How Gulf war is bad -- and good -- for some in oil world
The Iran-Iraq war presents the oil world with a dilemma: if the war persists it is a tremendous human and financial waste. But if it ends that might cause oil markets to crash.Skip to next paragraph
Subscribe Today to the Monitor
The remote, marshy frontier between Iran and Iraq is a sinkhole for petrodollars. Since September 1980, an estimated $3 billion a month in the form of tanks, planes, bullets, and soldiers has poured in - and has come out only as suffering, destruction, and demands for more money to buy more war materiel.
The war is costly not only to Iran and Iraq but also to Saudi Arabia and the Gulf Arab states which heavily subsidize Iraq and are fighting an oil-production war with Iran.
The oil potential of the two combatants is enormous. Before the 1978 Islamic revolution knocked the country into chaos, Iran was the second-largest oil exporter in the Middle East after Saudi Arabia. Before its ports and pipelines were interdicted, Iraq, sitting atop the second-largest known oil reserves in the Middle East after Saudi Arabia, was the third-biggest exporter.
If the war were to end, Iran and Iraq would almost certainly attempt to recover by unleashing their oil into an already glutted international market. Prices might take a nose dive and stay down indefinitely.
A recent study by the Edison Electric Institute noted that in the long run the war's impact ''will be a much larger volume of oil production in order to reconstruct war-torn economies.'' Even in the short run, it added, ''the impact of the Iran-Iraq war is to induce the Arab Gulf countries to raise their exports in order to finance aid to Iraq.''
The disruption of the Iranian revolution four years ago forced a drop in its oil output from a high of 5.9 million barrels per day (b.p.d.) to less than 1 million. That caused a worldwide panic, the price of oil doubled to near its current level, global inflation soared, and petrodollars poured into the Middle East.
Two years later, the onset of the Iran-Iraq war caused concern. Damage to Iraqi pumping and loading facilities decreased Iraq's output from a high of 2.6 million b.p.d. to 700,000. But a strain on world markets was averted by Saudi Arabia and Kuwait, who stepped up production.
Both Iran and Iraq initially financed their war effort with petrodollars brought in during the 1970s price boom. Both are trying to sustain their side of the fight by selling oil at deflated prices. And the war seems nowhere near ending.
Bitterly opposed to one another, Iran and Iraq are fighting for as lethal a combination of reasons as exist: territory, ideology, religion, race. For 2 1/2 years all peace efforts have been frustrated because of the rigid stands of the two governments - Saddam Hussein's regime in Iraq and the Muslim clergy, led by Ayatollah Khomeini, in Iran. Lately, President Hussein has seemed willing - indeed eager - to see the war end, but Iran has toughened its stand, calling for Hussein's overthrow and huge reparation payments.
Economies in both countries have suffered. Iraq has been barely able to export oil because its Gulf port at Basra has been blocked. Its pipeline to the Mediterranean has been shut off by Iran's ally, Syria. Only the line through Turkey remains, and this has both modest capacity and susceptibility to attack in the Kurdistan region.