Prev msg | Threaded Index | Next msg Post A Follow-Up Message 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. Prev msg | Threaded Index | Next msg |