Fighting for Oil?

June 1, 2004 Topic: Economics Regions: Asia Tags: BusinessGulf WarIraq War

Fighting for Oil?

Mini Teaser: It is hard to find any public statement from an American official justifying the ouster of Saddam Hussein in terms of oil.

by Author(s): Edward L. Morse

The third dimension of our analysis is perhaps the most surprising and unexpected, as is the role Washington played in what may charitably be called the perverse result of the highest and best of intentions. This dimension has to do with the surprising tightening of the oil market a year after the liberation of Iraq. Prevailing oil prices were about $30 per barrel throughout 2003. They have moved closer to $40 per barrel during the first half of 2004. Spot prices have reached the highest point ever, in nominal terms, surpassing the peaks attained during the prelude to the Gulf War in 1990 and the immediate aftermath of Iraq's attack on Iran in September 1980. What is more, they appear likely to stay at high levels for a long time even if there are no new disruptions, and could skyrocket to substantially higher levels in the event of new outages in supply in the near future.

Whatever the other complex causes of this unexpected turn of events in the world's oil markets, Washington's role in triggering the recent price rise is undeniable. It seems clear in retrospect that the severe imbalances that exist between crude oil and petroleum product inventories in the United States and elsewhere (that underlie much of today's high prices) date back to the preparations for war in 2003. Still other elements of today's prices relate to the consequences of the modalities of the occupation and its administration in Iraq.

The imbalances date back to what happened in the oil market in the winter of 2002, when Venezuela's oil sector was shut down by a domestic strike and some 200 million barrels of oil (including some 60 million barrels of gasoline and other petroleum products) were lost to the market. At the time, the United States considered the release of strategic stocks as a defensive measure. Newspaper reports indicate that all of the president's advisors except the vice president were in favor of such a release at the time. It was reported that the vice president argued that Saudi Arabia could be relied on as the substitute for lost Venezuelan oil. He also apparently argued that the option of a release of strategic stocks needed to be held in reserve in the event the world required more oil at the time of an attack on Iraq.

There is no doubt that Saudi Arabia did try to come to the rescue, but too late to be effective: The increase in Saudi output occurred 45 days after the Venezuelan strike and began arriving in the market another 45 days later. In a world where oil stocks were being held low as a consequence of Saudi and opec policy, market imbalance and shortages this year were clearly a result of problems that emerged before the Iraq War began. Had Washington not been obsessed with holding on to strategic stocks in the winter of 2002, oil prices would undoubtedly be substantially lower today, perhaps by more than $5 per barrel.

The other factor that forms part of today's record price is, of course, the fear factor. This factor is based on the numerous attacks on oil facilities, including infrastructure. These attacks have centered in Iraq, where the steady flow of exports has been made impossible by lack of security, but they have occurred elsewhere as well, including Saudi Arabia. Thus, Washington's failure to assure the steady flow of Iraqi oil and work toward increasing the country's capacity has served to make the market tighter. But the lack of security at Iraq's oil facilities has also been responsible for a price premium, which some analysts peg at another $5 per barrel. So the Iraq War and its consequences may have raised the price by up to $10 per barrel.

We remain too much a part of unfolding events in Iraq and in the global oil market to provide a clear assessment of the multiple and complex roles Iraqi oil play in American foreign policy, in the politics within opec and in today's oil market. What is clear, however, is that what has occurred over the past year has surprised virtually all analysts and players in the market. But the path taken here, as elsewhere in human affairs, is paved far more by the perverse consequences of good intentions than it is by bold or far-sighted statesmanship.

Essay Types: Essay