The oil factor in impending war

Many in the world say one of the reasons why America wants war against Iraq has to do with oil.

The "oil idea" has been repeated so much in the past few months, it has almost become a cliche. But cliche it is not. A recent report entitled "War with Iraq, Costs, Consequences and Alternatives" under the auspices of the American Academy of Arts and Sciences reveals very interesting facts about U.S. motives.

The report published in late 2002 was compiled by leading academics from prestigious American universities.

In one section, the issue of oil is tackled by William Nordhaus, a professor of economics at Yale University. At length, he examines the importance of the oil factor in influencing America's decision to embark on a war strategy and its desire to introduce regime change in Iraq.

This becomes plausible when we look at the figures as many tend to forget the vast oil resources Iraq has. The report states "Iraq has about 10 per cent of the world's proven oil reserves and resources".

Relying on figures by the U.S. Energy Information Agency, it states: "Iraq contains 112 barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia), along with roughly 220 billion barrels of probable and possible resources. Iraq's true resource may be far greater than this..."

With these figures at hand, Nordhaus suggests "Iraq oil resources could satisfy current U.S. imports for almost half a century".

Although the American administration downplays the oil factor when talking about Iraq and concentrates on the need for Baghdad to comply with UN resolutions dealing with weapons of mass destruction, Nordhaus, quoting Larry Lindsey of the Wall Street Journal, says that "...improved oil security and control of oil resources after the war may be hidden in the classified U.S. analysis".

Further still, "whatever the role of oil supplies in the Bush administration's calculus, many foreign nations suspect that getting control of Iraqi oil supplies for American companies and American SUVs is high on the American priority list".

From the analysis contained in the report what America appears to want is long-term stability in the supplies of oil, minimum price fluctuation, minimum outside interference from say the Organisation of Petroleum Exporting Countries (Opec) and other outside powers and, above all, maximum control. Implicit in the analysis is that Opec has a monopoly over oil and oil flow. This is bearing in mind in 2000-2001, 29 million bpd of the 68 million bpd consumed in the world was controlled by countries in Opec.

In terms of yield, this can give the oil cartel a lot of muscle flexing power as, according to these figures, Opec controls about 42 per cent of the oil market.

But regardless, one analyst in the report projects that if war happens, the oil price is likely to shoot up, in fact "triple", to $75 a barrel and gasoline to $3 per gallon, with the imported oil bill rising by $200 billion per year in the world with a projected decline in real GDP of 3 per cent.

One of the problems for the world economy as clearly stated in the report is the stability issue of oil prices seen as essential to the growth and prosperity of the world economy.

The oil price shocks as happened in the 1973-74 hikes, in 1978-79, and in 1990-91 at the time of the Gulf war have added great strain on global productivity.

Restrictions in oil production led to sharp increases in the fuel bill, higher prices in consumer goods, rising costs in output and consequent recession in different parts of the world.

"We should avoid the common fallacy of thinking that the U.S. or any country can insulate its economy from an oil shock because it imports from 'safe' sources. As long as oil prices are determined by the oil market, oil is a fungible commodity, and a price shock anywhere affects importers everywhere."

While politicians and military strategists may gear up to war for totally different reasons, economists can provide a more sober, reflective approach.

George Perry quoted in the report suggests "the impact of the worse (three cases bad, worse, worst) oil is a reduction in real income of $175 billion in the first year and $778 billion over the entire decade...one-seventh of the decadal cost comes in higher cost of imported oil, while the balance comes in lower domestic production".

However, the "gloomy" case is counteracted by a more "happy" outcome in the oil markets of the world. Many are "betting on a successful war in Iraq" that would liberate "Iraqi oil and its people".

Some see a 'quick victory" as creating stability in the region, increasing oil production and putting downward pressure on the oil price that would stable at around $10. But it is suggested this would require a bigger oil production quota in a post-war Iraq and under a necessarily different regime.

Iraq's oil capacity in 1979 was 3.5 million barrels per day. In 2002, it stood at between 2.8 million and three million bpd.

With restructuring operations of its tattered oil industry, it is believed it can increase oil production to between three and four million bpd within the next two years.

The $40 billion contracts signed between Iraq and Russia, France and China last year has worried the U.S. Indeed, the report suggests the U.S. may try to undermine these contracts in a post-war Iraq.

"The jockeying for contracts in a post-war Iraq is likely to be time-consuming, particularly if the United States tries to ensure 'equity' for its own companies. Unless the United States decides to treat Iraq as a fifty-first state - Texas on the Tigris - developing new oil fields is likely to be a contentious and a lengthy process," the American Academy report points out.

Nordhaus suggests there is a sticking point that is likely to come from Opec, especially if Iraq, after the war, wants to increase oil production capacity to say five million, a decision already taken by signing the oil contracts with Russia, China and France.

Opec would likely impose an oil production quota and restrict Iraqi oil. Thus, "in the post-war era, a first decision Iraq's decision-makers will face is whether to remain in Opec.

Whilst the writers of the report say that such a decision would be beneficial, ensuring "oil-importing countries'... the U.S.'... economic growth at low prices for many years to come. But if the decision to quit were dictated from Washington, it would be the economic equivalent of the recent national security doctrine that trumpets U.S. hegemony over the world".

In a rather strong tone, the writers of the report say: "Forcing Iraq out of Opec, and encouraging a major production increase by Iraq would be an economic declaration of war on Opec."

However, if this were to happen, the report adds that it would lower income in the whole of the Middle East, "deal a blow to the Russian economy, and could destabilise the region from Algiers to Novosibirsk".

The report, however, concludes: "From the U.S. point of view, it would be a myopic policy leading to even greater dependency on...Gulf oil supplies and inviting decades more of political, economic and military struggles in that region."

Having said that, Nordhaus does sa