Uncertainty in oil markets as war looms

Iraq: The nation's vast reserves figure to play a major role as military action is weighed.

October 04, 2002|By Mark Matthews | Mark Matthews,SUN NATIONAL STAFF

WASHINGTON - The prospect of a war to topple Saddam Hussein has injected new volatility into world oil markets, raised fears of future disruptions, and spurred international and corporate jockeying for the untapped petroleum bonanza beneath Iraq.

Tremors are already evident. The higher prices Americans pay at the gas pump reflect a "war premium" of about $5 a barrel exacted by tight oil markets worried about interruption of supplies during a conflict, analysts say.

But this is just the prologue of what could be a long-running energy drama with potentially serious effects for the United States and world economies. There will be numerous turns in the plot, hinging on prewar diplomacy, the speed and success of a war, regional stability and what Iraq looks like afterward. Few are predicting how the drama will end.

Iraq contains the world's second-biggest proven oil reserves after those in Saudi Arabia, and in decades past used the wealth flowing from these deposits to lead the Arab world in educational opportunities and health care, developing a large middle class.

But more than two decades of war and sanctions, starting with the eight-year war with Iran, followed in 1990 by Iraq's invasion of Kuwait and in 1991 by the Persian Gulf war, have badly damaged ports and caused the state-run oilfield and refinery infrastructure to fall into serious disrepair. As a result, Iraq remains far below its potential as an oil exporter.

The economics of oil have complicated American efforts to win support at the United Nations Security Council for a tough resolution threatening war if Iraq fails to destroy any program to develop nuclear, chemical or biological weapons or long-range missiles.

Russia, which holds a veto in the Security Council, is Iraq's biggest supplier of nonmilitary goods under a U.N. program that requires Iraqi imports to be screened by the United Nations' sanctions administrators. Russia is also eyeing a major role in developing Iraqi oilfields.

U.S. and Russian officials from the top down have talked about Russia's stake in Iraq. American officials are wielding a carrot and stick to get Russian support on Iraq.

"We are in conversation with our Russian friends about their interests. And we are taking into account their considerations," Secretary of State Colin L. Powell told the U.S.-Russia Business Council yesterday. Meanwhile, U.S. officials are encouraging American investment to expand Russia's oil production capability and welcome the prospect of more Russian oil flowing to the United States.

At the same time, one senior official said, Russians have been warned that if they fail to back the United States at the United Nations, a post-Hussein regime would "stiff them" on future oilfield development.

If Iraq blocks thorough inspections, setting the stage for war, analysts expect a spike in oil prices of as much as $10 a barrel (the current price is an already-high $30 a barrel) as the United States, with Britain, prepares its forces for military action.

"The closer we come to a [military] strike, the higher it would go," said Vera de Ladoucette, director of Middle East research for Cambridge Energy Research Associates.

Whether this price increase would continue during a war is uncertain. Iraq, which is pumping 1 million to 2 million barrels a day for sale either legitimately through the United Nations or illegitimately through smuggling, might shut off supplies, forcing others in the Organization of Petroleum Exporting Countries to pick up the slack.

The key factor here is Saudi Arabia, which has the production and export capacity to flood jittery markets and force prices down. Saudi Arabia prides itself on its stabilizing role in global oil markets, and sources close to its government predict it will pump enough oil to prevent a new energy crisis during a war.

Saudi Oil Minister Ali al-Naimi assured a conference in Japan recently that the kingdom "is committed to maintaining a stable worldwide oil market, free of disruptive price swings yet responsive to changing conditions."

But if U.S. forces prove unable to secure a quick and decisive victory in Iraq, events in the region could spiral out of control and weaken the Saudis' leverage over the market, some analysts fear.

Possibilities of wartime disturbances include an Iraqi attack on oilfields in Saudi Arabia or Kuwait, disrupting supplies; an attack by Iraq on Israel that draws Israel into the conflict; or a surge of new Israeli-Palestinian violence that further inflames anti-American feeling in the Arab world.

In one nightmare scenario, oil industry consultant Herman Franssen said, terrorists inside Saudi Arabia might attempt to sabotage a major oil facility, choking off exports. Domestic unrest could even destabilize the Saudi monarchy, he said, paralyzing the kingdom's oil industry.

"A cutoff of oil from Saudi Arabia would be an utter disaster," said Franssen. "No combination of countries could make up for that for any length of time."

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