What military strategy vs. Iraq yields lower oil prices?

The military strategy employed by the US against Iraq could result in an oil price response echoing that of Desert Storm.

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The parlor game of the moment is: What shape will the speculated US-led campaign to oust Saddam Hussein take (which in turn presages the shape of oil markets to come)?

That game is all but overshadowing the old standby, Will the Organization of Petroleum Exporting Countries boost production or not?

The latter will become evident when OPEC ministers meet in Osaka Sept. 19. The former could be playing out even as this column goes to press.

And even as oil prices ramp back up in response to the latest rumors, the speculation continues to build that a post-Saddam Iraq could mean increased downward pressure on oil prices for some time to come, once the immediate hostilities had ceased.

The latest influences on jittery oil markets include another report, this time by Reuters, that the US Navy had commandeered a large vessel to take heavy armor to the Persian Gulf—ostensibly in preparation for an invasion of Iraq. The report follows a similar such booking a few weeks ago that the Navy denied had anything to do with a run-up to an invasion. Together with the launch of a campaign to state his administration's case against Iraq by President George W. Bush and a steadily rising drawdown of oil stocks, these factors have helped push oil prices back close to $30/bbl territory.

And the guessing game as to whether any hostilities would be a repeat of 1991 have oil analysts playing surrogate military analysts for the Bush administration.

Military strategies

Speculating over a Saddam ouster leading to a low-price scenario presupposes that the US-led military campaign would succeed quickly and cleanly with minimal fallout beyond Iraq.

There is little concern over the loss of Iraqi supplies. Baghdad's legal exports have dwindled to a mere 830,000 b/d over the last 4 months, according to the London-based Centre for Global Energy Studies. Losing those volumes would be a godsend to the likes of Algeria and Nigeria, clamoring for bigger quotas—not to mention other quotabreakers in OPEC. If the conflict doesn't spread beyond Iraq, the current war premium disappears and oil prices slump—Desert Storm redux.

Attacks on Saudi, Kuwaiti, or Iranian oil facilities would spike oil prices, but, says CGES, "If the conflict were to disrupt Saudi oil exports, an upper limit might be hard to find, but military analysts doubt Saddam's ability to launch such an attack."

Energy Security Analysis Inc., Boston, takes a "Clausewitzian" view of possible US military strategy, recognizing that Saddam's only hope—a military victory against the US not being a remotely plausible option—is, in essence, what he did during Desert Shield in 1990-91.

Such a strategy by Saddam would invoke Carl von Clausewitz's view that an inferior power can best a superior one by forcing an unacceptable cost of or improbability of total victory by the latter. That is, in short, suggesting that engaging US troops in street fighting in Baghdad would cause unacceptable US troop and civilian losses—raising specters of US military failures in Viet Nam, Beirut, and Mogadishu. The other part of Saddam's strategy continues as well: rousing restive Arab populations already angry at the US over its Israel policy.

But the US can prey on Saddam's own paranoia by attacking selectively, hitting heavily a Republican guard placed as much to guard against a coup by the regular Iraqi army as against other threats. And following that up with heavy hits on a regular army could spark the beginning of a widespread defection by the Iraqi army and loss of support for Saddam among the Iraqi populace.

Such tactically savvy approaches could minimize US troop and Iraqi civilian losses, paving the way for a quick victory over Baghdad.

So the question becomes: How much of the anger targeting the US over such an attack stems from the regime change aspect vs. the otherwise unrelated issue of its Israeli-Palestinian stance?

Is it so inconceivable that a number of regimes in the region might cheer, at least in private, a Saddam-less Iraq? Or that Israeli-Palestinian peace efforts might make still more progress without the neverending added irritant of Saddam in the picture?

There was a lot of similar trepidation over the prospect of spiraling oil prices during Desert Shield.

Thing is, they spiraled down.

(Online Sept. 7; author's e-mail: bobw@ogjonline.com)

OGJ Hotline Market Pulse
Latest Prices as of Sept. 6, 2002

US OIL MARKETS WERE CLOSED SEPT. 2, 2002

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