War's effect on U.S. economy studied
www.gopbi.com By Linzhi Shi, Palm Beach Post Washington Bureau Sunday, February 2, 2003
WASHINGTON -- As the Pentagon gathers forces in and near the Persian Gulf for a potential military confrontation with Iraq, policy-makers and experts in Washington are shifting their focus to the war's possible economic consequences.
In the worst-case war scenario, Americans could face more unemployment, a tumble of stock exchanges, long gas lines and restrictions on electricity use. If it is a quick victory, economists and analysts believe the impact would be minimal and that oil production from both a new Iraq and other countries eventually could bring oil prices down and stimulate the world economy.
Based on two congressional studies, economist William Nordhaus at Yale University estimates the war could cost the United States from $100 billion to $2 trillion and lead the global economy into recession.
The countdown to a possible war with Iraq is taking place at a time when world oil inventories are extremely tight. The U.S. Energy Information Administration recently announced that America's crude inventories had fallen to near-critical levels because of the ongoing strike in Venezuela, which supplied about 13 percent of U.S. oil imports.
Oil dealers are worried a war in the Persian Gulf could cause an upheaval in the market and send oil prices soaring to or beyond the 1991 Gulf War highs of $40 a barrel, which contributed to a global recession in the early 1990s. The current oil price is about $33 a barrel.
Iraq has the world's second-largest proven oil reserve, estimated at more than 112 billion barrels. After a dramatic decline because of sanctions on oil exports after the 1991 war, Iraqi oil output gradually recovered with the introduction of the U.N. "Oil for Food" program, which allows Baghdad to sell its oil under international sanctions to gain cash to buy food and meet other social needs.
Some 3.3 billion barrels of Iraqi oil valued at about $62 billion have been exported under the U.N. program since December 1996. In 2001, Iraq was the fifth-largest crude oil provider to the United States, supplying 8.5 percent of oil imports.
However, fears of war made U.S. oil companies radically cut back purchases from Iraq in the past year. Now, the United States imports a relatively small amount of crude oil from Iraq, less than 3 percent of its oil consumption, according to the American Petroleum Institute.
Experts say war carries two potentials: Stabilizing the Gulf region, lowering world oil prices and stimulating the U.S. economy; or bogging down into a months-long conflict with deep economic, political and environmental consequences.
"The key is which scenario plays out," said Robert Ebel, director of the energy program at the Center for Strategic and International Studies, a Washington think tank.
Quick war
A decisive U.S. victory in four to six weeks would interrupt Iraqi oil production and prevent its crude from reaching the market for about three months, experts predict. A quick war reduces the risk of damage to oil-production facilities in the region. Increased production from other countries could offset the loss of Iraqi oil on the world market.
Analysts at the Center for Strategic and International Studies predict oil prices would spike at the start of hostilities. But prices eventually would fall to the low $20 a barrel by the end of the year, as a result of high production from both OPEC and non-OPEC countries.
Some analysts suggest the U.S. economy would grow faster with a quick war than if there were no war, because a decisive victory would ease investors' fears about the future, leading to more business investment and consumer spending.
This is the scenario the Bush administration is betting on, said William Nordhaus, a Yale University economist and co-author of the study War With Iraq: Costs, Consequences and Alternatives. White House strategists assume a quick U.S. victory could lead Iraq to achieve its full oil-production capability, he said.
But the Iraqi oil industry could face many challenges "the morning after" a war, said Ebel, energy program director at the Center for Strategic and International Studies. "Many experienced engineers and geologists have left. Will they return? Might they return? They need drilling and work-over crews. They need the rigs.... They need the latest oil field technology, the know-how, and managerial skills that go along with that technology."
Nordhaus also warns "the speed at which Iraq can increase its oil production should not be overestimated."
In the 1991 Gulf War, Saddam Hussein destroyed many of Kuwait's oil fields as he withdrew. The sabotage shut down Kuwaiti oil production for a year.
"I am almost certain that Saddam Hussein has that in his mind. He will probably set the oil fields on fire before he goes," said David Lesch, a Middle East expert at Trinity University in San Antonio who was a National Security Agency analyst during the 1991 Gulf War.
Prolonged war
Fighting could last six weeks to six months if Iraqi forces mount substantial resistance or Saddam Hussein was to try to use biological or chemical agents against U.S. troops or neighboring countries such as Kuwait, Jordan or Israel. Extensive damage to the oil-production facilities in Iraq and the region could cause oil prices to spike for at least two years.
Analysts at the Center for Strategic and International Studies predict that, in the worst case, Iraqi oil production could stop for the remainder of this year. Oil prices would jump to $80 per barrel and then fall back to $40 a barrel by the end of 2004 -- still substantially above the current level of about $33.
The result would be a U.S. oil shortage, requiring voluntary rationing in the short term. Steps taken during the oil shortages of the 1970s are among the possible schemes for dealing with a new shortfall, including: alternating days of gasoline purchases based on odd/even license plate numbers; limiting purchases to 8 gallons per fill-up; restrictions on heating and electricity consumption; bans on illuminated outdoor advertisements; and encouraging use of mass transportation.
A prolonged war also could adversely affect the economy by driving down stocks and inhibiting consumer spending. The unemployment rate could initially rise to near 7.5 percent and remain above 7 percent at the end of 2004, according to the Center for Strategic and International Studies.
During the 1991 war, the United States did most of the military fighting, yet 80 percent of the $60 billion in war costs was carried by Germany, Japan, Saudi Arabia, Kuwait and other U.S. allies.
Will these countries come forward again to pay the bills in what would likely be a more expensive war, estimated by academics and think tanks to range from $100 billion to $200 billion?
Experts say probably not, because a second Gulf War would be much different from the first.
Most of the burden will fall on American taxpayers this time, they say.