Analysts say war with Iraq a minor risk to economy

by The Associated Press

A U.S.-led war against Iraq with its massive oil reserves would probably inflict only modest and temporary pain on the world economy, analysts say, providing the conflict did not drag on and spread throughout the region.

The immediate economic effect of hostilities would be a disruption in the production and export of Iraqi crude oil. Baghdad’s reserves rank second in size to those of Saudi Arabia.

“The market is fairly laid back about a short, sharp and relatively confined conflict,” said Keith Morris, an oil industry analyst at French bank BNP Paribas.

What’s more, the nightmare vision of war spilling across borders and involving nuclear arms or other weapons of mass destruction is seen as unlikely, in the view of most analysts.

Nevertheless, much would depend on the speed at which other oil-producing countries boosted production to make up for shortfalls. Iraq pumped 1.89 million barrels a day in September, or 2.5 percent of world supplies, according to the International Energy Agency.

Because of the perceived risk of war in the Gulf, crude now costs about $25 a barrel, several dollars above what the price would be under normal market conditions. The Economist Intelligence Unit says this so-called war premium has already shaved 0.2 percent off annual growth rates in wealthy oil-importing countries.

An attack on Iraq is widely expected to cause oil prices to spike at $30 or more. If prices stayed at that level for six months, rich oil-importing countries would see economic growth slow by 0.5 percent, said Fatih Birol, chief economist for the International Energy Agency. Developing countries would be hit harder, losing 1 percent in growth. Prices of $35 a barrel would double the impact for rich and poor alike, Birol said.

However, a war-induced price spike could reverse within weeks, days or even hours, economists and analysts say, citing massive stockpiles in the United States and other wealthy countries.

In addition, Iraq’s fellow members of the Organization of Petroleum Exporting Countries have indicated their willingness to pump more oil, if only to keep the United States and other importers from tapping into their strategic reserves and flooding the market.

In a prolonged conflict, some analysts anticipate oil prices could rise as high as $40 a barrel.

Post-war Iraq could boost production

With Western investment and technical help, Iraq could boost its daily crude output to as much as 3 million barrels within six months of a war’s end, said Yasser Elguindi of Medley Global Advisors, a New York consultancy.