Will Saddam's ouster presage low oil prices?

Crude oil prices are hovering near $30/bbl again. Demand for oil is inching up, a trend surely to continue with seasonal trends in the coming months.

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Crude oil prices are hovering near $30/bbl again. Demand for oil is inching up, a trend surely to continue with seasonal trends in the coming months. Indications are that the Organization of Petroleum Exporting Countries will do little to boost oil supply. And the dogs of war are baying again in the Middle East.

All the signs are there for a sustained period of high oil prices. So now is a good time to speculate a few months-or even a year or two-ahead about a scenario that could mean a sustained period of low oil prices.

Iraq attack

As the din of saber-rattling grows ever louder between the US and Iraq, jittery markets are keeping a sturdy prop under oil prices.

When the US recently commandeered commercial vessels to ship military equipment to friendly Persian Gulf regimes, that underscored for many the seriousness of the Bush administration's intent to depose Iraqi President Saddam Hussein. The No. 1 topic among presidential advisers and pundits alike is how and when-not if-to mount a campaign, including invasion by US ground troops, to overthrow Saddam.

The constant talk of a US military campaign against Iraq has bolstered oil prices to a degree unexpected in a market beset by lackluster demand and burgeoning supplies among OPEC and non-OPEC exporters alike. A crude oil price near $30/bbl in this kind of market incorporates a so-called "war premium," emanating from US-Iraq war talk as well as the continuing Israeli-Palestine strife, of $2-6/bbl.

A $30/bbl price for New York Mercantile Exchange crude futures puts the price of the OPEC marker basket of crudes at the upper end of its targeted range of $22-28/bbl. According to OPEC policy, should that price be sustained for 30 days, an automatic 500,000 b/d production quota increase would kick in to keep oil prices from overheating. But the last time OPEC was faced with this circumstance, it dawdled conspicuously about effecting that quota hike.

The likelihood at this writing is that if OPEC allows any quota increase, it will be a modest one that simply reflects the current level of overproduction by members. At the same time, an attack on Iraq offers a host of scenarios for an Arab-dominated OPEC-none of them attractive. OPEC cohesion will be tested by the countervailing stresses of Arab outrage over a US-led attack on Iraq and by fears of an economic collapse among the group's biggest customers caused by oil prices spiraling out of control. It may be that all of this will turn on whether Saddam lashes out against his Arab neighbors, particularly Saudi Arabia, as well as Israel as his regime crumbles.

Post-Saddam Iraq

There is little doubt over whether a US-led ouster of Saddam would succeed. But how the US handles the aftermath could mean the difference between low oil prices and high oil prices for years to come.

There is now a fierce debate within the Bush administration over whether it should disavow its earlier refusal to participate in what it calls "nation-building"-the comprehensive effort to establish a stable, democratic government in a vanquished foe.

Questions continue to bubble up over the future of Afghanistan with respect to US staying power.

"And staying power-painstaking effort to cultivate the institutions for self-rule-will be the ultimate deciding factor in the battle against terrorism," warned Boston-based think tank Energy Security Analysis Inc., expressing concern over the US's reluctance to stay the course in helping to build a viable government in Kabul.

ESAI contends that, as the Bush administration seems to be doing in Afghanistan, it will also try for a "quick and cheap" fix in post-Saddam Iraq.

But if the US manages to shake off the legacy of Viet Nam and helps create a stable democracy in post-Saddam Iraq, the result could be the foundation of a lasting Pax Americana beginning in the Middle East. This in turn could mean a drift toward openness, democracy, and economic reforms among the shaky, fundamentalist-oriented regimes of the Persian Gulf. Such trends-as was the case in oil-rich countries as disparate as Venezuela, Brazil, and Russia-have always meant increased oil production capacity. And the more OPEC oil production capacity grows, the softer oil prices become over the long term.

So it's possible that the "collateral damage" from a US attack on Iraq could be the ultimate unraveling of OPEC as a serious force in oil markets.

(Online Aug. 23, 2002; author's e-mail: bobw@ogjonline.com.)

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Latest Prices as of Aug. 23, 2002

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NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.

*Futures price, next month delivery. #Spot price. @New contract

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