and Control System Gulf Cooperation Council GDP Gross Domestic Product GNP Gross National Product IEA International Energy Agency IEP International Energy Program mbd millions of barrels a day OECD Organization for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries Page 6 GAO/NSIAD-90.282BR The Persian Gulf * Section 1 Allied Commitment to the Gulf Region . Several Countries Have Maintained a Lengthy Presence in the Region Summary . U.S. Objective Is to Ensure Regional Security and Maintain Oil Flow l U.S. Forces Vary as Threat Increases and Subsides l Operation Earnest Will Begins The United States has maintained a naval presence in the Persian Gulf Several Countries region’ since 1949. France and the United Kingdom have also main- Have Maintained a tained a lengthy naval presence in the Gulf. The United Kingdom, for Lengthy Presencein example, has maintained ships in the region since 1980. The rationale the Region for this presence is the importance of Gulf oil to industrialized nations. The economies of the United States and its European and Pacific allies U.S. Objective Is to are dependent on the uninterrupted flow of Persian Gulf oil. In the short Ensure Regional term, a disruption in the flow of oil from the Gulf may not pose an Security and Maintain immediate problem because oil may be available from other producers. However, a mid- or long-term disruption would, no doubt, result in price Oil Flow increases, thereby threatening the economies of all net oil-importing nations. The greatest threat to allied interests in the area is the spillover of a regional conflict that could interrupt the flow of oil. Historically, rela- tions in the Gulf region have been volatile. U.S. strategy has been to demonstrate a commitment to the region that is firm, credible, and durable in the face of conflicts that could affect established U.S. com- mitments. The United States is therefore committed to ensuring stability and security with the friendly regional states. In the last 41 years of U.S.