$6 or $60

The international oil market is showing signs of a price hike as the U.S. is reportedly planning a military action against Iraq. Should the U.S. choose to exercise a military option, how it would affect oil prices and international politics? Thomas Friedman, New York Times foreign-affairs columnist, and Philip Verleger, an oil expert at the U.S. Council on Foreign Relations, recently presented their view on the correlation between a war in the Middle East and oil prices.

September North Sea Brent crude futures rose 15 cents to $25.83 a barrel in London on July 31, while Texas oil futures were up 81 cents in New York to $27.36. Although the American Petroleum Agency reported that crude stocks grew by 873,000 barrels to 3,082,000 barrels in the week ending July 26, the news failed to stop the rise on the day.

AFP quoted oil broker Tony Mckersec as saying “It’s beyond the law of supply and demand.” Friedman pointed out that it is because “the government is talking about a war

in the world’s main gas station.” He warned that an attack on Iraq “would have a very bad impact on the world unlike a war in Tora Bora.”

“A proposed attack on Iraq is an extraordinarily high-risk economic adventure,” said Verleger, “If things went wrong, it could lead to a prolonged disruption of world oil supplies.

Friedman wrote in his July 31 column that oil prices could soar to $60-a-barrle. “While the Pentagon keeps leaking its war plans, no one ever writes about what Saddam`s war plans might be,” he pointed out. “What if Saddam responds by firing Scuds with chemical or biological warheads at Saudi Arabian and Kuwaiti oilfields?” In fact, Kuwait’s mostly densely-populated area is only 120㎞ away from Basra, a southern city of Iraq.

Oil-producing countries such as Venezuela, Iran and Nigeria could cut back their output and keep prices high to raise the world’s oil price to $60-a-barrel, destabilizing the global economy as a result.

On the contrary, Friedman continued, if a U.S. invasion works and Saddam is ousted and replaced by a moderate government, Iraq would be able to ramp up its oil production from the current 200 million barrel-a-day limit to five million barrels. This would, he noted, lead to oversupplies. Then, other oil-producing countries would also increase their production capacities to make up for losses from price declines, sending oil prices further down to $6-a-barrel.

According to Friedman, a victory would be catching two birds with one stone – it could not only lead to a fall of undemocratic governments in Saudi Arabia, Venezuela and Nigeria heavily dependent on oil incomes, but also seriously weaken the OPEC oil cartel.

No one knows, however, which scenario will prevail. Friedman also added, “You better prepare for the consequences of both.”

Eun-Taek Hong euntack@donga.com