War in Iraq: could soaring oil prices create a global disaster?
focus.scmp.com Thursday, January 30, 2003 SUNANDA DATTA-RAY
After the warning from Sheik Ahmed Zaki Yamani, the former Saudi Arabian oil minister and co- founder of the Organisation of Petroleum Exporting Countries (Opec), that the oil price could shoot up to US$100 (HK$780) a barrel, it is no wonder French President Jacques Chirac and German Chancellor Gerhard Schroeder are worried about America's planned war on Iraq.
British Prime Minister Tony Blair can afford to be sanguine, since Britain is self-sufficient in oil. Europe is not. Obliged to hold enough oil in reserve for 90 days, Other European Union members are haunted by the spectre of civil strife and rampaging mobs when food and fuel fall short, if Iraqi President Saddam Hussein destroys not only his own oil wells but also those in neighbouring countries that help the US. (Iraq has the world's second-largest deposits, though the United Nations allows it to produce only two million barrels a day.)
If that happened, Sheik Yamani told a conference in Doha, the capital of Qatar, the US "would be the cause of a global disaster". It would be a nightmare for Asia and Africa, where rising prices would curb investment, slow production, reduce trade and arrest the development process. Basic necessities would be priced out of reach. The Arab Monetary Fund estimated during the 1991 Gulf War that while the Middle East lost US$676 billion in oil revenue and structural damage, the cost to Iraq was US$256 billion. According to the Arab fund, the poorest Asian countries lost US$23 billion.
The EU imports 30 per cent of its oil from the Gulf, which has two-thirds of the world's known reserves and has more spare capacity than any other oil-producing region. Another 15 per cent comes from Iran and Iraq.
Of course, there are other reasons - morality, legal propriety and respect for the UN - why EU leaders advise caution. And they have not forgotten the devastation of two world wars. They know better than Mr Bush that it is folly to imagine all evil can be driven out and the world reinvented according to some idealistic model. They might also be keen to show that Europe counts. Waxing lyrical on the 40th anniversary of the signing by France and Germany of the Elysee treaty to forge closer ties, Mr Chirac said: "When Germany and France get along, Europe advances. When they don't, Europe stops." Maybe. But the most immediately compelling reason why they agree on the question of war and peace in the Middle East is that they do not want to add to voter discontent.
Oil causes concern even in Britain. One has only to think of the strike by oil tanker drivers in 2000. The British had adequate reserves but responded with long queues at petrol stations, while panic buying emptied many supermarket shelves.
Britain cannot remain isolated from a global fuel crisis. Its food imports have doubled in the last two decades and the food trade deficit stands at £8.3 billion (HK$106 billion). Food accounts for 40 per cent of all road freight in Britain and there was a 90 per cent increase in food and agricultural product freight between Britain and continental Europe from 1989 to 1999.
Trying to keep the oil price at between US$22 and US$28 a barrel, Opec decided recently to increase daily production by an additional 1.5 million barrels. This was to counter the crippling strike in Venezuela, which supplies 13 per cent of US imports. Ironically, America - which has less than 3 per cent of the world's oil reserves - saw Venezuela as its bulwark against Arab oil politics. Now the Arabs have had to go to America's rescue.
Prices will fall if Mr Bush pulls back and Iraq is allowed to return to normal oil production. However, the US calculates that a quick war would give them control of Iraq's oil industry. They would then be able to lift UN restrictions, invest in drilling and increase production. But even the US knows that prices are bound to rise during hostilities, however short they might be.
Seeking support, the US is reported to have privately promised Russia that Iraq will have to pay its outstanding dues of about US$8 billion.
It has also assured Turkey that, apart from financial compensation, its claim to royalties from the Mosul and Kirkuk fields (the reason Britain prised Iraq out of the Ottoman empire) will be considered. China has been told that only a common strategy on cheap energy can sustain its phenomenal growth rate.
Urban societies that depend on the long-haul transport of imported food fear the most from the political fallout of economic discontent. Panic buying would mean massive disruption, sudden scarcities, an erosion of confidence in governments and civil unrest. There was evidence of this during the 1973 Arab oil embargo.
But, of course, the developing nations will bear the main brunt. Some could be reduced to destitution. As the traditional English song has it:
"It's the same the whole world over,
It's the poor what gets the blame. . ."
For blame read punishment.
Sunanda Datta-Ray is a senior fellow at the School of Communication and Information of Nanyang Technological University, Singapore.