Accessibility links

Analysts Worried About Impact on World Economy of Possible Iraq War - 2002-09-19


Nervousness over the prospect of a new war with Iraq is keeping the price of crude oil high on world markets. A prolonged war in the gulf or a refusal of other oil producing countries to support it, could risk a slowdown in the world economy.

Economists are worried that a war to topple President Saddam Hussein could do to the U.S. economy what the gulf war 11 years ago did send it into another recession. At the very least, analysts say it would almost certainly lead to higher oil prices. But if all goes well, a change of regime in Baghdad would lead to a lifting of U.N. sanctions, putting more Iraqi oil on the market.

Before that though, the United States would have to rely on other oil producers, like Saudi Arabia and Russia, to make up for the amount of Iraqi oil that would be off the market during war. At a meeting in Japan Thursday, OPEC decided to keep production quotas at current levels.

"The nightmare scenario of course is that a war with Iraq will spill over throughout the Middle East. It might disrupt oil production in Saudi Arabia or Kuwait," said Allen Beattie, the international economy correspondent at the Financial Times of London.

"The combination of all of this will stop or circumscribe the flow of oil to the world economy," he said. "That's what people are really concerned about."

The United States is the biggest purchaser of Iraqi oil, but Iraq currently produces less than two percent of the world's oil supply, a situation that John Felmy, chief economist at the American Petroleum Institute, points out, is much different from 12 years ago, when Iraqi tanks rolled across the Kuwaiti border.

"Immediately, about five million barrels of petroleum a day were taken off the market and that was on a base of total supply of roughly about 66 million barrels a day of consumption," he said. "So it was a fairly large share of world supplies. Now if you were to lose current Iraqi production, which appears to be less than a million barrels a day, it's on a base of roughly 76 million barrels a day of consumption, so it's a smaller share in terms of Iraqi importance to world supplies."

All of this assumes the United States will get a commitment from oil producing allies to pump at the current rate, or better, even if they refuse to lend support to the war. But there are other long term questions as well.

"Suppose they went in and managed to knock the Saddam Hussein regime down quite quickly, I don't think that will be the end to it," said Mr. Beattie. "I don't think that some sort of miraculous democratic regime is suddenly going to leap up from the ashes and the U.S. could withdraw. It might well be that the U.S. had to spend a long time afterwards doing what this administration does not like doing and which is nation building, spending time and money on the ground trying to build the sort of stable regime it wants to see there."

And that requires money. Bush administration officials are reluctant to discuss such scenarios, preferring to keep the focus on the reasons for getting rid of President Saddam. But White House economic advisor Larry Lindsey estimates the cost of waging war with Iraq to be as high as $200 billion.

The last time U.S. troops fought in the Gulf, Kuwait and Saudi Arabia picked up most of the estimated $60 billion cost. With many Arab allies publicly opposed to war, this time the United States may end up paying most of those costs.

XS
SM
MD
LG