Poor countries first casualties of U.S. wars

Iqbal Widastomo, London School of Economics

People are already talking about a "war premium" on the price of oil and yet, officially anyway, the United States and its few and even dwindling allies have not yet gone to war with and over Iraq.

It is variously estimated that this "war premium" has already added between US$2 and $4 onto the price of oil. Members of the Organization of Petroleum Exporter Countries (OPEC) are still talking about keeping prices down to a "magic number" of $25 by the end of the year; but the reality of present and on-going conditions suggests that $30 is a more realistic figure.

It is essentially uncertainty that drives prices up and it does seem as though we will be facing considerable uncertainty in the weeks and months ahead. A perfect example was provided by the recent posturing and proclamations of President George W. Bush. There can be no doubt that the apparent "war premium" has come into recent existence as a direct consequence of Bush's sabre- rattling in the direction of, what he seems to enjoy calling, Baghdad's "outlaw regime". This has inevitably given people the jitters.

Kuwait's acting oil minister, Sheikh Ahmed Al Fahd Al Ahmed Al Sabah, provides a prime example of a jittery, concerned oil producer. He has expressed his worry of retaliatory attacks from Saddam Hussein such as those that occurred at the end of the Gulf War that left oil-fields aflame and the skies over Kuwait blackened by the smoke of burnt oil.

He stated that they "have a history for that -- so we always worry." Worries like this, from a significant oil-producing nation, have a knock-on affect to the markets. Consequently the markets are currently rather volatile.

The uncertainty creates a market that is both prone to price hikes and price recoveries. Once the market can identify some certainty, recovery is possible. Again Bush's recent words and actions illustrate this. Once he announced that he would ask the American Congress to approve military intervention in Iraq with or without support from the United Nations, prices recovered somewhat, cutting back the "war premium".

Likewise, once it became clear that the Congress was ready to back their President, prices improved a little further.

Through all of this it is clear to see that, for price stability to be maintained, the markets need clarity and some assurance of what is going to happen politically and also militarily in the current context. In reference to the recent increases in price the Qatari oil minister, Abdullah Hamad al- Attiyah, OPEC's new president, said he thought, "they are political prices, not market prices".

This seems almost incredibly naive; who can possibly doubt that political decisions critically influence market price?

OPEC too is a critical influence over price. Some analysts have called for OPEC to increase its output to help alleviate the current concerns that an outbreak of war will affect supplies and in turn force prices still higher. But OPEC members continue overproducing by as much as 2 million barrels a day. The official supply ceiling of 21.7 million barrels per day is daily flaunted as nearly all of the members cheat on their individual quotas. In a real sense, then, the market price is a false one anyway.

It is absolutely clear, though, that the weeks and months ahead are going to be marked by price volatility and this volatility will be felt in Indonesia. All nations are going to feel negative affects but this negativity is going to be heightened for economically weak nations and nations that are oil-importers.

OPEC has shown some sensitivity towards these kinds of concerns; oil ministers will meet again on Dec. 12 at OPEC headquarters in Vienna to reconsider the market in light of political and military developments.

So it seems that OPEC will increase output if prices are forced higher and, analysts agree, prices will increase in the wake of any U.S. aggression against Iraq. Any attack on Iraq will potentially lead to supply shortages and even hoarding of stocks by consumers that will inevitably force prices up.

OPEC seems concerned but quietly confident that it can handle this type of condition. Recent appraisals suggest that the world economy will show only modest growth in the near term and hence demand stimulated by economic growth may actually dip somewhat.

This, however, is a short-term outlook. Short-term world economic growth may be limited, and so less demanding on supply, but both short- and long-term economic instability due to events in and around Iraq could exert far greater pressures on the market.

Indonesia is and will remain vulnerable to for some time to come. If the world economy weakens, our economy is among the first to be damaged. Whilst Indonesia may have seen some turn- around from the worst of its economic meltdown, there is still a huge amount of ground to be recovered and war in the Middle East will make that recovery process more difficult.

Bush has a short-term objective to remove the "unwanted outlaw regime" of President Saddam Hussein in Iraq, but he must also have a longer-term projection for the stability of the region. His lack of foreign affairs experience and knowledge would suggest that he is not likely to possess such a long-view.

It is a fair and reasonable observation to state that the Middle East and the world community would be better off without Saddam in power but a critical question remains and worries many. At what cost and knock-on affect to the rest of the world will this removal take place?

A previous policy of containment, as applied by both presidents Clinton and Bush Senior, have not removed the Iraqi tyrant but have allowed for reasonable stability to be maintained. With a second Bush in the White House targeting a more aggressive and belligerent handling of the Iraqi dictator, mostly prescribed on the back of Sept. 11 and anti-terror campaigns, the world will have to be more watchful. Oil prices and nations with weak economies could be among the first casualties of America's new war.

Dr. Iqbal Widastomo is a research associate at the LSE's research unit at its School of Politics. His team develops analysis and strategies for the development of democracy in Islamic nations.