DOES THE Iraqi crisis spell disaster for the world economy? Not necessarily. From a strictly economic perspective, the current confrontation may not only be far less threatening than commonly supposed, but may ultimately provide a needed boost to the faltering U.S. economy.
Historically, wars have often taken root in economic conflicts, and the one looming in the Persian Gulf is no exception. If Kuwait had not been a wealthy oil producer, would Iraq's Saddam Hussein have ever bothered to invade it? Except for the threat the invasion posed to free access to the region's oil, would 170,000 American troops be getting ready to do battle there?
And both Iraq and the countries whose forces are arrayed against it, indeed all the rest of the world as well, are already paying an economic price because of the invasion. Financial markets around the globe have been unnerved. Oil prices, inflation and interest rates have shot up and stock prices have plunged. Moreover, if a shooting war breaks out, many financial market analysts believe there will be carnage not just on the battlefield but among investors as well.
World Bank economists early on suggested war would send crude oil prices to $65 a barrel, up from the current $35 price which in turn is up from $18 just before the invasion. Figures of $85 and $100 have also been tossed around. Obviously no one knows where the price of oil would end up, only that fears that Saudi Arabia's huge oil fields would no longer be able to produce their 7.5 million barrels of oil a day would send the cost of crude sky high.
If oil prices soar, the world probably will see a replay of what has happened in the past two months, in spades. Long-term interest rates will rocket upward and stock prices, already at their lowest level in years in many markets, will fall anew. The swift developments likely will also cause a new wave of consumer and business caution; no one will want to make new commitments until the outcome, including the damage to the Saudi oil-production machine, is known.
In short, economies around the world will falter. For those that are already growing very weakly, such as the United States, Canada and Australia, the blow could drive them into a serious recession.
But are the risks really that great? No, they are not, say executives with several major U.S. oil companies who have operated in the Persian Gulf area for years.
Economically, everything turns on the availability of enough oil to supply the world's daily appetite for 50 million barrels. If oil prices do not soar -- or more likely, go up but come down quickly -- the economic damage around the world from a shooting war over Kuwait would be minimal.
The oil company executives simply do not believe that either the Iraqi military forces or terrorist actions can seriously damage Saudi production facilities. If Iraq was never able to do serious damage to Iran's oil-production capacity during eight years of war, they ask, how on earth will it be able to do such damage in Saudi Arabia where U.S. forces should have virtually complete control of the air and vastly greater firepower than Iran ever did?
"There is a pipeline in Colombia that guerrillas blow up regularly," says one executive, who does strategic planning for a major oil company. "It is always back in service in a day or two. Pipelines are not hard to repair."
The real point of vulnerability, he says, is shipping. A huge tanker taking on crude is truly a sitting duck. But even there the Iraqis failed to shut down Iran's major loading point, Kharg Island, which not only was only a little over 100 miles from Iraq but was isolated out in the Persian Gulf and hard to defend. Tankers were damaged by rocket attacks and crewmen killed, but they continued to load.
In contrast, Ras Tanura, the principal Saudi shipping terminal, is roughly 300 miles from Iraq and on the coast. Moreover, even if it were damaged, the Saudis have two east-to-west pipelines to the relatively safe Red Sea that together can carry about 3 million barrels daily.
"Even if shipping were halted at Ras Tanura, they could still ship a reasonable amount of oil through the pipelines. In the Iraq-Iran war, Iran was still able to ship," the executive said.
Just offshore from the Kuwait-Saudi border there is an oil field still producing about 200,000 barrels a day that are shipped directly from there. That production likely would be lost during the conflict. Similarly, since some of the Saudi oil fields are north of Ras Tanura and therefore closer to Iraq, there is the possibility of damage to gathering lines that are not buried but have only sand piled over them and to pumping stations.
But such damage could be repaired in a matter of days, and planning to deal with it is already under way, he asserts.
Behind this sanguine outlook is the basic assumption that the forces assembled by the United States and the other nations opposing Iraq will overwhelm Saddam Hussein's army relatively quickly. It could be a very bloody conflict, but Iraq simply cannot fight a long war because it cannot resupply its military, as it did during its war with Iran, since almost every nation selling arms has joined in the embargo against it.
If these informed assessments are correct -- and they are shared by officials at several major oil companies -- then a shooting war in the Gulf could turn out not to be the widely predicted economic disaster but actually something of an economic boon for just about every country in the world save Iraq. (The battlefield casualties are another matter altogether, of course.)
The reason that oil prices soared after the invasion of Kuwait was not that there was any shortage of oil in the world -- once Saudi Arabia and some other producers stepped up their output to offset much of the lost Kuwaiti and Iraqi production. Rather, it was that the invasion created great uncertainty about future supplies. In such situations, everyone naturally begins to snap up whatever oil they can get and to sell as little as possible of what they already have -- and prices take off.
An end to the confrontation, even if it involves a war, would resolve that uncertainty. If Saudi fields do not suffer significant damage, the cost of crude likely would drop back to $21 or $22 a barrel, a number of analysts believe, a price that would accurately reflect world balance between supply and demand. The fear component of prices would be gone.
Just as oil prices dragged long-term interest rates upward, so would their fall bring them down. And the Federal Reserve and central banks around the world would have more leeway to reduce short-term rates because inflation expectations would be lower. Lower oil prices and interest rates could spark a huge stock market rally.
A dark cloud would also be lifted from consumers and business. After months of scary news, the sheer relief could make both groups more optimistic about the immediate economic outlook than they were before the invasion. In the United States, such developments would put an end to any prospect of a recession in coming months.
If all this makes it sound like war is good for business, well, that, too, is one of the lessons of history -- unless you lose.
John Berry writes about economic affairs for the Washington Post.