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War and the economic domino
theory
In the next few weeks, the
struggling global economy may be put to the test if
Washington chooses to invade Iraq. There are many
economic risks involved in bombing Baghdad, the most
important being a spike in oil prices. With oil prices
already over US$30 a barrel, increased pressure has been
put on the global economy as more money is spent on
importing oil.
Should the United States attack
Iraq, there is a real possibility that Middle East oil
shipments will be disrupted. US oil inventories are
already running low due to the nearly two-month long
Petroleos de Venezuela oil strike in Venezuela. While it
takes only one week for Venezuelan oil exports to reach
the United States, it takes four to five weeks for them
to arrive from the Middle East.
During an
American attack on Iraq, an errant bomb could destroy or
interfere with oil operations, halting Iraq's 1-2
million barrels per day (bpd) in exports. Compounding
the American threat, Iraqi leader Saddam Hussein could
opt to damage his own oilfields by ordering troops to
light them on fire, as was done to Kuwait in 1991.
In order to prevent a rise in oil prices, any
reduction in Iraqi oil exports will need to be
compensated by an increase in oil exports from OPEC
nations and non-OPEC nations alike. However, most OPEC
nations are already producing at capacity, such as
Indonesia and Qatar; the biggest oil producers outside
of OPEC - Russia, Norway and Mexico - cannot increase
their output since their pumps are already running at
full capacity.
This likely scenario has worried
economists; it could result in oil prices as high as $40
a barrel, possibly causing extensive damage to the
global economy. However, the Bush administration
believes that the end result of the invasion will be
economic growth rather than economic recession. The fate
of the economy will rest on how fast the United States
can get oil flowing again after the war; once oil
production has stabilized again, the United States will
likely be able to increase capacity by updating Iraq's
oil infrastructure.
While before the Gulf War,
Iraq was exporting 3.5 million barrels per day, it is
predicted that Iraq may be able to increase production
up to 5 million bpd with US assistance. Larry Lindsey,
former top economic adviser to President George W Bush,
supported this prediction in a statement last fall,
"When there is regime change in Iraq, you could add
three million to five million barrels [per day] of
production to world supply. The successful prosecution
of the war would be good for the economy." Indeed, this
scenario would provide a boon to the global economy by
increasing oil supply, dropping prices down to $15 to
$20 a barrel.
But successful "regime change"
might not be as easy as it seems. Iraq's oil
infrastructure is already in bad shape and the
prediction is that it will take five to 10 years for
Iraqi oil output to reach such levels, if at all; in
addition, there is no guarantee that the new Iraqi
government will be willing to export such an inflated
amount of oil. However, any new administration will most
likely be installed and protected by US troops, thus
reducing the government's actual independence from
Washington.
The other most dangerous scenario is
whether an invasion by Washington will heighten tensions
in the Middle East in such a way that militant groups
will attack oil interests when the US and global economy
are most vulnerable. Indeed, if militants inside Saudi
Arabia attempted to sabotage major oil facilities within
the country, limiting exports, oil prices would
skyrocket since other nations would not be able to
supplement the amount of oil Saudi Arabia exports.
This would possibly send oil prices to over $50
a barrel, or cause prices to become static at $40 a
barrel for many months. Indeed, Gary Hufbauer, of the
Institute for International Economics, stated in the
Baltimore Sun last October that a sustained rise in oil
prices at a level of $45 or $50 a barrel could "turn
[the economies of] the United States and Japan into a
recession".
Should the two largest global
economies - the United States and Japan - enter a
recession, or even suffer further economic setback due
to increased oil prices, it would greatly add to the
misery of other suffering states and impact emerging
market economies.
South American states, for
instance, have had difficulty accessing global capital
markets due to the economic uncertainty in Brazil -
which has been flirting with economic disaster - and the
recent economic meltdown of Argentina. Paraguay and
Uruguay too have been hit by their neighbors' economic
troubles, with the former suffering from low tax
revenues and a stagnant economy. If the global economy
were to deteriorate, it could create a scenario where
Argentina would have to default on its debts to the
International Monetary Fund. If Argentina were to
default, and other countries soon followed, it would
compromise the Fund's own financial position and
economic assistance to needy economies would falter,
further spiraling the world economy toward a grave
future.
Along with South America, Asia will also
be pushed into economic disaster should oil prices spike
for a prolonged period. In addition to putting Japan
into recession, South Korea, fraught with its own
economic woes due to a rapid increase in real estate
prices and unemployment, is also vulnerable. Seoul
cannot rely on domestic spending to stimulate its
economy due to ballooning household debt, a situation
that increased oil prices would only exacerbate.
Singapore, too, is walking on the edge of
economic demise. Narrowly missing a double-dip recession
this last year, weak demand for the city-state's key
electronics exports and manufactured goods led to
further job losses, ballooning its unemployment level to
a 15- year high.
Therefore, these concerns will
be carefully weighed by the Bush administration as they
consider whether or not to invade Iraq. With the global
economy in such a precarious position, Washington will
be hedging its bets; a war will either provide great
economic gains, or colossal economic ruin.
The Power and Interest News Report (PINR) is
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objectively as possible, provide insight into various
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globe. PINR approaches a subject based on the powers and
interests involved, leaving the moral judgments to the
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