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Profile: Worries In The World Oil Markets Regarding Possible U.S. Action Against Iraq

All Things Considered: October 22, 2002

Iraq Oil

ROBERT SIEGEL, host:

The oil market is uneasy about war with Iraq. Iraq is potentially one of the world's largest producers of oil. Although war and economic sanctions crippled its output in the 1990s, Iraq sits on one of the largest reserves of oil anywhere. What happens to Iraq's oil if war erupts will have a profound impact on the price and supply of oil worldwide. NPR's Mike Shuster has more.

MIKE SHUSTER reporting:

Among oil experts, there are optimists and pessimists: those who fear a war with Iraq will send oil prices through the roof, and those who believe such a war will result in dramatically lower prices. But no scenario is free of dangers. Officials in the Bush administration who favor the use of military force to oust Saddam Hussein have suggested that Iraq's oil fields could be developed and modernized, and that Iraqi oil exports could finance the war effort and the rebuilding of the country. But that depends on whether the oil fields are unaffected by the war. Philip Verleger, a California-based oil analyst with the Council on Foreign Relations, recalls that Saddam Hussein's troops set Kuwait's oil fields on fire as they withdrew in 1991.

Mr. PHILIP VERLEGER (Analyst, Council on Foreign Relations): If Saddam Hussein, as his last parting gift to Iraq, were to blow the oil fields, we could wind up taking over a country that has essentially no means of selling oil, lots of fires, oil puddles developing across the country and no means to fix the problem.

SHUSTER: It took Kuwait two years to repair its oil wells at a cost of $50 billion. It could take even longer to repair Iraq's oil fields, not to speak of the investment in modernization and further exploration that might lengthen the time that Iraq would be hard-pressed to export any oil at all. The US could be looking at a very large bill to reconstruct and run Iraq without several years' worth of oil production.

Then there is the question of political reaction in the Middle East. That poses many dangers for oil, says Philip Verleger.

Mr. VERLEGER: One could imagine a situation where thousands of Iraqi civilians were killed, either by a bombing mistake or if the Israelis retaliated, as they've talked about retaliating, to a Scud missile attack; essentially that the whole political stability in the Gulf area got undermined, those countries might for a while choose to cut production back, particularly if Iraq were taken out of the market.

SHUSTER: If Iraq's oil fields are not damaged, the US would want to see them improved and pumping as much oil as possible as quickly as possible. Experts estimate that in four years, Iraq could be exporting up to five million barrels a day, five times what it is producing now. That would likely spark a big drop in worldwide oil prices and certainly aid in the reconstruction of Iraq. But even then the Middle East could face wider problems, argues Roger Diwan, of The Petroleum Finance Company in Washington.

Mr. ROGER DIWAN (The Petroleum Finance Company): A very pro-American Iraq or, actually, any new regime in Iraq is likely to say that Iraq will not be bound by OPEC quotas for the time being until at least it meets its full capacity of production in the next five to seven years. So Iraq will be certainly a destabilizing force in the oil market no matter which scenario we take into account here.

SHUSTER: In all these scenarios, the question of political instability focuses most sharply on Saudi Arabia. Hostility in Saudi Arabia towards the United States remains high. Osama bin Laden remains popular there. An American war on Iraq, many experts fear, could prompt unrest and efforts to challenge the Al Saud monarchy. A dramatic drop in oil prices would further challenge Saudi Arabia's economic stability, says Roger Diwan.

Mr. DIWAN: That's the biggest risk, in a way. It's what lower oil prices do to the Kingdom of Saudi Arabia when you'll have a political situation which is tense in the region. And on top of that, if you add an economic downturn, it could have quite dramatic consequences. And how much the Saudi regime wants to risk that is the big question.

SHUSTER: Some experts also worry about sabotage inside Saudi Arabia carried out by agents of Iraq or by al-Qaeda. Michael Herberg, of the University of California at San Diego, says that's not a high probability, but it is a concern.

Mr. MICHAEL HERBERG (University of California at San Diego): Some sort of sabotage of a key component in the Saudi oil complex; the Abqaiq gathering center, for example. It's a central gathering center for a large part of Saudi crude oil exports. So if there was some permanent or major damage to that, it would take quite a while to put back together.

SHUSTER: In the worst-case scenarios, experts worry that oil could go to $50 or $60 a barrel. They are just under $30 a barrel now. So many oil experts argue that the United States must take into account the threats to Saudi Arabia and the rest of the Persian Gulf as it goes about making its military and political decisions about what to do in Iraq. One way or another, says Philip Verleger, a crisis in Saudi Arabia is coming.

Mr. VERLEGER: The approach we take to Iraq could accelerate the problems with Saudi Arabia or could retard the problems in Saudi Arabia. But it is not going to change the ultimate story, that the Saudi Arabians have not dealt with their domestic problems and seem to have no plans and no ability to deal with them. So the problem's going to come in Saudi Arabia sooner or later.

SHUSTER: Oil may not the primary motivating factor to go to war in Iraq, but it is certainly a major factor effecting how the war and the peace after are waged. Mike Shuster, NPR News, Los Angeles.

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