Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Attack Iraq? -- Ignore unavailable to you. Want to Upgrade?

To: AK2004 who wrote (1235)	9/16/2002 2:15:05 AM
From: calgal	Respond to of 8683

Saddam's Oil The Gulf War lesson is that a quick victory will bring prices down. URL: opinionjournal.com Monday, September 16, 2002 12:01 a.m. EDT Going to war with Iraq involves many strategic and tactical calculations, which is just another way of saying it involves a lot of uncertainty. But the current anxiety about the economic impact of war, now reflected in higher oil prices, ought not to be an occasion for scare-mongering. Economic forecasting is always a mug's game. At its best it involves economic models based on what has happened in the past. Well, it turns out that the last four recessions were associated with oil prices of more than $30 a barrel. Many forecasters are thus looking at the run-up in oil prices in recent months (now near $30), and taking fright. In particular, some are seizing on the recession associated with the Gulf War of 1990-1991 to forecast economic disaster. So it's worth looking at what actually did happen to prices during that war, because that history tends to rebut today's doomsayers. When Saddam Hussein moved Iraqi troops to the border of Kuwait in June of 1990, oil prices were low--below $16 a barrel. That's one reason he sent his troops; he was furious about low prices and wanted to convey that fury to his OPEC colleagues. He invaded in early August, and oil prices doubled. By September, oil was $38 a barrel, buoyed by a tremendous amount of hoarding due to uncertainty about what the U.S. would do, whether Saddam would move into Saudi Arabia, whether Saudi Arabia and other oil producers had enough spare capacity to make up for embargoed Iraqi and Kuwaiti oil and whether or not they would use it. The first Bush Administration didn't help by dithering over whether and when to release oil from the Strategic Petroleum Reserve. When the government released a few tiny drops in September, the market responded with derision. And oil prices kept rising. The U.S. economy was already struggling. After eight years of expansion, interest rates were rising and credit was tight. Growth was still positive but anemic at around 1%. No doubt the economy was sliding into a recession, and rocketing oil prices accelerated the slide. In October oil hit $40 a barrel and the economy finished the fourth quarter of 1990 with steeply negative growth. Prices began to fall back down by the end of that year, mostly in response to increased oil production by other countries. And when the U.S. began air strikes in the middle of January, decisively ending the market's uncertainty, oil fell to about $20 a barrel. Prices stayed mostly below $20 for the next four years. Simply put, in the absence of certainty, in part coming from government policy, oil prices were pushed up beyond what fundamentals would dictate. And higher prices aggravated underlying economic weakness. But if anything, the war itself, by ending the great amount of uncertainty attached to oil prices, was critical in reversing the economy's slide; Saddam was vanquished in February and growth resumed in the second quarter of 1991. And that brings us to the market's current flirtation with $30-a-barrel oil. Some of the price pressure is coming from tight supplies; global inventories are low. But some also comes from anxieties about war. Observers put this "war premium" at anywhere from $5 to $10 a barrel. One way to let the air out of this premium would be for the Bush Administration to declare that it is ready and eager to release oil from the Strategic Petroleum Reserve if there are severe oil-supply disruptions, for example, if Saddam attacks Saudi or Kuwaiti oil fields. The U.S. holds almost 600 million barrels of oil (about half of global stocks) that could provide the market with four million barrels a day for 90 days. Optimists argue that even $30 oil would not be as devastating to the economy as in years past. The U.S. is less dependent on oil for generating electricity or heating homes. Moreover, if Saddam is unable to attack Kuwait and Saudi Arabia, there isn't much danger of prices going a lot higher as those two countries alone have sufficient reserves to cover any lost output from Iraq. And if Saddam were deposed, and Iraq ruled by more enlightened leaders, that country's oil (potentially as much as three or four million barrels a day) would also go on the world market. Pessimists respond that war is never easy, things will happen we don't expect, and that oil could spike to $60, which over several months would be highly damaging for the economy. All of which is another way of saying that the best way to keep oil prices in check is a short, successful war on Iraq that begins sooner rather than later. We aren't suggesting the U.S. should go to war to get cheaper oil. Only that as long as uncertainty continues, the greater the possibility that economists will have to put another recession associated with $30 oil into their mug's game.