Iran-Iraq war and West's oil
Boston — If you are an American, European, or Japanese, your energy costs - for the gasoline your car uses and the energy component in the items you buy - should remain stable in 1984 . . . unless:
* Unless the growing viciousness of the 41-month-old Iran-Iraq war threatens the West's oil supplies from the Gulf.
* Unless world oil production again swamps world demand, thereby forcing prices to drop.
Of major concern today is the escalation of the Iran-Iraq war. In recent days , Iraq has bombed targets in Iranian cities and at the port of Bandar Khomeini. Iran, in turn, has launched a major military offensive.
These developments renew worries that the Strait of Hormuz could be imperiled or that oil fields, refineries, and loading terminals on the Arabian side of the Gulf - from which the West (including Japan) draws 8 million barrels a day in crude - could come under attack.
Strategic analysts were watching Iran's offensive with an eye to two worst-case scenarios.
Under pressure, Iraq could decide to attack Iran's oil-loading terminals at Kharg Island. That could set in motion an Iranian attempt to close the strait (Iranian officials earlier this week said such a ''contingency plan'' exists) and a virtually automatic counterattack by the United States to keep the strait opened (as outlined in the 1979 ''Carter doctrine''). Even if the narrow sea lane were kept open by force, oil tankers would be deterred from entering the Gulf.
If, however, the current Iranian offensive is blunted, as a dozen such offensives have been in the past 31/2 years, Iran might choose to turn from the battlefield. Instead, it may attempt to undermine Gulf Arab support for Iraq by attacking economic targets in Kuwait, Saudi Arabia, or the United Arab Emirates.
How likely are these scenarios?
Fred Axelgard, Middle East research specialist at the Georgetown Center for Strategic and International Studies in Washington, points out that worrying about either case is extreme in light of past behavior in the Gulf war. Neither side, he says, wants to escalate the conflict to a point that superpower intervention occurs.
Worries about the war, says Mr. Axelgard, reached a high pitch last November when Iraq acquired French-made Super Etendard aircraft and Exocet missiles and threatened to use them against Kharg Island. That threat has not been carried out, he notes, mainly because Iraq has not wanted to give the superpowers cause to enter the conflict.
Though Iraq is facing a new Iranian offensive, analysts in Baghdad and Washington have noted that Iraq actually is feeling less desperate today than it was late last year. Oil exports via its pipeline to Turkey have grown from 700, 000 barrels per day to 900,000 and are scheduled to reach 1.3 million by summer; direct aid from Saudi Arabia and Gulf Arabs has resumed; Iraq has arranged deferred payments on its international loans, has secured new import credits, and has curtailed actual imports.
Still, Joseph C. Story, senior economist with Wharton Econometric's Middle East Economic Service in Washington, says that does not represent solid improvement. The Iraq-Turkey pipeline, through which virtually all oil is exported, could be attacked, as could the Kirkuk oil fields. Direct Arab aid also could be threatened.
Iraqi President Saddam Hussein, moreover, knows the improvement in Iraq's economic position is tenuous and that his country ''is facing economic and social erosion from within'' due to the protracted nature of the war, Mr. Story says. Consequently, he predicts a decisive turn in the conflict before summer. Such a turn could impinge upon Gulf oil supplies. Though some of the oil that passes through the strait could be diverted through Saudi Arabia's cross-country pipeline to the Red Sea, the loss of up to 8 million barrels a day in the West would quickly drive up prices.
Short of these worse-case worries, the world's supply of oil should remain stable - and might increase. Pressure would continue on oil producers to lower prices.
But few analysts today feel, as they did late last year, that a drop in oil prices is inevitable.
Demand for oil in the US and Europe is increasing, says Onnic Marashian, editor of Platt's Oilgram News in New York. This is partly due to worldwide economic recovery and partly to a colder winter in the US this year than last.
As a result, Mr. Marashian does not think the Organization of Petroleum Exporting Countries (OPEC) will be forced to reduce its benchmark price from $29 per barrel, although spot-market prices for oil may decline slightly.
Wharton's Story believes US demand for oil could grow 2 million to 2.5 million barrels per day. OPEC production, he notes, has been restrained due to conservative economic forecasts for the US and European economies. Therefore, he does not expect supply to outstrip demand greatly.
But everything can change, these analysts note, if the US economy slows down - or if the Gulf war suddenly takes a turn for the worse.