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Stable Oil Prices Likely to Become a War Casualty, Experts Say
Published on Wednesday, October 2, 2002 by the New York Times
Stable Oil Prices Likely to Become a War Casualty, Experts Say
by Neela Banerjee

Amid all the unknowns about the American campaign against Saddam Hussein, the one certainty is its potential to shake up oil markets.

Already, oil prices have risen substantially over the last few weeks, because of traders' and consumers' concern that a war in the Persian Gulf could disrupt supplies and set off price spikes. Prices rose on similar fears before the Persian Gulf war a decade ago, but fell back once the first shots were fired, replacing uncertainty with action.

Longer term, the impact depends on the outcome of any military campaign, and the fallout.

Some analysts warn that if Mr. Hussein were ousted, Iraq could dissolve into civil war. If so, its oil exports 1.1 million barrels a day under the United Nations' oil-for-food program could be drained from the world market.

Bush administration strategists and Western oil companies have a rosier view. Iraq's reserves are second only to Saudi Arabia's, they note. Revived by the lifting of sanctions and a flow of foreign investment, Iraq's production could rival Saudi Arabia's in five to seven years.

"Oil will be the engine of Iraq's reconstruction," said Gregg Sullivan, a spokesman for the State Department, which has set up working groups to develop plans for a post-Hussein Iraq. "No one is talking about a Marshall Plan for Iraq because oil will take care of that."

A market awash in Iraqi oil would mean lower prices an economic boon to the United States, the world's top consumer of oil. It could also rattle the cohesion of the Organization of the Petroleum Exporting Countries, whose control of oil prices the Bush administration seeks to loosen, those analysts say.

But success for the United States could roil the economies of oil-producing countries from Indonesia to Mexico to the Middle East.

The deepest concerns are for Saudi Arabia, where some officials worry that an American-led attack on Iraq could touch off upheaval, given the powerful anti-American feelings there. A prolonged period of low oil prices would erode the kingdom's budget revenues, making it harder for Saudi Arabia to support the vast welfare state vital to its stability.

Over the past three months, the possibility of war in the Persian Gulf has spread anxiety through oil markets, lifting prices almost 18 percent, to above $30 a barrel.

According to oil traders, those prices reflect worry that Baghdad would retaliate against American allies perhaps by bombing oil facilities in Saudi Arabia or Kuwait.

Saudi officials say that their facilities are well defended, and that even if an Iraqi attack succeeded, they could quickly repair the damage. Any price increases, in that case, would be short-lived. Industry experts point out that destroyed Kuwaiti fields were restored in about a year after the gulf war. The loss of Iraqi and Kuwaiti oil from world markets during the gulf war was offset by increased Saudi production.

As before the gulf war, there is a sharp debate about the extent to which oil is driving Washington's policies toward Iraq. That would seem inevitable, given the potential of Iraqi oil fields. "It's not about oil, but becomes about oil," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation, a research group.

A decade of United Nations sanctions has weakened the Iraqi oil industry, whose production capacity is about three million barrels a day but which is producing about half that, analysts said.

If a removal of Mr. Hussein led to foreign investment in Iraq, production could increase to seven million barrels a day within five years, according to Fadhil Chalabi, a former Iraqi under secretary of oil who is executive director of the Center for Global Energy Studies in London. Saudi Arabia pumps about 7.7 million barrels a day and has a production capacity of 10 to 10.5 million barrels.

Other experts contend that Iraq, even at a higher capacity, would not displace Saudi Arabia in oil markets.

"It's a truly ludicrous strategic error that continually crops up in discussions of oil that bilateral relations have anything to do with supplies," said Chas. W. Freeman Jr., the United States ambassador to Saudi Arabia from 1989 to 1992. "If Saudi Arabia were not selling to the United States, we would still be indirectly dependent on Saudi Arabia, because of the major role it has in the international oil trade."

Indeed, Mr. Freeman and other experts doubt that a post-Hussein Iraq would fight OPEC quotas or leave the cartel, because the new regime would favor the higher oil prices that would bring it revenues to rebuild the country.

Still, a friendly regime in Baghdad could enhance American leverage over Saudi Arabia, according to a recent report by the Petroleum Finance Company, a Washington consulting firm. World demand for oil is expected to remain weak in the medium term, the report said, so if more oil were pumped into that market, prices and arguably Saudi power would decline.

"The `new' Baghdad's willingness to cooperate with the United States with respect to military bases, expanded oil production and perhaps even peace with Israel would all work to diminish Saudi influence," the report said.

So far, Saudi officials claim that more Iraqi oil would not threaten their country's prosperity, because increased demand would help keep prices stable.

The Petroleum Finance report suggests that Saudi Arabia could wrest control of oil markets now by flooding them quickly with oil, touching off a collapse in prices and discouraging investment in new fields, like those in Iraq. The Saudis have the money to weather low prices for a time, the report contends.

But for that approach to work, the Saudis would have to win the agreement of their OPEC partners and the Saudi business community, industry analysts said.

The effects of lower oil prices would be felt well beyond the Middle East. Countries friendly to the United States but dependent on oil revenues could suffer. The new oil production that the Bush administration has encouraged in Russia and West Africa could wither. Oil companies would be reeling.

"What's actually going to happen here is bad for our business," said a senior Western oil company executive about the prospect of Mr. Hussein's ouster. "We're looking at short-term price spikes, possible supply disruptions and then, after the fact, the question, `Was that all about oil?' "

Copyright The New York Times Company


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