Invasion of Iraq may collapse global economy
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 US$30 a barrel, increased pressure has been put on the global economy as more money is spent on importing oil.
Should the US 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 PDVSA oil strike in Venezuela. While it takes only one week for Venezuelan oil exports to reach the US, it takes four to five weeks for this 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 set 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 US$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 US can get oil flowing again after the war; once oil production has stabilised again, the US 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 five million bpd with US assistance.
Larry Lindsey, former top economic adviser to 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 US$15 to US$20 a barrel.
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 US$30 a barrel, increased pressure has been put on the global economy as more money is spent on importing oil.
Should the US 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 PDVSA oil strike in Venezuela. While it takes only one week for Venezuelan oil exports to reach the US, it takes four to five weeks for this 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 set 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 US$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 US can get oil flowing again after the war; once oil production has stabilised again, the US 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 five million bpd with US assistance.
Larry Lindsey, former top economic adviser to 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 US$15 to US$20 a barrel.
Militant attacks
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 attempt to sabotage major oil facilities within the country, thereby 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 US$50 a barrel, or cause prices to become static at US$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 US$45 or US$50 a barrel could "turn [the economies of] the US and Japan into a recession".
Should the two largest global economies - the US 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.
Emerging markets
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 neighbours' 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 follow, it would compromise the fund's own financial position and economic assistance to needy economies would falter, further spiralling 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. - PINR
ERICH MARQUARDT drafted this report.
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