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Franssen Scenarios - real life!



We may want to use some of this in our sim game....
https://www1.columbia.edu/sec/bboard/gulf2000/gulf2000-29/msg01000.html
Title: Franssen Scenarios
Gulf2000 #29 Oil and the Gulf

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Post A Follow-Up Message
Subject: Franssen Scenarios
To: oil <gulf2000-29@columbia.edu>
From: Gary G Sick <ggs2@columbia.edu>
Date: Tue, 24 Sep 2002 22:58:02 -0400 (EDT)


www.energyintel.com

September 20, 2002

Perspective

Scenario planning in Iraq

How would a US invasion of Iraq affect oil markets and the global economy?
Dr. Herman Franssen, senior adviser, Energy Intelligence Group, suggests
three possible answers. The scenarios were part of a presentation, Arab-US
Energy Needs in Perspective, given to the 11th annual US-Mideast
Policymakers Conference of the National Council on US-Arab Relations and
the US-GCC Corporate Cooperation Committee in Washington earlier this
month.

The three scenarios represent an attempt to explore what could happen to
oil markets and the global economy should the US invade Iraq. They
incorporate a variety of strategic and political assumptions - of which
none, some, or all may come to pass - and are based on current and
forecast oil market conditions between now and the first quarter of 2003,
which, because of weather is regarded as the most likely timeframe for any
invasion.

Right now, oil markets are tight, and commercial stocks in September are
lower than at this time last year and only about 50 million barrels above
the very-low levels of September 2000. Even if Opec had decided to raise
the production ceiling slightly in Osaka this week - and it didn't -
forecasts suggest stocks could be as tight by mid-November as they were in
2000, and well below November 2001 levels. By the end of the first quarter
of 2003, commercial stocks are projected to be slightly above levels in
2000 and 2001.

The three scenarios range from the least serious, Veni Vidi Vici, through
Global Stagnation, to Apocalypse Now, the worst-case. No attempt is made
here to establish the probability of any of the scenarios - US
neoconservatives who believe Iraq will implode soon after a US attack
would probably subscribe to "Veni Vidi Vici," and pessimists to
"Apocalypse Now." Probably the best advice for the oil industry is to hope
for the best, but prepare for the worst.

Best-case: Veni Vidi Vici

o A US invasion of Iraq in the autumn or winter meets little resistance.
Iraqi forces collapse within a few weeks, perhaps less. Casualties on both
sides are modest, and "collateral damage" is limited. While there are
demonstrations throughout the Arab world, the feared reaction from the
Arab "street" generally proves controllable, in view of the small number
of casualties and speed of the regime change. A new government is
installed with the aim of establishing a broad-based government, preparing
a new constitution, and setting a date for elections. Immediate foreign
assistance, along with the resumption of trade, lifting of sanctions and
debt relief, soon restores the economic activity needed to support the new
government. Peacekeeping forces remain in Iraq to prevent renewed internal
hostilities.

o Damage to oil infrastructure is minor, and oil exports resume on a
limited scale within weeks. By the end of spring 2003, Iraqi production
reaches 3 million barrels per day. Within a year, the new government
resumes discussions with Western, Russian, and Chinese oil companies, and
a formula is worked out to meet the expectations of the French, Russian,
and Chinese oil industry, as well as US and UK newcomers.  Iraq is on
target to produce 5 million b/d by the middle of the decade.

o Oil prices rise ahead of the invasion to well over $30/bbl because of
tightening fundamentals and market psychology. The US carries through on
its pledge to release oil from the Strategic Petroleum Reserve (SPR) in
case of a supply disruption, announcing the release of 1.5 million b/d
once the invasion starts, much higher than Iraqi oil exports at the time.
With an estimated 5 million b/d of spare production capacity, other Opec
countries quietly take advantage of high prices to release more oil on to
the market to meet rising demand.

o The release of the SPR oil and higher Opec exports help push down oil
prices considerably in anticipation of a supply glut in late spring and
summer 2003, as does the realization that the US will win a quick victory,
damage to oil infrastructure will be modest, and there will be no supply
disruptions elsewhere. Medium and long-term oil prices also come under
pressure from the additional volumes of Iraqi production expected on
stream in the future.

Middle-case: Global Stagnation

o The invasion meets stiff resistance from Iraq's Revolutionary Guard, and
both sides suffer considerable losses, although weapons of mass
destruction (WMD) aren't used. As the fighting continues, more bloody
antiUS and anti-Western riots occur throughout the Arab world. After
prolonged house-to-house fighting, which leads to significant casualties
and collateral damage, US forces defeat the Iraqis. A new government is
installed, but has no effective control beyond Baghdad. Fighting continues
in many parts of the country as various groups settle old scores.

o The internal disturbances lead to erratic oil production. Exports
initially stop entirely, before resuming on a limited scale after a few
weeks. But continued disturbances plus damage to infrastructure prevent a
return to full export capacity for much of 2003. Oil exports range from
500,000-1 million b/d for a year.

o Pressure from the "street" stops other Arab oilexporting countries from
increasing production, and Iran joins moderate Arab producers in keeping
output where it is. Extremists encourage minor acts of sabotage against
oil field and transportation infrastructure, as well as sporadic attacks
on oil tankers in the Gulf. Political pressures, along with some
producers' inability to increase export capacity, result in a cut in
Mideast exports for the duration of the conflict. Some 1 million b/d of
spare capacity outside the Middle East is put on the market.

o As fighting continues inside Iraq and disturbances spread throughout the
Mideast Gulf, several industrialized countries outside the International
Energy Agency (IEA) engage in major stockbuilding. To counter production
losses in an already tight oil market, the US releases SPR oil. This is
followed by the release of public stocks in other IEA countries. But the
IEA releases aren't enough to offset the Opec losses and the higher
stockbuild by nonIEA consumers.

o The net result is oil prices of significantly above $30/bbl for the
duration of the conflict. With OECD economies already weak, the prolonged
period of high prices reduces global economic activity even more.

Worst-case: Apocalypse Now

o The invasion meets stiff resistance from the Revolutionary Guard. Both
sides suffer major casualties, and "collateral damage" is serious. With
its back to the wall, the Iraqi regime successfully spreads the conflict
to Israel, either using a Scud missile with a chemical warhead or through
a big terrorist attack, and Israel retaliates. Alternatively, Israel takes
the opportunity to launch a major drive against Palestinians. In either
case, it leads to upheaval throughout the Arab and Islamic world, and the
government of at least one major Gulf exporter fails to survive the
turmoil.

o US forces are ultimately victorious, but fail to bring peace. Before the
US establishes control, Iraqi troops destroy vital oil field and
transportation infrastructure. It takes at least a year to repair the
damage and bring the fields back on stream. Serious disturbances in
neighboring countries, including oil producers, force some governments to
cut exports under pressure from increasingly agitated populations. The
Iraqi regime pollutes the Gulf waterway, disrupting exports from other
producers. As the turmoil spreads, terrorists attack US and other Western
oil and industrial interests in many parts of the world, creating minor
supply disruptions. Faced with the possibility of more widespread
disruptions, the US has to decide whether to occupy Mideast oil fields.

o The rapid spread of the conflict causes panic-buying in non-IEA oil
importers with no strategic stocks. IEA public stocks of about 1.3 billion
bbl will enable a stockdraw of 5 million b/d for four months or 3 million
b/d for six months. But individual IEA members are reluctant to increase
the rate of release to near capacity for fear the conflict may outlast the
emergency reserves. As what began as a limited military action again Iraq
escalates into a major regional conflict, the IEA mechanism proves
inadequate. Oil prices double for an extended period, escalating to levels
that cause serious harm to the global economy (Glenn Hubbard, economic
adviser to the White House, has said a $10/bbl rise for a sustained period
may reduce US GDP by 0.25%-0.5% after six months to a year). Several years
of recession follow, and OECD countries formulate new policies to speed up
the transition to less oil-dependent economies.

Energy Compass would welcome readers' comments on this article, plus
opinions on the possible impact on oil markets or the oil industry of a US
military attack against Iraq. Letters/articles should be submitted to:
Jane Collin, Editor, Energy Compass, email: jcollinOenergyintel.com; or
write to: Energy Intelligence Group, Holborn Towers, 8th Floor, 137144
High Holborn, London WCI V 6PW, UK.



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