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War fears and market jitters Aug 23rd 2002
From The Economist Global Agenda The oil price jumped to more than $30 a barrel this week on fears of an American invasion of Iraq. The real danger the war poses may be of an interruption in the supply of oil from Saudi Arabia, which sits on a quarter of the world’s oil reserves. Some policymakers in Washington, DC, fear that the Saudis, which used to be counted a reliable “swing” producer, may no longer be the allies America needs A SHORT-LIVED jump in the oil price earlier this month was a reminder of one possible side-effect of a potential American war against Iraq. With fears mounting that the American economy may relapse into a “double-dip” recession, the last thing it needs is a higher oil price. Rather reassuringly, the price for delivery in one month’s time of so-called West Texas Intermediate, the benchmark for American crude oil, soon fell back after the recent surge. It slid below $30 a barrel once it became apparent that reports that American reserves were at a 17-month low were exaggerated. However, as speculation about America’s policy towards Iraq remains intense, the oil market is bound to remain nervous. Iraq sits on the world’s second-biggest oil reserves, well over 100 billion barrels—or 100 years of production at current rates. So there are understandable fears about the interruption of supplies if America launches a war to depose Saddam Hussein, the Iraqi dictator. However, those fears may be overstated. The effects of United Nations sanctions, even after their recent relaxation—and of Mr Hussein’s own disastrous economic policies—have already sharply reduced Iraq’s oil production.
Of more concern is what may happen to the oil fields of Kuwait and Saudi Arabia. Iraq suffers UN sanctions as punishment for the invasion of Kuwait in 1990 and because of fears that it retains the sort of weapons of mass destruction that it has used in the past. Kuwaiti and Saudi officials are both, in contrast to their countries' stances during the 1991 Gulf war, distancing themselves from American opposition to Mr Hussein. In the volatile atmosphere of the Middle East, with widespread resentment of repressive regimes across the region, disruption of supplies in neighbouring countries cannot be ruled out. There is also a small chance that American policy towards Saudi Arabia may change. While it has long been America’s closest ally in the Middle East, the relationship has recently come under strain. No fewer than 15 of the 19 suicide hijackers responsible for the attacks on New York and Washington were Saudi citizens, as is Osama bin Laden, the assumed mastermind of the atrocity. Worried about unrest on the street—many Saudis seem to prefer the elusive Mr bin Laden to the corrupt ruling dynasty—the Saudi government gave no support to America’s campaign in Afghanistan, and it has refused to allow America to use its bases in Saudi Arabia for attacks on Iraq. On the contrary, the government has instead been talking of revitalising trade with Iraq, and of reopening a border crossing closed since the Gulf war. In turn, one researcher from the Rand Corporation, a think-tank, recently told a Pentagon briefing that Saudi Arabia was America’s true enemy and that its oil fields should be seized. While the administration officially moved to distance itself from this briefing, Donald Rumsfeld, America’s defence secretary, seemed to confirm that at least some officials shared the dismay at Saudi policy by saying that the views expressed were not the “dominant” view in the administration. Quite apart from its diminishing value as a military ally, Saudi Arabia has worked to maintain discipline in the OPEC oil-producers’ cartel, and to keep prices up, at around $25 a barrel, well above what many economists think would be their market level in the absence of OPEC. This clashes directly with the interests of America, the world’s biggest oil importer. Prince Turki al-Faisal, until a year ago the Saudi head of external intelligence and brother of the foreign minister, said last month that Saudi would never use oil as a weapon against America. But Saudi’s oil minister, Ali al-Naimi, spent last autumn on a tour of oil-producing capitals, trying (unavailingly) to bully producers into production cuts. OPEC recently admitted that its members had exceeded their production quotas by 1.8m barrels per day in July. This overproduction suggests that, whatever the short-term war-influenced gyrations may be, the trend of the oil price may be downwards over the medium term. After the late-1990s boom, economic growth around the world has slowed dramatically, with a corresponding impact on the demand for oil. The supply of oil is no longer controlled as tightly as it was during the 1970s oil shock. Russia has emerged as an important producer—it is now the world’s second-largest exporter, and its need for cash is such that it routinely undermines OPEC’s attempts to limit global production. This in turn reduces the incentive for other non-OPEC producers, such as Norway and Mexico, to agree to production cuts. Besides losing revenue, they might also lose market share to the Russians. Even Saudi Arabia itself must be tempted to produce more oil, to pay for its extravagant public sector. While its oil is the cheapest in the world to produce—it costs just $1 per barrel to lift it from the ground—it is estimated that the country’s bloated bureaucracy requires a price of $15 a barrel to sustain itself. It is a sign of how much the world has changed that America may now be looking not to its old ally, Saudi Arabia, to keep the oil flowing through a war, but to the old Cold War enemy, Russia. |
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