What about the price of oil? Will the price of oil go up or down with an invasion of Iraq? And will the price of oil move enough to cause a world economic crises?
A bet on lower oil prices
David Ignatius IHT Saturday, October 19, 2002
Iraq war fallout
PARIS It's really about oil. That's the first thing many suspicious Arabs say about U.S. policy in the Middle East - and the first thing some skeptical Americans also say. Let's assume for the moment that the cynics are right: When you peel away all the high-minded talk about Arab democracy, America's national interest lies in maintaining a reliable supply of oil at stable prices. So the first question about a war with Iraq is what it will do to the oil market?Looking through this narrow lens of economic self-interest, some analysts foresee disaster. They warn of rising oil prices and a possible shortage of crude. But the surprising prediction of several oil experts is that oil prices may actually crash next year, from the current level of about $29 to $15 per barrel or less. That's because Saudi Arabia may raise its production in an effort to force down prices and crush its higher-cost competitors, especially in Russia. These oil experts also dismiss an Arab conspiracy theory, that the Bush administration's real goal in toppling Saddam Hussein is to transfer the U.S. energy lifeline from a shaky Saudi Arabia to a robust, pro-Western regime in Baghdad. Nonsense, say the oil experts. They note that senior Bush administration officials are so busy worrying about weapons of mass destruction that they have paid little attention to oil politics in Iraq. Indeed, U.S. oil companies are said to fear they would be excluded from postwar contracts. Even the Iraqi opposition denies that U.S. companies would get special breaks after the liberation. The scenario for lower oil prices is simple. Prices have increased this year for two reasons: OPEC's ability to manage supply and uncertainty about what will happen in Iraq. Both factors would disappear after an Iraq war. Oil prices are likely to fall when the war begins - or if the Bush administration accomplishes its war aims through inspections or other means. Prices collapsed the day Operation Desert Storm began in 1991, and they declined by a total of nearly 50 percent over subsequent weeks. "We are all assuming that will happen again," said Walid Khadduri, editor in chief of the Cyprus-based newsletter Middle East Economic Survey. The only factors that would prevent a sharp price decline would be a prolonged war or an Iraqi attack with unconventional weapons against oil installations in Kuwait or Saudi Arabia, he said. If a long war led to a sustained increase in oil prices, that would probably worsen the current global economic slowdown. The likely downward pressure on oil prices next year was explained in a recent report by the Petroleum Finance Co. The Washington-based consulting firm notes that oil exports from Iraq itself would increase by at least a million barrels per day over the next few years. With a stable, pro-Western regime in Baghdad, production could climb even more, to more than 5 million barrels per day from the current 3-million-barrel level. Two other members of the Organization of Petroleum Exporting Countries, Nigeria and Algeria, are also increasing their production capacity. Finally, there's the Saudi factor. If prices begin to collapse, "the only response available to Saudi Arabia is to force a decline in non-OPEC supply by sustained lower prices," argues the Petroleum Finance report. Prices could stay below $15 a barrel for 18 to 24 months, they predict. Oil prices that low might fuel a new global economic boom, particularly in Asia. But such low prices could prove disastrous for Russia and its oil-driven economy. "Managing a portfolio of risks is what oil companies do," noted J. Robinson West, the chairman of Petroleum Finance, who sponsored a gathering of top industry CEOs this month in Venice. The consensus of that group, West said, was that the oil market will remain volatile, whether or not the United States invades Iraq. Experts are skeptical about reports that the Russians, French and Americans have already divvied up oil rights in post-Hussein Iraq. Russian companies have been jockeying to keep their Iraqi contracts, whatever happens in the future. But French oil executives have been complaining privately that they have received no assurances that contracts would be honored, and it's doubtful the Russians have either. Iraqi opposition leaders aren't making any promises. This week's edition of Middle East Economic Survey carried interviews with economic advisers to three leading opposition groups. All agreed that current contracts "have to be reviewed," and they cautioned that U.S. companies won't have any inside track. "No Iraqi government would last 24 hours if they allowed something like that, " said Salah Shaikhly, an official of the Iraqi National Accord. A war in Iraq could trigger a new economic boom or a deeper slump. But most of the downside risk is already built into oil prices. So if forced to wager where prices will be in a year, a sensible gambler would bet on a price decline - and a corresponding boost to the global economy. International Herald Tribune The Washington Post
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