War poses hard choices about oil

www.news-miner.com72521205844,00.html Article Published: Wednesday, February 26, 2003 - 3:03:45 AM AKST By DOUG REYNOLDS

A number of Europeans and Americans are saying that the United States wants to go to war with Iraq for cheap oil.

While that may or may not be the only justification for war, it could be one goal. Nevertheless, it is important to look more critically at the ramifications of war on the international oil market.

Since 1973, when the first oil shock hit the industrial world, no feasible oil substitutes have been developed. Electric power and space heating have oil alternatives, but fuel for cars, planes, boats and trains is derived mainly from oil.

We don't have economically feasible oil substitutes, even though plenty of research and development dollars have gone into these alternatives from government, big oil and many smaller firms. That is why in the 30 years since the first oil shock, oil substitutes technology has been relatively marginal, especially in comparison to information technology. We still depend on oil.

In fact, the proof of the pudding of our oil dependence can be seen by watching the world's economic performance every time the oil market changes radically. Three of the last five major world economic growth slowdowns have occurred after an oil market shock. (Four out of six if we include the economic collapse of the Soviet Union and Eastern Europe that occurred after an internal oil shortage.) And the biggest growth spurts occurred during times of very low oil prices. Even the current world slowdown is being exasperated by higher oil prices. Thus, economic growth and oil price volatility are highly correlated.

Even if we are instrumental in creating a nascent democracy in Iraq (a big "if" considering the complexity of the nation and region), it does not mean that oil production will be put under a competitive oil leasing regime similar to what the United States and Canada have. Mexico, Venezuela, ostensibly Iran and even Norway are all democracies and still oil production is completely government controlled. Likewise, Iraq probably will have a government-controlled oil company after a war.

Iraq likely won't produce much more oil than it did before 1991, when Iraq was free to produce as much oil as it could and only got up to 3 million barrels per day, which is only a half million barrels per day higher than its current average output. That only adds a half a percent to world output. Plus, repair and development of the infrastructure will likely be as slow as it would be in any of the major underdeveloped oil producing countries. So if our country's goal is fast, cheap oil, victory in Iraq will not soon provide us with that end.

Another danger, however, is Iraq's potential for wreaking havoc in the Persian Gulf, where 65 percent of the world's proven reserves of oil reside. While it is possible that within the Middle East, Israel and Iran already posses nuclear weapons, Iraq's possession of a nuclear capability is more troubling.

Unlike other potential nuclear powers, Iraq could try a quick strike with conventional arms in order to take Kuwait again, and even go on to Saudi Arabia, the United Arab Emirates and Qatar in order to control over 20 percent of the world's petroleum exporting supply potential. Then they can sit back and threaten nuclear explosions on the oil fields if they are attacked. The fields would be ruined and radioactive if that happened. It would be blackmail.

There are four solutions: continue to contain Saddam Hussein with devastating economic embargoes while the Iraqi people suffer; try to increase United Nations weapons inspections and possibly insert United Nations peacekeepers; let Iraq free of embargoes so that it can rebuild its military for another attack on Kuwait with the addition of nuclear threats; or engage in a regime change intervention.

The costs in terms of money, military buildups, human suffering and oil supply stability in the long run are hard to determine for each of the options. Interestingly enough, the only way that the United Nations has been able to keep up an economic embargo at all and be able to put weapons inspectors on the ground in Iraq is when the United States threatens a credible military intervention. Unfortunately, with higher oil prices and the ability of Iraq to smuggle oil out and trade for arms, the regime change option could become harder in five or 10 years. The war is troubling, so are the other options.

Doug Reynolds is an associate professor of oil and energy economics at the University of Alaska Fairbanks. He can be contacted at ffdbr@uaf.edu.