Not a war for oil

The oil price has not soared quite as dramatically as it did in 1990, but since the UN Resolution 1441 was passed last November it has put on more than $10 a barrel to hit a high of over $37.

War threats, the recent Venezuelan oil strike and a particularly hard North American winter have also reduced oil stocks in the US to levels not seen since the mid-1970s. The real damage to the world economy will, however, depend on how long the oil price spike is sustained. The general rule of thumb is that if a $5 rise in the oil price is sustained for a year, worldwide economic output drops by 0.25 percent. Hardest hit are the poorest oil-importing countries, though the US, the world’s largest consumer, will also suffer.

This prospect of adverse effects on the US from war has not stemmed the tide of conspiracy theories that the Bush administration’s real motive over Iraq is to get its hands on that country’s 11 percent share of world oil reserves, the second largest after Saudi Arabia. Least plausible is the idea that the US would simply grab Iraqi oil for itself, though early on in any war it plans to seize Iraqi oil wells to preempt any sabotage by Saddam Hussein. Washington says it would keep the oil in trust for the Iraqi people; and there is no reason to believe otherwise. Less far-fetched is the possibility the US might preside over a handing out of new oil licences to US oil companies. That prospect has caused some nervousness among non-US oil companies, which have already conducted preliminary negotiations with Baghdad, pending a lifting of UN sanctions.

The US, and other oil-consuming countries, would certainly like Iraq to increase its output. The potential is there; only 24 of Iraq’s 73 oilfields are working at present. Privatisation of Iraq’s oil industry would also help boost production. But increased output would bring immediate demands from its fellow OPEC members that Iraq re-submit itself to production quotas, which it has been excused while under UN sanctions. Ideally, the US would probably like Iraq to quit OPEC. Yet it is hard to see how even a pro-US regime in Baghdad could do this without discrediting itself in the eyes of its citizens or neighbours. That in turn would be counterproductive for any US hopes to extend its influence in the Gulf on whose energy it will depend for many years. So the immediate prospect is of less rather than more oil production as a result of the Iraq crisis. This may drive prices up even further. If therefore the US persists in going to war, it should at least mitigate the damage to the world economy by being prompt to release oil from its Strategic Petroleum Reserve and urging other western governments to do the same with their stocks.

(An editied version of an editorial that appeared in the Financial Times)