How Gulf war is bad -- and good -- for some in oil world
Nicosia, Cyprus — 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.
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.
Closure of its Gulf port has increased transit costs for goods flowing into Iraq, which now must come via Jordan, Kuwait, and Turkey. Hussein, moreover, has attempted to minimize the potentially destabilizing effects of the war by continuing to import consumer goods and modernize his country to keep his countrymen happy.
But guns and butter are costly. Since most of its oil money has been cut off, Iraq has turned to Saudi Arabia, Kuwait, and other Gulf countries with continuing requests for aid. They are said to be contributing $1 billion a month to Iraq.
Iran has fared better, upping its production recently to 2.5 million b.p.d. and aiming for 3 million.
Most Iranian oil is loaded onto tankers at Kharg Island in the Gulf. Iraqi jets and gunboats have repeatedly tried to knock out the island and harass tankers, but they have failed to deter operations significantly.
Far from resigning itself to Kharg Island, however, Iraq is believed testing a devastating new battlefield missile that can put the oil facility out of commission.
Such a missile was fired on the Iranian city of Dezful last December killing 67 people and leveling a wide area. Military analysts say that if Kharg Island is crippled, Iran may well decide to choke the Straits of Hormuz in retaliation.
Meanwhile, Iran's success at exporting oil has come at the expense of OPEC in general and Gulf Arab states in particular. Iran is pumping more than twice its alloted OPEC production quota. This has forced Saudi Arabia to cut back production in an effort to keep the world oil market from running at a heavy surplus. Saudi production has dropped from 12 million b.p.d. just after the war began to 4.5 million today.
With its oil money, Iran has been buying guns. Last year the Iranian Army was able to push Iraqi soldiers off most of its land and counterinvade Iraq.
Not only is Iran threatening Iraq militarily, it is threatening conservative Arabs in general through Iranian calls to revolt. In addition, the Saudis and other Gulf Arabs are irked that Iran is overproducing and they have been demanding that Iran cut oil output. Iran has refused, saying the money is vitally needed in the country and that oil production is well below historic production levels anyway.
Iranian Oil Minister Muhammad Gharazi has indicated Iran is willing to see OPEC collapse, Saudi Arabia lose the standing that it has acquired the past few years, and a new alignment among oil-producing countries arise.
To counter this threat, the Saudi-led Gulf states, grouped as the Gulf Cooperation Council, are hinting they can outproduce the Iranians and take their customers away. With defense and security rapidly being integrated, the GCC is working on trade and investment policies designed to encourage foreign countries to optimize oil imports from the GCC.
A financial analyst in Nicosia says that, though Iranian oil is cheap and plentiful now, ''foreign oil traders, in buying spot crude from Iran or other countries that offer discounts, will have to be extremely careful'' - not only because of rapidly changing financial conditions in the oil market but also because of the trade-oil link the GCC is establishing. For if Kharg Island one day is destroyed, or if the oil market begins to tighten up, oil buyers will have to have good relations with GCC countries.
If the war presents a dilemma for oil producers, taking advantage of the war presents a dilemma for oil buyers.
Next: The impact on the non-oil states.