Fluctuating oil price and the war on terrorism

Gwynne Dyer, Journalist, London

"We hear that Iraq may be targeted," said Sheikh Ahmed Zaki al-Yamani, oil minister of Saudi Arabia during the 1970s and 1980s heyday of the Organization of Petroleum Exporting Countries (OPEC), now chairman of the London-based Center for Global Energy Studies. "Now, if that is a fact, the attacks will remove Iraqi production (from the marketplace). There could be knock-on effects." By which he meant very expensive oil.

Yamani made his remarks six weeks ago, just before the United States began bombing Afghanistan. Now, with the Taliban regime near collapse and the first phase of President George W. Bush's "war on terrorism" seemingly close to success, speculation in Washington about a follow-on strike against Saddam Hussein's regime in Iraq is growing daily more heated.

But if an attack on Iraq means soaring oil prices, and that in turn means a longer and deeper recession in the US, then Saddam is probably safe.

Oil remains the most volatile key commodity in the global economy, having dropped as low as US$10 a barrel and soared above $30 a barrel within the past 30 months. The price more or less stabilized in the upper $20s during most of this year, but it again nudged $30 after Sept. 11, only to fall below $20 as the rapidly deepening recession ate into demand.

At the moment, the fear in the OPEC countries is that they cannot halt a renewed slide towards the $10 mark, so they are trying to enforce a cut in production to hold the price up. OPEC has already announced three production cuts this year, amounting to more than 3 million barrels per day (bpd) or 13 percent of its entire output, but it is now seeking a further cut of 1.5 million barrel per day among the OPEC countries accompanied by a half- million barrel cut by the biggest non-OPEC oil exporters, Mexico, Norway and Russia.

Since the OPEC cut will only happen if the non-OPEC producers agree to their share of the cuts, this is by no means assured. Russia, in particular, is playing for bigger political stakes during the current crisis. Moscow is trying to earn credit towards eventual membership in the World Trade Organization, the European Union, and even NATO by being very helpful to the West on all sorts of political, military and economic issues -- and it is a major Western interest to keep the recession short by keeping energy prices low.

If Russia refuses to cut its oil production, the whole proposed 2 million bpd cut by OPEC and non-OPEC countries probably fails and the price keeps on dropping. Given the steep fall in global demand for oil as the recession deepens -- airlines alone are expected to be using 400,000 barrels less per day by December -- the price could continue to drift downwards even if the OPEC package of cuts does get made.

But the underlying volatility remains. It would be a very different story if the 2.8 million bpd currently produced by Iraq were suddenly removed from the world's oil supply.

That would be the very least that would happen if the U.S.attacked Iraq, as the Washington lobby led by Deputy Defense Secretary Paul Wolfowitz continues to urge.

The impact of a U.S. attack on Iraq on the global oil supply could be even greater, since Saddam Hussein might retain for some time the ability to threaten tankers carrying oil out from neighboring Gulf countries like Iran, Kuwait and Saudi Arabia.

If the Arab world, including its major oil exporters, were to close ranks and impose an oil embargo in response to an essentially unprovoked attack on Iraq, then the consequences could be as extreme as in 1973.

But even stopping the flow of oil from Iraq would be enough to send the price soaring well past $30 a barrel.

If there were any convincing evidence that Iraq was implicated in the terrorist attacks on the U.S. last September, popular pressure on the U.S. government to strike back against Saddam Hussein might well be irresistible, but there is not.

There is only the general suspicion and hostility that permeates all American dealings with the Iraqi dictator, plus a clique of bureaucrats that very badly wants to finish off the job that the previous Bush administration failed to accomplish during the Gulf War 10 years ago. That is not enough.

We are in the early stages of a global recession that has probably been made worse by the events of Sept. 11, but it was already going to be pretty bad. For the first time in 30 years, all three industrialized regions of the world, North America, Europe and Japan, are entering a recession together -- and as the International Monetary Fund recently pointed out, it is in unlikely in any case that the biggest, longest boom of the past half-century will be followed by a short, shallow recession.

Just how long the recession will be matters to the Bush administration. It will almost certainly last long enough to do the Republicans some damage in the mid-term Congressional elections that are now only a year away. A really lengthy recession could also destroy Bush's own hopes of re-election two years later.

Now consider: What single event would be most likely to kill an early recovery and condemn the global economy to a very long recession? That's right: Soaring energy prices.

So how likely is it that President George W. Bush will sanction a U.S. attack on Iraq that would send the oil price through the roof? Exactly.