A dollar a gallon or $5?: Iraq war could bring changes to oil market

WASHINGTON (AP) - What price war with Iraq? If the war goes well, gasoline prices might settle as low as $1.10 a gallon on average, by some estimates. If the oil fields burn, look for prices as high as $4.84, others say. Also possible: The market will simply adjust and prices will stay at today's $1.40-$1.60 range. The wide variance illustrates how much is at stake any decision to attack a country holding at least one-tenth of the world's oil reserves.

But the subject of war and oil is a sensitive one, and the Bush administration has said little about the promise and peril for consumers from the gathering conflict.

"There are enormous ramifications for consumers, given that Iraq's reserves are second behind Saudi Arabia," said Sen. Ron Wyden, D-Ore., who serves on the Senate energy committee. "Now is the time to find out how the administration is going to address this issue."

The frustration crosses the political spectrum.

"This needs to be done in an orderly fashion," said Ariel Cohen, an oil economist with the conservative Heritage Foundation who favors ousting Saddam Hussein - and then, a quick and open sale of Iraqi oil assets to private interests.

"If it's about oil, make the case," said Phyllis Bennis of the antiwar Institute for Policy Studies. "They haven't yet." President Bush's then-chief economic adviser, Larry Lindsey, made part of the case in September.

"When there is a regime change in Iraq, you could add 3 million to 5 million barrels of production to world supply," he said. "The successful prosecution of the war would be good for the economy." But those comments helped cost Lindsey his job. Bush advisers quickly backpedaled, and a couple of months later he was shown the door.

The problem with sizing up the economic and oil consequences is that much of the evidence is shifting. The length and cost of war would depend on support from regional allies - decisions not likely to come until the last minute - and oil payoffs would be easier to predict with accurate statistics, notably absent from Iraq's chaotic government.

Iraq now produces 2 million to 2.5 million barrels a day, with unknown additional amounts smuggled out.

In a world market producing 75 million barrels daily, an extra 3 million to 5 million barrels from a friendly postwar Iraq could bring pump prices in the United States down to $1.10, some economists say.

Once Iraq is producing, "someone else will have to give up something to keep prices at $25 a barrel, the OPEC ideal," said Tom Drennen, an economist at Hobart and William Smith College in Geneva, N.Y. "That means someone will probably cheat, and gas prices will drop to the $1-$1.20 range."

Then there is the worst-case scenario - actually two of them: Saddam levels his oil fields as a final vengeful act, a prediction with a 1991 precedent in Kuwait; and Iraq's fractious population makes governance next to impossible, plunging the entire region into instability.

George Perry, a Brookings Institution economist, recently analyzed bad, worse and worst-case oil disruption scenarios, drawing his conclusions in part from the "price shock" engendered by the 1973 Arab-Israeli war. His worst-case prediction, which factors in the collapse of neighboring governments friendly to America: gasoline at $4.84 a gallon.

Others see too many unknowables to venture a guess. "It's premature to say we're heading for any price spiral, up or down," said Yasser Elguindi, an analyst with Medley Global Advisors in New York.

A functioning Iraqi government with friendly Western companies pumping wells at capacity is not likely to happen soon, said John Felmy of the American Petroleum Institute, an oil industry group. Lacking the most modern equipment for a dozen years, Iraq probably has been using "aggressive production techniques, which can damage wells," Felmy said.

"We haven't been in the country for years," he said, "We don't know what the geology is," especially in the western Desert, where the optimists speculate new wells would allow Iraq to overtake Saudi Arabia as the country with the largest reserves.

Such predictions also assume a world exactly as it is today - something belied by current unrest in Venezuela.

"The loss of Venezuelan oil is beginning to hurt," said Robert Ebel of the private Center for Strategic and International Studies. A defeated Iraq would be expected to make good on outstanding debts to former enemies and allies - Russia alone is expecting a $7 billion payment. The payoffs that would inhibit the rapid development of a free-market economy.

The pessimists' prediction of a price shock is similarly based on unknowables, for instance in presuming that war would automatically stoke revolution in the region - or that Saddam would have the time to destroy Iraqi wells.

The U.S. government says protecting Iraqi oil fields is a priority. Most oil producers also have been increasing storage as a cushion.

"It's standard inventory policy," said Henry Lee, an energy specialist at Harvard University's Kennedy School of Government. "Like building up reserves throughout the winter for the driving season, from Memorial to Labor Day."

The U.S. strategic reserve also offers limited protection - the government says it would cover a disruption of 286 days.