Global Policy Forum

By Erich Marquardt

In the next few weeks, the struggling global economy may be put to the test if Washington chooses to invade Iraq. There are many risks involved in bombing Baghdad, the most important being a spike in oil prices. With oil prices already over $30.00 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. U.S. oil inventories are already running low due to the nearly two-month long PDVSA 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 spike 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 $40.00 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 U.S. assistance. Larry Lindsey, former top economic adviser to President 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 5 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 U.S. 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 U.S. 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 $40.00 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 (IMF). 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.

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