WAR AND CHANGE IN THE OIL WORLD

For the international petroleum industry, war in the Middle East means the world will never be the same. Early in the conflict, the strategic outcome seemed certain: International forces amassed against Iraqi troops in Kuwait would prevail. Saddam Hussein's apocalyptic bluster was no match for the overwhelming air power that led the attack. Iraq seemed quickly to have lost most of its command and control capability, leaving its forces in Kuwait in jeopardy. Early in the conflict,

Jan. 21, 1991

3 min read

For the international petroleum industry, war in the Middle East means the world will never be the same.

Early in the conflict, the strategic outcome seemed certain: International forces amassed against Iraqi troops in Kuwait would prevail. Saddam Hussein's apocalyptic bluster was no match for the overwhelming air power that led the attack. Iraq seemed quickly to have lost most of its command and control capability, leaving its forces in Kuwait in jeopardy.

Early in the conflict, therefore, there were two main questions: How long would the fighting last? And how many soldiers would perish?

But there are huge questions beyond those involving the conflict itself. The petroleum industry now must wonder what happens once the shooting stops.

A DANGEROUS PLACE

No matter what happens in the war, two thirds of the world's crude oil will remain concentrated in a very dangerous place. And with Iraq's military power neutralized, as it surely will be, regional power and wealth will be out of balance as never before. Countries with the most oil will, with the possible exception of Iran, be among the region's weakest militarily.

Oil companies that work in or with nations in the Middle East must therefore recognize that simple defeat of Iraq, even if coupled with removal of Saddam Hussein from power and destruction of his military machine, will not make the region more stable. Unless this war overhauls Middle Eastern politics--unless states in the region yield some of their tribal customs, relax antique hatreds, and adopt a few formal trappings of modern sovereignty, such as national boundaries--the region faces less stability than ever.

For industry, the dangers are obvious. What may be less obvious is the rapidly diminishing degree to which companies in the future will be able to rely on stability enforced from abroad. The petroleum world--and that includes consumers--has played its Western military ace. If this fight lives up to its bloody expectations, who will lead the next defense of the world's economic sustenance?

Not the U.S. A loud minority didn't want to fight to defend petroleum interests this time. Next time, it won't be a minority. And this war, coming as it does at the beginning of a recession and well into a period of fiscal distress, will be costly. If the next crisis comes anytime soon, the U.S. won't possess the military and financial resources necessary to respond. And if the world's single biggest oil consuming country doesn't respond, no one will.

People must have oil but should not have to die for it. And they wouldn't have to die for oil if the world paid sufficient attention to the value of supply security and its corollary--the costs of insecurity.

ATTENTION TO SECURITY

When the current tragedy ends and future risks become apparent, market forces will add a premium to costs of Middle Eastern oil and make oil elsewhere more attractive than it was before by comparison. The mechanisms will take many forms--war risk premiums for work in the Middle East, for example. Political forces will pursue changes, too--some good, some probably bad. Consuming nation governments certainly should try to encourage domestic production. And Middle Eastern countries should try to make their region a safer place. Security of supply is worth something to all parties.

The oil industry's world after this war will not be like the world before the conflict. But its population of tyrants willing to kill for the wealth and power that come with control of petroleum will have been reduced by at least one.