Iraq: War and the Economy: All About The Oil

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That depends on how long the fighting lasts and how much damage Iraq's oil fields sustain. Even if a U.S. battlefield victory comes in just a few weeks--and there is no major sabotage to Iraq's oil fields--the country's production of 2.8 million bbl. a day is likely to shut down, perhaps for as long as three months. The oil fields will have to be checked for mines and other hazards before local workers and foreign experts can get down to business.

On the plus side, Saudi Arabia, with 2.5 million bbl. a day in spare capacity, has promised to make up part of Iraq's shortfall. The U.S., Europe and the major industrialized countries of Asia also have access to substantial oil stocks to help them weather the likely drought. President Bush has given orders to top off America's 700 million--bbl. Strategic Petroleum Reserve--enough oil to meet U.S. needs for 36 days. That process is about 85% complete. The most probable scenario, according to a study by the Center for Strategic and International Studies, a research institute in Washington, has oil prices running up a few dollars, to about $36 per bbl. As Saudi Prince Alwaleed bin Talal al-Saud, one of the world's leading stock-market investors, tells TIME, "Oil prices could shoot up initially not because there is a shortage but because of the perception there will be one."

But within a few months, with the prospect that Iraqi crude will start to flow again, prices might fall to about $25. By summer, the market could face a glut--and $20 crude. Moreover, says the Institute of Directors, a British employers group, a short war would actually be better for the global economy than the uncertainty and higher oil prices that would hang over it if war continues to be merely a possibility. For the U.S. economy, the study says, a war that resulted in lower oil prices would generate 2003 growth of nearly 3%, compared with the 2% currently forecast by many economists.

WHAT HAPPENS IF THE FIGHTING DRAGS ON?

Here's a nightmare scenario: Iraqi ground troops led by the Republican Guard resist to the bitter end. Saddam hunkers down in a densely populated section of Baghdad, broadcasting calls for sabotage against oil facilities around the Persian Gulf. Large-scale battles tail off in a few weeks, but sporadic attacks on U.S. forces and oil installations continue. Fearful workers and engineers refuse to operate Iraq's oil fields, which close down for as long as six months. In this case, experts say, prices would probably peak above $40 per bbl. and, once fighting ended, fall gradually by year's end to about $30.

WOULD SADDAM BLOW UP IRAQ'S OIL WELLS?

It's a risk. "Saddam Hussein might well see burning Iraq's oil fields, and chemical, biological, radiological or nuclear attacks on major Gulf oil fields as both a defense and a form of revenge," says Anthony Cordesman, an expert on the Iraqi military.

Saddam has tried it before. During the Gulf War, Iraqi soldiers set fire to 700 of Kuwait's wells using plastic explosives. Dense smoke caused health and environmental problems, as crude gushing from damaged facilities contaminated underground drinking water. Damage amounted to at least $20 billion, and more than a decade later, some of it still isn't repaired.