Prices may soar to highest level in history
Dubai |By Nadim Kawach | 05-03-2003
Oil prices could surge to their highest level in history if a U.S.-led invasion of Iraq drags on for a long time and the country's elite forces decide to resist the invaders and take revenge on their own oilfields, according to analysts.
Prices could still jump in the first days of a short war but will likely fall back later as U.S. troops are expected to seize Iraq's oilfields to protect them against any sabotage.
During this period, oil prices are likely to peak at $40 a barrel before starting to decline on prospects that the war will be short and decisive and Iraq would be able to boost production in the coming few years, said Henry Azzam, chief executive officer of Jordinvest in Amman.
In a study on oil price scenarios during a war against Iraq, Azzam said crude prices could return to their normal levels of around $22 if the U.S. decides against attacking Iraq and the United Nations establishes that Baghdad no longer has weapons of mass destruction.
"The third scenario is that of a war on Iraq dragging for months...while this scenario is considered by many to be less likely, it should not be ruled out...here, President Saddam Hussain and his close lieutenants would go underground while troops led by the elite Republican Guard could continue resisting out of densely populated sections of the capital Baghdad," Azzam said in the study provided to Gulf News yesterday.
"Large scale battles will tail off in few weeks but sporadic attacks on enemy forces will continue...fearful workers and engineers refuse to operate Iraq's oilfields, closing them for several months...in this case, oil prices would trade up towards $45 a barrel for Brent crude before falling gradually by the year's end to around $30 a barrel."
But Azzam said the case would not be so if the Republican Guard decided both to put up a tough resistance and sabotage the oilfields.
"In this case, the world's oil market could lose a substantial portion of Iraq's output...this will put more upward pressure on oil prices, add to the cost of rehabilitating Iraq's oil production capacity and severely handicap the country's postwar economy recovery."
Azzam gave no figure for the maximum level that oil prices could reach but, according to former Saudi oil minister, Sheikh Ahmed Zaki Al Yamani, crude prices could hit their highest level in history of nearly $100 a barrel if Iraq's oilfields were destroyed.
"I do support such a scenario because as you know Iraq is the second largest oil power in the world and destruction of its fields means the global market will be deprived of large crude quantities for a long time," said Leo Drollas, deputy director of the London-based Centre for Global Energy Studies, which is owned by Yamani.
In an interview with the U.S. CBS network last week, the Iraqi president, however, indicated he would not take any step to sabotage those fields, home to nearly 112 billion barrels of recoverable crude resources, second only to Saudi Arabia's 261 billion barrels.
Oil prices have remained high over the past few months and this week they hit their highest level in nearly 12 years because of mounting war fears and a decline in the U.S. strategic crude stockpiles to their lowest level in more than 25 years.
Experts believe that whether or not there is a war against Iraq, oil prices will eventually slip back to their normal average and could lose further ground when the UN's 12-year-old embargo against Baghdad is lifted and Iraq's immense oilfields are rehabilitated.
Iraq produced more than 3.5 million barrels per day before the 1990 Gulf war but the embargo has pushed supplies to less than two million bpd.
Azzam said Iraq was expected to pursue the expansion of its crude oil production in two phases after the end of the present crisis. He dubbed the first stage as the recovery phase, which he said would last one to two years and cost around $five billion.
"Major oil service companies would help Iraq restore its production capacity from the current 2.5 million bpd to the 3.5 million bpd level that prevailed in July 1990...the second phase, the development phase, will take much longer and will be aimed at doubling Iraq's production capacity to nearly seven million bpd by the year 2010," he said.
"Here, the world's largest oil companies, including those from the U.S., Britain, France, Russia and Italy, will compete for lucrative contracts with the new government of Iraq...Baghdad's desperate need for money to rebuild an economy ravaged by 13 years of sanctions and a heavy debt burden of $140 billion will agree to sign production sharing agreements with the major oil companies."