By Marc Davis, Managing Editor
February, 2003

If the U.S. goes to war with Iraq, it may pay dearly in the shape of a stalled economic recovery. That's because high oil prices are here to stay and may yet reach $40 a barrel and beyond. That's the word from the Saudi-dominated Organization of Petroleum Exporting Countries (OPEC) cartel at the recent the World Economic Forum annual meeting in Switzerland. Saudi Arabia says there is no lack of oil in world markets despite fears of war in Iraq. And that means that OPEC has no intention of raising production quotas for the foreseeable future.

"There is no shortage in the market and there should be no reason for prices where they are today," says Saudi Oil minister Ali al-Naimi. "We have no control over the war premium on oil prices."

OPEC's stated mandate of maintaining oil prices in a $22-$28 a barrel target range may ring pretty hollow these days with oil trading as high as $35 a barrel. But OPEC argues that its ideal price band does not (and cannot) take into consideration the influence of U.S. foreign policy on oil.

Already, OPEC has raised production quotas by seven percent or 1.5 million barrels a day in recent weeks. OPEC argues that this was to offset the supply shortfall resulting from the grinding general strike in Venezuela. But OPEC leaders say there is nothing more that they can do to rein in prices. Any further output could lead to an oil glut if a war with Iraq is short-lived and Iraqi oil resumes production, they claim.

However, in the event of a war, OPEC says it will ensure sufficient supplies should an attack on Iraq and continued troubles in Venezuela continue to hamper world supplies. But Naimi says it would take about three months to get the infrastructure in place to make up the shortfall in Iraqi oil if Saddam Hussein acts on fears that he will destroy his own oil wells and refineries. Meanwhile, prices could spiral higher - even way higher than $40 a barrel.

This worst-case scenario could have global implications. The world economy will slow significantly later this year if oil prices remain above $30 for a long period. And this would come at a particularly bad time, after two years of economic stagnation in the Western world. Conversely, the prospect of the U.S. gaining access to Iraqi oil could prove to be a major stimulus to world economic growth. Since the U.S. military would control Iraq's oil for some time, U.S. companies could be in line for a lucrative slice of that business. Also, the modernization of the decrepit Iraqi oil industry would be a huge opportunity to dramatically increase Iraq's oil reserves. Experts suggest that Iraq may even have as much untapped oil as Saudi Arabia, OPEC's most prolific producer. Thus, in the long term, by assuring a larger and more stable oil supply outside of Saudi Arabia's influence, the U.S. may precipitate much lower oil prices. And a pro-U.S. Iraqi government could operate outside of the control of OPEC, thereby negating much of the cartel's power to control oil prices at will.

The opportunity to neuter OPEC and avail the world's major industrialized nations of cheaper oil in the long-run is certainly not lost on President Bush (a former oil man, himself). The paradox, however, is that, in the near-term, he may shoot himself in the foot by going to war when the U.S. economy is too fragile to withstand months on end of high oil prices. And that could cost him the next election. Remember what happened to his father. George Bush Senior lost his bid for a second term of office when he ignored a struggling U.S. economy and instead focused on his own war with Saddam Hussein.

 

Oil and gas news