Emergency oil stocks not needed, IEA says

Mar. 21, 2003. 08:58 AM

PARIS (AP) — The International Energy Agency said today it sees no reason to release emergency crude oil stocks despite the war in Iraq and civil unrest in Nigeria.

"There is no event in Iraq that makes us fear about a disruption in oil supply," agency spokesman Pierre Lefevre said, noting that the output concerned in Nigeria was not significant in terms of volume.

Thursday, soon after the U.S.-led troops launched an invasion of Iraq, the Paris-based energy watchdog said increased production from OPEC kingpin Saudi Arabia and key member Venezuela, combined with lower demand for heating oil in the United States, helped to reinforce confidence that demand would be met.

The agency has said it will allow the Organization of Petroleum Exporting Countries to have first crack at supplying customers before the IEA takes a decision to release stocks. OPEC has pledged to keep markets well supplied.

Iraq's oil exports through the United Nations' oil for food program, normally around 1.7 million barrels a day, are now virtually at a standstill following the withdrawal of UN staff from Iraq on Tuesday.

To date, ethnic clashes in the oil-rich Niger delta in Nigeria have disrupted more than 250,000 barrels a day of the OPEC member's two million barrels a day output.

www.sundayherald.com A short war could stall recovery but, say Ian Fraser and Mike Woodcock, a longer one could bring the economy to its knees

AS THE first few Tomahawk cruise missiles rained down around Baghdad last Thursday morning there was a distinct sense of d?jˆ vu among seasoned economic observers.

After all, there's a George Bush in the White House, Saddam Hussein clinging onto power in Baghdad and uncertainty about the conflict's duration and long-term economic repercussions clouding the global economic picture, fear of terrorist reprisals under mining the tourism and aviation sectors, and financial markets in limbo after an astonishing 'war rally' that started when the diplomatic wrangling ended 10 days ago.

Economic commentator Anatole Kaletsky was last week unremittingly gloomy about the conflict's possible impact on all our economic futures.

Writing in the Times, Kaletsky said: 'It may seem callous to suggest this when people are about to die, but the worst consequences of the Iraq crisis may be economic.'

If the current war is short and successful, the consensus is there will be a strong economic rebound worldwide.

But should the war drag on for longer than markets are expecting -- as George W Bush warned in his eve of hostilities address -- commentators are united in feeling the outlook would be distinctly more hairy.

Kaletsky said a 'bad' war would not only be catastrophic for Bush and Blair, but would also provoke a doomsday scenario for the global economy.

'[In the UK] tumbling financial markets would hit London property prices and the contagion would quickly spread to regional housing markets, causing a collapse in consumer spending, recession and a dramatic deterioration in fiscal policy. Gordon Brown would be forced to choose between cutting public spending, raising taxes or accepting huge deficits. Britain could find itself sucked through a time warp back to the days of Denis Healey.

'[In the US] the stock market and the economy would plunge, almost certainly triggering a double-dip recession. Fiscal policy would be unable to compensate. The dollar would fall sharply. Trade policy would lurch towards protectionism in response to recession and Europe's perceived betrayal of the US. Export industries would be devastated around the world. Unemployment in continental Europe would rise to a level last seen in the 1930s. And who knows what Rough Beast might arise again?'

Not a particularly happy scenario for our future economic well-being.

And, even if the war is short and successful, the diplomatic schism between 'old Europe' and the USA may take years to heal, with disturbing consequences for economies and financial markets in France and Germany. Their aerospace industries, for example, could be grounded as they find themselves frozen out from US-related joint ventures and technology transfer.

This would accelerate the current weakening of the European economy, with repercussions for UK and Scottish exporters which on average distribute 50% of their exports to other EU member states.

The Ernst & Young Item club is also warning that even a short war could knock the stuffing out of UK growth during 2003 and beyond.

Adrian Cooper, managing director of Oxford Economic Forecasting and an adviser to E&Y's Item club said: 'Businesses are being unsettled by the continuing uncertainty. Many are delaying decisions to invest or take on new staff until they have a clearer picture of how the war will pan out. The recovery from the bursting of the new economy investment bubble has so far been very subdued. The Item club is now forecasting a pause in growth through this year rather than the continued acceleration one would previously have expected.

'If the war is protracted, if oil supplies are interrupted and if there are significant terrorist reprisals then it is going to be very, very costly -- and would certainly lead to recession across Europe.'

The most obvious and immediate lightning rod from the conflict in Iraq to the global economy is through the oil price. After all, it is the channel through which most damage to global growth could be done.

So far, the omens are good. Even with seven oil wells alight around Basra in southern Iraq, the price was still coming down after the impressive 26% falls last week, with Brent crude selling for around $25 per barrel on Friday.

Traders seemed confident this war would be short, decisive and would leave Gulf producers unscathed.

However if the war proves does turn out to be prolonged and the oil price starts to rise frighteningly towards the $40 per barrel mark, central banks around the world will almost certainly take concerted action to reduce interest rates further.

The conflict's effect on the oil market would be easier to fathom were the precedent set by the previous Gulf war anything to go by. However, this is an altogether different conflict and, for example, the support from the Arab world has been much more muted than last time around.

The Boston Consulting Group (BCG), a management consultancy, believes Iraq will sharply increase oil production once the war is over as a means of restoring its battered economy as swiftly as possible, and that Opec countries will follow its lead.

Whilst accepting that other scenarios are possible, BCG believes this would probably lead to a break-up of Opec and cause the oil price to crash to $10-$12 per barrel. BCG's Stephan Dertnig said: 'It's already difficult for Opec member states to restrain production because of population growth and increase in governmental subsidies.'

One reason that oil prices fell so soon after hostilities broke out in 1991 was because it soon became apparent that nearby Saudi oil fields would remain unscathed. This time it is what happens to the fields in Iraq that is more critical, according to Professor Alex Kemp, a petroleum economics expert at Aberdeen University.

He said: 'This time the uncertainty is over the question: will the Iraqi fields be damaged?' he said.

Bruce Dingwall, president of the UK Offshore Operators' Association (UKOOA), who spent nearly 10 years working in the Middle East, points out that the already crumbling oil infrastructure in Iraq is now 12 years older than in the previous conflict and that -- given interruption to production in Venezuela -- the supply side of the equation is harder to forecast.

'The days of simply being able to turn on an oil field are gone. If they are already full on, and only really Saudi Arabia can do that, the oil price might not go down as much as we think.'

A key issue is whether Iraq remains a member of Opec, the Saudi-led cartel of oil-producing states. If it does, Iraq's output quotas could be no more than Iran's three million barrels per day. That would make wholesale development of its huge reserves unviable in the short to medium-term.

An Iraq outside Opec would produce much more oil and invite significantly greater Western investment. But such a turn of events might also send oil prices tumbling. Even the US, with its dislike of high oil prices, would not necessarily want a collapse in the market.

But what about reconstructing and rehabilitating the Iraqi oil industry once peace returns? The prospect of a $1.5 billion rehabilitation programme in a post- sanctions world is already getting oil companies salivating.

As one senior oil executive said: 'There is no reserves constraint in Iraq. It is the second biggest holder of oil in the world next to Saudi and it is not difficult oil. There isn't 3000ft of water, and it isn't jungle. This is desert. It is easy oil.' The US Agency for International Development (USAID) has, reportedly, established a shortlist of five companies to bid for a $900 million contract to rebuild Iraq, with the likes of Kellogg Brown & Root, part of Halliburton, which helped bring 320 oil wells under control in the last Gulf war, believed to be in the frame.

According to Deutsche Bank's global oil analyst JJ Traynor, Halliburton, of which US vice president Dick Cheney was chairman and chief executive from 1995 to 2000, and Schlumberger Oilfield Services, are 'almost certain to play an early role in upgrading the technical facilities of Iraq's oil fields'.

However, the level of participation and the types of contracts that could be offered will not be clear until a new government takes office.

Martin Purvis, Middle East energy consultant at Edinburgh-based energy consultants Wood Mackenzie, said the potential for foreign oil firms will depend on the types of contracts on offer. He said Saddam's government set up several Production Sharing Contracts (PSCs) following the previous Gulf War, notably with France's TotalFinaElf and Russia's Lukoil, but that new contracts called Development and Production Contracts (DPCs) have since become more fashionable in neigh bouring countries such as Kuwait and Saudi Arabia.

Under DPCs, foreign investors are paid a fee for participating in the development of a prospective oilfield, after which the field reverts to state control. 'What is certain is that Iraq has only exploited a few of its large discoveries,' said Purvis.

While US companies jostle for position in an unseemly fashion, British and European companies are being more circumspect. Speculation has been rife that the US will seek carve up oil contracts between itself and its principal allies, including Britain. That would infuriate the Russians and the French, some of whose oil companies already have PSCs in Iraq.

It is entirely possible however that the successor regime in Iraq will prove reluctant to open its doors wide to international production partners.

Middle Eastern nations such as Iraq, Iran and Saudi Arabia nationalised their oil industries in the 1970s, and while they have pledged to invite foreign producers to bid for contracts, the oil majors have in fact made very slow progress in establishing themselves in these countries.

This is partly because the countries concerned have such a strong desire to retain control over their own black gold. 'If they get a new government why should they think any differently?' said one well-placed source. 'Iraq has been denied capital investment for many years, so they may insist that they can do it themselves.'

Oil giant BP, led by CEO Lord Browne of Madingley, is one major that is keen to become involved in any post-war deals in Iraq. But despite reported meetings with the UK government on the opportunities, the company was reluctant to comment while a post-war settlement remains some way off. A spokesman said: 'If sanctions are lifted and if the Iraqi government wants foreign investment in the oil sector, then we would could consider any opportunities there as we would anywhere else in the world.'

Last week, the chairman of Royal/Dutch Shell, Philip Watts, said he hoped there would be 'a level playing field' for the international energy industry in a post-war Iraq if Saddam Hussein is removed from power.

The most direct opportunities are likely to be available to oil services firms (in Scotland these would include Weir and Wood Group), especially those with experience of rebuilding crumbling infrastructure. Aberdeen-based Wood Group was, for example, involved in the rebuilding process in the Kuwaiti oil fields following the last Gulf War.

Kemp said: 'I have no doubt that a number of North Sea companies could participate in either rehabilitation, if that were necessary, or in redeveloping the fields. If there is no damage to the fields because the American troops get there and protect them, the question would be if they still want to expand the sector.

'It currently produces about two million barrels a day but it could become much larger. This would create opportunities for the oil companies themselves and the contractors.'

Overall, however, many North Sea firms seem to prefer to keep their powder dry until the conflict is resolved.

But Dingwall sounds a note of caution. He suggests that any turn round in production could take up to five years as new legal and fiscal frameworks are put in place by the still unknowable post-war regime.

'There will be no grab and steal,' he added. 'I think it will be done in an incredibly orderly and sensible fashion. The Iraqis are a very intelligent bunch and they understand the oil business intimately. There will be no bonanza, but they will take a year or two to see what the new fiscal and legal regime will look like.'

Lessons to be learned from the first gulf war... IN the six months between Saddam Hussein's 1990 invasion of Kuwait and the beginning of the Gulf war in January 1991, the build up to war had a worse effect on global stock prices than the actual war itself.

The over-reaction of equity markets was linked to talk of another 'Vietnam'. The US Standard & Poor's 500 Index declined by 19.2% and the FTSE-100 by 16.2%.

The only market areas almost immune from the jitters were defensive stocks such as utilities, telecoms, consumer staples, energy and healthcare.

After the Gulf war concluded there was a 20% leap in the US equity markets, however this jump has to be seen in the context of a US and global economy which was entering a recession. The post-conflict rally could also be linked to a more stable economic and political environment, where the dollar was stronger and the US had an 18% excess capacity for oil.

The movement of oil prices in 1990/1991 was erratic, with crude prices increasing by 160.1% during the conflict. At its highest level the price of a barrel reached... but once the land war commenced, prices had already started to decline, and by the end, had come down to around 53% from the peak to levels reached prior to the invasion. Tourism revenues have not declined for a single year since the second world war, but the Gulf war was a benchmark of gloom, with growth in global revenues from 21.5% in 1990 to just 3.2% in 1991. However, the sector's resilience combined with aggressive pricing and marketing to achieve a growth figure of 13.5% in 1992. In Scotland, the value of tourism expenditure in Scotland during 1991 increased by 8% to £1.7bn -- despite the Gulf war.

The international airline sector reported that transatlantic bookings suffered the most in 1991. After the Gulf war, three US airlines folded as fuel prices soared amid fears about supplies from the Middle East. These were Eastern, Midway and Pan American. British Airways saw profits plunge from £156m to just £9m before tax in the aftermath of the war.

The financial difficulties were exacerbated by airlines over-ordering aircraft in the boom years of the late 1980s, leading to significant excess capacity in the market. International Air Transport Association member airlines suffered cumulative net losses of $20.4bn in the years from 1990 to 1994.

The construction sector in the US hit a low point in 1991. The US economy had been in recession since July 1990, with contractions in real estate and commercial property. In the UK the sector, which contributes around 10% to GDP, struggled through the early 1990s as investment levels dropped as a result of generally poor economic conditions.

By 1991 the US economy was so big and the scale of fighting so small that extra military spending did little to boost the economy. Global sector consolidation began, R&D levels rose and defence spending increased.

The good, the bad and the ugly

Experts agree war in Iraq will have profound economic consequences. But, as Faisal Islam explains below, it all depends on how far the conflagration spreads, and global recovery may be hampered by a US trade war

Sunday March 23, 2003 The Observer

· As good as it gets Quick decisive victory, no use of biological or chemical weapons, no reduction of Opec exports of crude oil (35-40 per cent chance)

Markets are itching for a swift victory, most likely to be brought about by the capitulation of Iraqi forces.

Confidence in equity markets has begun to return as the Stars and Stripes is hoisted over Iraqi oil towns. Even the dollar has rebounded and appears to be heading back to parity with the euro.

If the benign scenario plays out, Brent crude oil will remain at or below $25, averaging $23 by the end of this year, says the Centre for Global Energy Studies. Then, after reorganisation and possible privatisation of the Iraqi oil industry, production is set to shoot up, offering a prolonged era of $20 per barrel oil.

The Ernst & Young Item Club believes that US growth would remain sluggish this year, but nowhere near recession. Growth, it predicts, would be 2.5 per cent - slow by US standards, but probably the fastest of the G7 industrial nations.

Then next year, on the back of a bull run in stock markets, and cheap oil, growth would surge to 3.7 per cent, returning the US econ omy to the growth rates of the late 1990s.

An additional benefit for the US economy would be less pressure on its budget deficits. Lehman Brothers' John Llewellyn predicts total costs of $75 billion.

'Besides deployment and repatriation costs, this scenario would presumably require the funding of a war of four weeks or less, occupation and peacekeeping outlays consistent with the maintenance of 100,000 troops for some two years, and reconstruction costs that are still towards the lower end of existing estimates,' he says.

But there are three key risks. Many of the upsides of this scenario are already discounted by the markets. Any deviation from this path now would see serious falls for the dollar and equity markets.

Also, as HSBC economists say: 'Given the most likely outcome of a short sharp war, the economic impact should be little different from no war at all'. There are plenty of bearish economists who believe that the US will continue to struggle with its post-bubble economy for at least two years.

And although an easy victory might help heal transatlantic tensions it could also encourage hawks in the US administration to pursue more unilateral actions.

· Damage limitation A more protracted war, Iraqi troops dig in, military costs surge, geopolitical tensions increase (40 per cent chance)

If Iraqi armed forces choose to fight, drawing coalition forces into Baghdad, then the market gains from assuming a rollover would go quickly. Awar longer than a month would be troubling for the world economy. Already tenuous political support for the action would dwindle further.

Any attacks on the oil infrastructure of the Middle East or even an attempt to draw Israel into the conflict would bring considerable geopolitical uncertainties into play. Ethnic strife between Iraq's minorities destabilises the country post-Saddam.

Some of the geopolitical poison spread at the UN Security Council would begin to infect economic relations.

Mark Cliffe, the chief economist at ING, calls this 'new world disorder'. Trade talks would become frostier. The World Trade Organisation's Doha round could founder in this atmosphere.

Turkey's economy risks a financial crisis following disagreements with the US about stationing of troops and overflight rights. Loan guarantees and aid are at risk.

The alliances that underpinned 50 years of relative prosperity in the West, such as the UN, Nato and the European Union, are split down the middle. Already key countries want to exclude Britain from a common defence project.

And within European nations support for war by governments would cause mounting public unrest. Tony Blair says his premiership is at risk. In Spain, PM Aznar's party risks being voted out of office.

'We could easily lose sight of the tectonic shifts that are now occurring in the world order - and the instability and insecurity that lies ahead,' says Stephen Roach, chief economist at Morgan Stanley.

Under this scenario, oil prices will stay up at about $30 for the rest of the year, falling to $25 in the middle of next year, says the Centre for Global Energy Studies.

Lehman Brothers chief economist John Llewellyn says that this would lead to 'a longer and more manpower intensive period of occupation [200,000 troops for five years], for reconstruction and nation-building'. The total cost could be as high as $250bn, and without Saudi Arabia, Germany or Kuwait to foot the bill, the US budget deficit would have to expand further.

· Worst-case scenario The conflagration spreads to other Gulf areas (10 per cent)

Oil and Weapons of Mass Destruction are the key to this situation degenerating into an economic cataclysm. The one WMD that Saddam Hussein undoubtedly possesses is his ability to destabilise world oil supplies. By yesterday the US claimed to have control over most of Iraq's oilfields, leading to a slump in crude oil prices.

But there is still tremendous uncertainty over the price of oil. A direct hit on the Kuwaiti or Saudi oilfields, either by a missile or through terrorist-related acts, would see the oil price spike. The Centre for Global Energy Studies estimates that any attack seriously threatening Saudi and Kuwaiti production would see oil 'at $50 with even higher spikes' for as long as there were problems.

Venezuela's battered oil industry, and tanker shortages, will add to oil prices. By next year, if hostilities have ceased, crude will fall to around $30. But if Iraq attacks Israel with chemical or biological weapons that trigger a response , there will be massive political unrest throughout the region. Significant casualties among either British or US forces, or Iraqi civilians, will exacerbate international discord. Item Club forecast this scenario will see an acute global recession this year. Overall growth in 2003 will be -0.8 per cent, bouncing back to around 2 per cent next year, still well below trend.

Any open-ended conflict like this risks confidence, a plunge in stock markets, global recession, deflation and evaporation of cross-border capital flows, says ING's Cliffe. Brazil and Turkey could easily relapse into financing difficulties.

Mindful of even the slim chance of such an outcome, European finance Ministers were reassuring markets last week. On Thursday, European finance Ministers and the European Central Bank said that they would monitor financial markets and 'stand ready to cooperate as necessary'. Earlier last week the US Federal Reserve promised 'heightened surveillance' for the world economy.

For the US, the direct costs of this nightmare scenario could unhinge the economy. 'One possible benchmark would be the Vietnam War, where US involvement resulted in a bill equivalent to 12 per cent of contemporary GDP [£800bn],' says John Llewellyn. Bush banks on a short war to avoid having to pay this price.

Making sense of oil supply & demand in a time of war

Peter Behr, Washington Post Published March 23, 2003 OIL23

At the start of the first Persian Gulf oil crisis 30 years ago, America's hulking, chrome-laden cars covered about 15 miles on a gallon of gasoline. But few motorists gave that a second thought -- not with gasoline priced at 38 cents a gallon.

At the same time, U.S. factories soaked up 43 percent of the nation's energy supplies and members of Congress debated how to address the power of the "seven sisters," the international oil companies that dominated worldwide production.

A generation later, as the fourth Persian Gulf confrontation gets underway, the nation's oil needs and uses have changed, mirroring broad transitions in society and commerce.

Cars have slimmed down in a campaign to boost gasoline efficiency that succeeded in the 1980s but stalled in the 1990s. Persian Gulf kingdoms have supplanted the multinational oil companies as dominant producers. Today, oil companies cautiously manage exploration and inventories, a strategy that played a part in a surge in prices that has continued as war begins in Iraq. From its peak of $40 a barrel last month, crude oil fell below $30 a barrel Wednesday. The benchmark West Texas intermediate crude closed Thursday at $28.61, falling $1.27 on expectations of a swift U.S. victory.

On Monday, gasoline prices nationwide averaged more than $1.70 a gallon, a record for this time of year.

The transformation in oil dates to the 1970s, when prices quadrupled, forcing U.S. industries to change their manufacturing processes to reduce energy costs.

Homes and appliances became more efficient, too, and the amount of energy needed to produce a dollar of gross domestic product dropped by 33 percent from 1973 to 1991.

Soaring pump prices and long gasoline lines in the late 1970s triggered a revolution in the auto industry, as consumers demanded cars that went farther on a tank of gasoline. Congress required that new vehicles get at least 27.5 miles per gallon, beginning in 1985. New cars' performance, led by imports, jumped from 20 miles per gallon at the end of the 1970s to 28 in the mid-1980s. Once that target had been reached, though, it was not raised, and the mileage performance of new cars stagnated.

An expanding and more affluent population, driving bigger cars, boosted gasoline demand 2 percent a year in the past decade.

Shrinking inventories

But the restructuring of the oil industry has left the United States increasingly dependent on gasoline imports to satisfy motorists' needs, said Douglas MacIntyre, a senior oil analyst at the Energy Information Administration. U.S. refineries that manufacture gasoline are operating at or near capacity, he said, "and we aren't building new ones."

Until the 1970s, seven oil companies held the coveted prime oil-production concessions in the Persian Gulf: Exxon, Mobil, Chevron, Texaco, Gulf, Royal Dutch/Shell and British Petroleum. Now the seven sisters are four: Exxon Mobil, ChevronTexaco, Royal Dutch/Shell and BP.

In the view of Daniel Yergin, the author of "The Prize," the largest multinational companies have become bureaucratic corporations, balancing risks to maximize profits and compelled -- despite their size -- to compete for shareholder support and financiers' capital.

One consequence is the oil companies' unwillingness to get stuck with large inventories of high-priced crude oil or gasoline when pump prices start falling, MacIntyre said.

Paul Ting, a managing director of Salomon Smith Barney Inc., estimates that as a result of the wave of mergers in the industry in the past half-dozen years, the seven biggest U.S. oil producers and refiners have cut their crude oil inventories by 115 million barrels.

The U.S. economy stumbled after the Sept. 11, 2001, terrorist attacks, and early last year OPEC cut production and the Bush administration began buying oil for the nation's Strategic Petroleum Reserve. Oil prices began to rise, and U.S. producers let inventories drop.

The inventory numbers are a crucial benchmark of supply and demand for a legion of investors, speculators, and industrial and commercial buyers, who trade oil and oil products on commodity exchanges.

Prices rise

As stocks of crude oil and gasoline in the United States began to shrink last year, traders bid up the prices of oil and gasoline.

Growing concerns about a U.S. confrontation with Iraq began to inflate oil prices in September. A hurricane in the Gulf of Mexico hurt oil production in October, further reducing inventories, and a December strike at oil fields in Venezuela, a critical U.S. supplier, pushed oil prices over $40 a barrel this winter.

Changes in gasoline prices on commodity markets begin to show up at the pumps in as little as a week. The volatility of the system means that energy prices could rise, or fall, rapidly once the uncertainty of the Iraq conflict is resolved, said Adam Sieminski, a Deutsche Bank analyst.

Three main fields are the key to Iraq's oil production, which contributed 5 percent of U.S. oil imports last year, Sieminski said. "If U.S. and British forces can secure them before anyone blows them up, that would be very good news."

That is the bet among a majority of traders on commodity markets, analysts say -- one reason why oil prices have dropped recently.

Oil prices could sink to $25 barrel or lower if the U.S. campaign succeeds, said analyst Peter Beutel, president of Cameron Hanover Inc., in New Canaan, Conn.

Mark Zandi, the chief economist at Economy.com, said, "The markets are priced for a perfect war." If all goes well, the economy will turn upward. "Not roaring back, but back," he added. "If we get anything less than that, we have a problem. If prices don't fall quickly, I'd say we're in a recession in a month or two."

Economies counting on a quick end to war

Economic Watch Under the Microscope

Cheaper oil will ease inflation, but post-war rand predictions are divergent, writes Lukanyo Mnyanda

'In times of risk aversion, South Africa, which has a well-managed economy, will do better than other emerging markets'

The certainty of war gave an initial boost to the financial markets this week, the assumption being that conflict will be quick, ending in an overwhelming victory for the US and its allies.

Some economists say this is probably the best scenario for South Africa, which stands to benefit from a fall in oil prices and the resumption of global economic growth once the conflict is out of the way.

A quick war and a reduction in oil prices will ease the inflationary pressure and enable the Reserve Bank to join other major central banks in cutting interest rates, giving a boost to the local economy.

Tradek economist Mike Schussler says CPIX, consumer inflation excluding mortgages rates, could have been closer to 10% had it not been for the uncertainty of the past few months, which has kept oil prices above $30.

CPIX was running at 11.3% last month, compared with the bank's target range of 3% to 6%. The bank kept rates steady after the meeting of its monetary policy committee this week.

Schussler says if the war is quick and there are minimal disruptions to oil supplies, the return to the market of Iraq and Venezuela, whose production has been crippled by a nationwide strike, could create an oversupply and push prices all the way down to $21/barrel.

He disputes the pessimistic view that oil prices will remain around $31 for the rest of the year.

Alternatively, the war could end up being prolonged and messy, with serious consequences for growth, worldwide and in South Africa.

In these circumstances, Mandla Maleka an Eskom economist, says oil prices could hit $40/barrel, slowing the decline in inflation and delaying interest rate cuts.

A prolonged conflict will also delay a recovery in the global economy and this, together with a strong rand, will be a drag on the export sector, making the projected growth rate of 3% for the year unlikely. Exports account for 26% of economic output.

Not very clear are the implications for the currency, which has posted impressive gains against the dollar in the past 15 months.

One of the most volatile currencies in the world, the rand has been hard to predict and forecasts vary as to its likely direction.

Jos Gerson, a Merrill Lynch economist and consistent rand bull, calls it at R8 by year-end and R7.50 in the middle of next year.

Francis Beddington, economist at J P Morgan in London, calls it at R9 by year-end, compared with the market consensus of around R9.50. Beddington says the rand could reach R7.50 against the dollar within the next couple of months, citing the high interest rate differential in South Africa's favour as well as a high gold price as geopolitical tensions persist. "But [we] do not see this level as sustainable."

The consensus is that the currency is likely to remain at current levels. It has spent most of the week trading between R8.10 and R8.25.

As a net importer of oil, South Africa's current account could take strain from a prolonged conflict.

The currency could also suffer if the war slows the recovery in the global economy, leading to a deterioration in South Africa's terms of trade due to the proportion of commodities - which are sensitive to global demand - in the country's export basket.

"Historically, commodities have not only caused volatility, they have also been a key determinant of the rand's long-term depreciation - in nominal and real terms," says Beddington.

But the overall balance of payments should remain in good shape, shielded somewhat by a healthy capital account. (South Africa has emerged as a safe-haven emerging market.)

"In times of risk aversion, South Africa, which has a well-managed economy, will do better than other emerging markets," says Carlos Teixeira, emerging markets economist at Goldman Sachs in London.

Macroeconomic management has been endorsed by major credit rating agencies in recent months, with Fitch indicating that South Africa' s debt might receive a rating upgrade as early as June. These should also help attract capital.

Economists are less clear about the rand's prospects in the longer term, saying this will depend on what happens after the war.

The market's response to the certainty of war would suggest a swift recovery in the global economy, which should see a stronger dollar, if the US continues to outperform the eurozoneas expected.

This should put some downward pressure on the rand. The Reserve Bank's policy of building up reserves should also cap gains by the currency.

But there is debate on the timing of a global recovery, with some economists saying structural issues that were holding the economy back prior to the war - including concerns about rigid labour markets in Europe, balance sheets in the US and deflation in Japan - will remain.

Teixeira says the market bounce this week was a knee-jerk reaction. "The view that a quick war will lead to a massive spurt in growth is wrong.

We see [a return to] trend growth only later in the year or in the first quarter of 2004."