[EDIT: Pro Forma] The Profits and Pitfalls of War in Iraq
20 September 2002
stratfor.com
Summary
Though it is too early to predict the exact economic effects of a war against Iraq, it is clear that the ramp-up to hostilities will send oil prices soaring. That, in and of itself, will have a dramatic effect on the global recession.
Analysis
While the global energy picture has changed much since 1990, one thing is certain: Once it becomes apparent that Washington will settle for nothing less than the ouster of Iraqi leader Saddam Hussein, oil prices will spike.
During Desert Shield, Brent crude shot up more than $20 from its levels on Aug. 1, 1990 -- the day before Iraq invaded Kuwait. And in February 2002, just before the Bush administration commenced its warmongering against Iraq and suicide bombings began to surge in the Middle East, Brent prices were clustered around the $20 mark. A return to $40 per barrel is highly likely considering Washington's steady march back toward the Middle East.
High energy prices affect different economic players in different ways. OPEC states -- excluding Iraq, of course -- will be among the biggest winners in the near term. Nearly all OPEC members have monochromatic economies that would wither and die without oil. Such economies, like other extraction-based economies, are unstable and inefficient. For example, the Energy Intelligence Group estimates that the bureaucracy of Saudi Arabia is so bloated that the country falls into deficit whenever oil prices dip below $25 per barrel -- even though Saudi oil is among the cheapest in the world to bring to market.
In the short term, therefore, a war with Iraq will be a huge boon to OPEC producers. Even the threat of war is serving them well: Without Washington's stream of bellicose statements, prices would be about $5 per barrel cheaper than they are now. Last year's global recession, combined with this year's sluggish growth and a rapid increase in non-OPEC oil supplies, should have left prices relatively flat, but anything that keeps Washington's threats going or actually leads to war will minimize Iraq's presence in the market and maximize oil prices.
The situation is even brighter for non-OPEC producers. Though their economies certainly are addicted to oil, most of them do not rely upon it as wholly as those of OPEC states. These non-members rarely face systemic collapse when prices dip, but they certainly enjoy the windfall when prices rise. Examples are Norway and Russia: Norway invests all of its oil proceeds in its national retirement fund; Russia -- despite sustaining a severe economic hit during the 1997-1998 oil crash -- retained both its relative social stability and its government. Venezuela and Indonesia, both OPEC members, were not so lucky. The Gulf states of OPEC have survived only because of their large savings accounts and small populations.
Unlike the quota-bound OPEC states, however, non-OPEC producers have little reason to rein in production. Instead of spending their windfall on overhead, most of them will invest in fresh production.
For oil importers, the prospect of a war with Iraq is not so positive, but the impact of the ensuing high oil prices varies widely among these states.
Those who suffer the most will be states that depend on heavy industry and those whose consumers have low levels of disposable income. Heavy industry is very energy-intensive, and consumer and industrial energy demands tend to be inelastic. Therefore, any increase in energy prices translates into a direct hit on the pocketbooks of industrialists and consumers. The knock-on effect from consumers is particularly sharp, since it reduces the amount of money consumers spend in all areas. The end result is that the non-energy sector is starved of sales and, therefore, funds. In short, high energy prices slam purchasing power across the board, lowering both standards of living and national output.
That means that developing states stand to be hurt the most by a war with Iraq. Almost all of the world's poorer states are deeply dependent upon heavy industry or have little to no disposable income -- or, in many cases, both.
Within the developed world, the United States will suffer least. It enjoys the highest level of disposable income of all the major developed states, and its dependence on heavy industry withered years before the dot-com boom materialized.
The United States also has four other critical buffers. First, it is the fastest-growing of the major economies, having racked up relatively steady -- if modest -- growth since the fourth quarter of 2001. During that time, Europe and Japan have remained in recession.
Second, as a proportion of national output, the United States spends less on energy consumption than other industrialized states. Net imports account for about 1 percent of U.S. GDP, versus 1.5 percent for the European Union and 1.4 percent for Japan. The Organization for Economic Cooperation and Development estimates that the recessionary effect of high oil prices hits the EU approximately one-third harder than the United States.
Third, the United States is a major energy producer as well as importer. It produces 41 percent of its own oil; Japan, by comparison, produces 2 percent of its domestic demand.
Finally, and perhaps most importantly, U.S. dollars dominate the oil market. Since the dollar tends to do well in times of international crisis, other countries will suffer disproportionately. For example, while oil prices tripled in dollar terms from the beginning of 1999 to the end of 2000, they quadrupled in euro terms. |
