U.S. invasion could impact oil markets

Loss in output could cause prices to soar By H. Josef Hebert The Associated Press January 6th, 2003

WASHINGTON -- If the United States invades Iraq, there could be oil shortages and gas lines -- or an oil glut and falling prices.

Much depends on whether American troops can secure Iraqi oil fields and whether other producers continue the flow of oil uninterrupted.

In the growing drumbeat over war with Iraq, the Bush administration rarely mentions oil, even though Iraq has one-tenth of the world’s oil reserves. But a military campaign almost certainly will have a major impact on world markets.

In the event of a war, Secretary of State Colin Powell said recently, "We would want to protect those fields and make sure that they’re ... not destroyed or damaged by a failing regime on the way out the door."

The growing prospect of war, combined with the monthlong political strife in Venezuela that is hamstringing that country’s oil production, already has caused unease among energy traders. Last week, prices for crude to be delivered in February jumped to more than $33 a barrel, 65 percent higher than a year ago. The average price of gasoline has risen steadily to more than $1.40 a gallon. On Dec. 26, pump prices in several cities jumped by as much as 20 cents a gallon overnight.

World oil stocks have been tight and fell sharply last week, the Energy Department says.

"The loss of Venezuelan oil is beginning to hurt," says Robert Ebel of the Center for Strategic and International Studies. "What people are beginning to worry about is, suppose the loss of Venezuelan oil continues when we intervene in Iraq?"

Together, Iraq and Venezuela produce about 5 million barrels a day. Ebel and other energy experts wonder whether increased production from other countries will be able to make up such a shortfall.

With global production at about 76 million barrels daily, a loss of several million barrels could cause prices to soar, economists say. U.S. officials emphasize that oil markets have changed dramatically since the 1970s, when Mideast supply disruptions led to fuel rationing, high prices and long lines at gas pumps.

Nearly 4 billion barrels of oil are in emergency stocks worldwide, including nearly 600 million barrels in a U.S. reserve. If withdrawn at 2 million barrels a day, the U.S. stocks could counter a disruption of 286 days, the administration told Congress this past summer.

"It’s premature to say we’re heading for any price spiral up or down," says Yasser Elguindi, an analyst with Medley Global Advisors in New York. "We have to see what kind of conflict emerges."

Among the scenarios outlined by economists: -- President Saddam Hussein’s government falls quickly, the Iraqi oil fields remain intact and the country’s already dwindling oil exports -- about 2 million barrels a day -- disappear for a few months. Venezuela’s exports resume and other countries, led by Saudi Arabia, boost production to make up any losses.

Prices briefly spike, as they did in the onset of the Gulf war in 1991, to more than $40 a barrel, but within three months recede to normal levels or even lower with supplies plentiful.

-- An invasion meets stiff resistance, Iraqi oil fields are set aflame, production is disrupted elsewhere in the Persian Gulf, global supplies fall by 6 million barrels a day. Emergency stocks cannot close the gap.

In such a case, oil prices could climb to $80 a barrel and stay above $40 well into 2004, halting the U.S. economic recovery and triggering a global recession, according to Ebel, whose group has mapped out a range of scenarios. There is gas rationing and lines at service stations.

George Perry, a Brookings Institution economist, analyzed a similar "worse case" possibility and forecast a potential loss of 7 million barrels a day, a tripling of crude prices and $3 per gallon gasoline.

From all indications, the administration believes Saddam can be toppled without severe impact to oil flow, and some officials have even suggested clear, long-term economic benefit.

With Saddam gone, "you could add 3 million to 5 million barrels of production to world supplies," Larry Lindsey, then Bush’s top economic adviser, said in September, suggesting a successful war "would be good for the economy."

The White House retreated from the comment and Lindsey was later replaced.

Economists agree that a revitalization of Iraq’s decimated oil industry in a post-Saddam, more pro-Western atmosphere, could have lasting impact on global markets.

"A quick victory in Iraq followed by relative stability in the region could lead to increases in oil production capacity in Iraq, Iran and other countries, putting downward pressure on oil prices," Yale economist William Nordhaus recently wrote.

Iraqi oil experts maintain production could reach 3 million barrels a day within a year and double that in a decade -- claims viewed by many as overly optimistic.

"When people talk about Iraq, there are so many unknowns," says John Felmy, chief economist of the American Petroleum Institute. "We haven’t been in the country for years."

It is estimated that it would take billions of dollars to get Iraq’s oil industry into shape where production could be expanded significantly.