Iraq: risks and opportunities
www.dailytelegraph.co.uk (Filed: 16/03/2003)
A war could have ruinous consequences for Western economies, but there are also rich pickings to be had for the oil majors and the construction industry. Mary Fagan and Edward Simpkins report
If Sheikh Yamani, the feted former Saudi oil minister, is to be believed, the imminent war with Iraq is all about oil.
Many people, including the American and British governments, fiercely disagree with Yamani's assessment, but what no one can deny is that the conflict could have enormous consequences for the price of oil and the world economy.
Oil prices have already soared by almost 60 per cent since the middle of last year when fears that there might be war with Iraq began to crystallise. Last month crude oil prices in the US nudged $40 a barrel, a level not seen since 1991 in the aftermath of the Gulf War.
In America, the situation has been hugely exacerbated by a severe winter and a shortage of gas. But prices of crude in the UK have also soared above $30 and increased the cost to consumers at the petrol pump, with prices up by 4p a litre within the past few weeks.
The optimists in the market say that, assuming a quick and "clean" war, the oil price will go up further but then fall back rapidly when hostilities end, as happened after Iraq invaded Kuwait.
The doomsayers fear wider instability in the Middle East (and in particular in Saudi Arabia, the world's largest producer with an output of 8m barrels per day) could see prices clinging to $50 or more.
The experience of previous oil shocks in 1973/74, 1979/8 and 1990/91 shows the damage that can be caused to global economies. In this case, the big question is whether the aftermath of war will release Iraq's potentially huge reserves for world consumption. Or will Saddam Hussein wreak havoc on his (and neighbouring) oilfields to terrible effect?
Yamani, speaking to The Telegraph, warns that the consequences for the world economy could be "disastrous".
"Is it going to be a quick war? Is Saddam going to resign? Will America go in and restore and manage the oil fields. If so the price will drop," he says.
"But if Saddam sets fire to the oil fields or damages those fields in any way then the price will jump. All these ifs. If he has chemical and biological weapons [and manages to mobilise them] there could be an absence of crude from the market. Its a disaster. We do not know the outcome and anyone who says they do is just taking a guess."
The short-term problem is that when war breaks out the world will lose Iraq's oil exports of between 1.5m and 2m barrels per day. The Organisation of Petroleum Exporting Countries, led by Saudi Arabia, has been quick to reassure markets that it will increase production to plug any gap in world supplies.
Opec, however, has already been increasing output to offset the shortage caused by a crippling general strike in Venezuela. There is growing concern as to whether, in the short time available, the cartel can do much more.
On Wednesday the International Energy Agency warned that world oil production capacity would fall short of demand this month by 1.68mbpd in the event of war. The IEA also said that Opec's spare capacity is just 900,000bpd, which is well below the amount estimated earlier by the US government.
One oil price expert with a major Western oil producer says people are panicking unnecessarily and that, assuming any damage is limited to Iraq, there is no shortage.
"The reason Opec's capacity is down is that Opec has been increasing production in anticipation of war. There is oil loaded on tankers out there. The world has more than enough oil to get through war. We are talking about 2mbpd [at risk] out of a daily consumption of 77mbpd," he says.
That said, the tenaciously high oil price even before the start of war is putting pressure on Western governments to release precious emergency reserves.
The US has been steadily building its strategic petroleum reserves to a record level of about 600m barrels and could, say analysts, release up to 4mbpd when war breaks out. That would be more than enough to account for the Iraqi shortfall, but it may not be enough to make up for potential disruption in production from neighbouring Kuwait.
According to Vincent Cable, the Liberal Democrat spokesman on trade and industry and former chief economist at Shell, the severity of the pre-war "oil shock" means that Western governments should be acting before it is too late.
"There is genuine scarcity. Why on earth are the Western governments not releasing strategic stocks? This is the time to do it," he says.
"The oil price is doing a lot of damage which may not be percolating through yet. It is almost certainly having a severe effect on oil importing developing countries such as India and China.
If this goes on for a few weeks, let alone months, we would have the kind of adverse effect on the world economy we had in 1991. We are back to 1991 with the potential for worse if the war does not go smoothly."
It is the prospect of the war "not going smoothly" which strikes fear in the heart of many industry experts. The main worry is that Saddam will attack oil reserves and infrastructure beyond his own - notably in Kuwait or Saudi Arabia.
Cable says that the most serious risk is if the new Gulf war were to hasten the collapse of the Saudi regime. That could happen, he believes, either because of an intensification of anti-Western feeling or because of a sharp post-war rise in Iraqi production. That could, in turn, cause prices of oil to slump to the detriment of the Saudi economy and its ability to provide cheap public services.
"The potential for revolution is all too plain. And regime change could bring to power people with little interest in worldly problems such as oil, much like the mullahs did in Iran in 1979," Cable says.
Philip Lambert of Lambert Energy Advisory is also deeply concerned about the effect of potential instability in the Middle East on the oil price. And he argues that the markets appear to be forgetting about the wider political difficulties in the oil world.
"What worries me is that Iraq is not the only place that is politically difficult. Our view is that political instability could create an almost permanent risk premium in the oil price," he says.
"A solution in Venezuela is not yet certain. Nigeria (which produces 2mbpd) is unstable and the Middle East will almost certainly be unstable after war. We have to ask whether there will be a fundamentalist backlash. All that has to be priced in by the market. What this crisis has proved is that there is not a lot of spare capacity in the world."