Oil, war and delicate timing

www.accessatlanta.com [ The Atlanta Journal-Constitution: 01/23/03] By MICHAEL E. KANELL The Atlanta Journal-Constitution

If the United States is going to attack Iraq, timing the assault for mid-February may minimize chances of a spike in oil prices.

Because oil is so critical to world commerce, a dramatic leap in prices -- whether or not supply is curtailed -- could shove vulnerable economies into recession. U.S. planners, of course, want any attack to go smoothly and quickly. Best-case scenarios call for shutting down only Iraqi oil production -- and that temporarily.

But any economic impact would be softest in a time when demand is decreasing and when countries are adding production.

Mid-February is that time.

"From the perspective of countries which rely on imports of crude oil from the region, the timing is optimal," said energy economist James Williams at WTRG Economics.

Demand for crude oil dips in spring by 2 million to 2.5 million barrels per day. The United States generally uses that time to pump up inventories in preparation for summer, when the use of cars and air conditioning zooms.

War's impact on prices, then, could be moderate, assuming all goes smoothly in Iraq. Economic danger rests mostly in the vulnerability of pipelines and shipping to terrorism, Williams said.

"Our concern remains the unintended consequences of war," he said.

On Wednesday, Russian military officials said they have information convincing them the United States intends to move against Iraq sometime around the middle of next month, according to the news agency Interfax.

The United States imports most of its oil. But only two of its top 10 suppliers -- Saudi Arabia and Iraq -- are in the Persian Gulf.

"If war disrupts shipments from the Gulf, it would hurt the Europeans more than it would hurt us," said economist Rod Duncan at Georgia State University. "The U.S. only gets about 12 percent of its oil from the Gulf."

But oil's price is determined by the world market, so any supply disruption would jack up prices for everyone, including the United States. And the U.S. economy is vulnerable.

If oil, now selling for just under $35 per barrel, were to rise to $60 per barrel, economic growth -- about 3 percent last year -- would be dragged down 1 percent. Every $10-per-barrel increase is like a $120 billion tax, according to the Institute for International Economics.

Yet the higher prices of recent months are largely because suppliers are betting that war will mean a price spike -- so they are holding back supplies. As a result, inventories have been depleted, and that makes prices more volatile.

But if the war is over quickly, prices could rapidly fall. Even if Iraqi oil fields do not pump for some time, several big oil producers -- especially Saudi Arabia, the largest -- are raising production. And Venezuela, whose oil industry was paralyzed by political turmoil, may be turning the corner back toward more production.

"I don't think the price of oil will change much at all," Duncan said.