Volume 2, Number 6, March 2003



• Geo-Political Considerations Weigh on the Economy
• The Concepts and Vision of the War
• The Unilateralist’s Preferences

MARCH 2003

Crude prices have plunged, the market has moved from shortage to plenty, and if OPEC wants to keep prices within its $22/b to $28/b target range it may have to reduce production quickly once hostilities in Iraq are over. On the economic front, last year there was clear evidence from the US, Japan and Germany, as well as hints from the UK and France, that the decline in investment that began in 2001 was starting to slow.
As war in Iraq approached, hopeful signs faded, and according to the Financial Times (1) many businesses have linked the two developments.


Uncertainty damps growth

An example of this can be seen from an experience in the UK: the Engineering Employers' Federation, which represents many capital equipment manufacturers, has revised sharply downwards its growth forecasts for 2003 from its expectations of three months ago, attributing the change to political uncertainty. Additionally, two thirds of the chief financial officers polled claimed they were spending cautiously or delaying investment because of geopolitical concerns.

Fears that the war will drag on may or may not turn out to be justified but businesses are concerned that the broader tensions will persist after the war is over.
In the motor industry, for example, there has been short-term crisis planning. Some have stockpiled parts to guard against disruption to supplies while others, including Honda and Toyota in the US, cut advertising as soon as war broke out.
Ford cut production plans for April, May and June by 17 per cent before the invasion while General Motors, the biggest carmaker, will produce 10 per cent fewer vehicles.

Goldman Sachs expects that corporations will still be reluctant to spend. "If you look at any capital spending model, the key driver has been consumer spending, and we expect

consumer spending to slow. When capacity utilisation is already low, companies are just not going to get the feeling that they need to invest."

Depending on the outcome of the war in Iraq, added the New York Times (2), the impact on the economy could range from a recession to a mild stimulant. The early indications for the economy, as for the war, had been good. For months, expert studies have predicted that a brisk campaign followed by total victory would lead to lower oil prices and increased consumer confidence. In addition, the removal of uncertainty could help some businesses to make investment decisions.

Quick moves on the military front would be good for the US economy

In the first few days of the war, the premium in oil prices had seemed to be vanishing - dropping to under $27/b a barrel from a peak of $39.99/b during New York trading on the 27th February. In the worst case, a price spike could cost the United States as much as $391 billion over 10 years, Professor Nordhaus wrote. The Centre for Strategic and International Studies in Washington forecast that a prolonged war accompanied by serious terrorist attacks could drain $472 billion from the gross domestic product in this year alone, or 4.5 percent. A loss of that magnitude could qualify as another recession. A report published in November by the centre suggested that the economy could gain an extra $52 billion in growth in the best case.

Direct cost of the war to the federal government, which the White House estimated yesterday at $70 billion to $90 billion, could also hurt the economy even "if Iraq is resolved successfully," he said, "there are other potential geopolitical clouds on the horizon."

Depending on the outcome of the war in Iraq, its impact on the economy could range from a recession to a mild stimulant. The early indications for the economy, as for the war, had been good. For months, expert studies have predicted that a brisk campaign followed by total victory would lead to lower oil prices and increased consumer confidence. In addition, the removal of uncertainty could help some businesses to make investment decisions.

The strike in Venezuela’s oil industry, which has reduced global supply, and now the problems in Nigeria make isolating the war's effect on prices difficult Goldman Sachs, said: An increase of $10, would cost American consumers about $50 billion a year. Data show that energy uses per dollar of real gross domestic product has halved since 1970 . Standard estimates from the IMF show that only a 0.3 % reduction in US GDP growth results from a $ 10/ b rise in the oil price. A 10/b rise in the price of oil puts a percentage point on the US unemployment rate after 18 months.

In the worst case, an oil price spike could cost the United States as much as $391 billion over 10 years, Professor William Nordhaus at Yale University wrote. The Center for Strategic and International Studies in Washington forecast that a prolonged war accompanied by serious terrorist attacks could drain $472 billion from the gross domestic product in this year alone, or 4.5 percent. A loss of that magnitude could qualify as another recession. A report published in November by the center suggested that the economy could gain an extra $52 billion in growth in the best case.

"If we get through this without major damage to Iraqi oil facilities, and without any kind of terrorist action, and relatively quickly on the military front, I would think that would be good for the economy," Deutsche Bank Securities said.

Direct cost of the war to the federal government, which the White House estimated at $70 billion to $90 billion, could also hurt the economy. Even "if Iraq is resolved successfully."

Turbulent times

"There are other potential geopolitical clouds on the horizon." Deutsche Bank Securities added. (3) One sector in particular is the airline industry which has not enjoyed clear skies since the 11th September. Even darker clouds are gathering, however: According to Jet Fuel Intelligence, the price of jet fuel - the second largest component of the airline cost structure - has been painfully high. The global industry lost more money in 2001-02 than their total profits since 1945. Following a disastrous year in 2001 when the industry lost $18 billion, the red ink narrowed to $5 billion in 2002, figures show. What looks more certain, according to new figures from the International Air Transport Association (IATA), is the devastating financial impact on the global airline industry of a war in Iraq. The world’s airlines would incur a net loss of $10 billion in 2003 under a worst-case scenario where a war that lasts one to three months would result in losses of $5.8 billion.

Since January alone, jet fuel’s share of US carriers’ expenses has risen from 12% to some 15%, ATA economists say. The world’s airlines spend upwards of $40 billion annually on jet fuel. Every one cent per gallon increase in fuel equates to an additional $600 million in the industry’s collective fuel bill, IATA calculates.


“The invasion of Iraq and the fallout could mark a significant turning point in the architecture of U.S. hegemony. The first Persian Gulf War marked the transition to the new post-cold war world. The Second Gulf war will mark the end of the post-cold war world. The history of what comes next remains to be written. But it is clear that the advocates for Empire, for a Pax Americana, are well prepared”. Said John Gershman, a senior analyst at the Interhemispheric Resource Center and the Asia/Pacific editor for Foreign Policy in Focus. (4)

Such a vision was outlined in a recent op-ed by Richard Perle, the head of the Defense Policy Board and a key intellectual architect of the Bush administration's policy in the Middle East, and is worth quoting at length:

“He (Saddam Hussein) will go quickly, but not alone: in a parting irony, he will take the UN down with him. Well, not the whole UN. The "good works" part will survive, the low-risk peacekeeping bureaucracies will remain, the chatterbox on the Hudson will continue to bleat. What will die is the fantasy of the UN as the foundation of a new world order. As we sift the debris, it will be important to preserve, the better to understand, the intellectual wreckage of the liberal conceit of safety through international law administered by international institutions.

Perle's eulogy for the vision of collective security the UN offered is an important illustration of the vision of the future it outlines, a vision that is truly staggering in its ambition, and in its casual rejection of the framework of international law. His alternative is a shifting away from international institutions to one of shifting ad hoc coalitions. As he writes, the chronic failure of the security council to enforce its own resolutions is unmistakable: it is simply not up to the task. One is left with coalitions of the willing. Far from disparaging them as a threat to a new world order, we should recognize that they are, by default, the best hope for that order, and the true alternative to the anarchy of the abject failure of the UN.

While rejecting the UN Security Council Perle also identifies countries hosting or sponsoring terrorism and possessing weapons of mass destruction as the major threat to international security (without actually naming names).

What then is the next step in the Bush administration's security agenda?

One clue is embodied in the statement from a senior British official to Newsweek last August: "Everyone wants to go to Baghdad. Real men want to go to Tehran." According to

the Israeli paper Ha'aretz, in February 2003, Undersecretary of State John Bolton told Israeli officials that after defeating Iraq the United States would "deal with" Iran, Syria, and North Korea.”

Michael Ledeen, another key intellectual in the pantheon of neoconservatives shaping the Bush administration policy, described one such agenda, writing in the New York Sun on March 19: noting that there is no mistaking the messianic vision of manifest destiny that he believes the war in Iraq will provide: “Once upon a time, it might have been possible to deal with Iraq alone, without having to face the murderous forces of the other terror masters in Tehran, Damascus, and Riyadh, but that time has passed. The Iranian, Syrian, and Saudi tyrants know that if we win a quick victory in Iraq and then establish a free government in Baghdad, their doom is sealed. It would then be only a matter of time before their peoples would demand the same liberation we brought to Afghanistan and Iraq. Thus, they must do everything in their power to tie us down in Iraq, bleed us on the ground, frustrate our designs, and eventually break our will.

It would be a terrible humiliation for America and Britain to fall prey to needless bloodshed because we blinded ourselves to the larger war in which we are now engaged. Iraq is a battle, not a war. We have to win the war, and the only way to do that is to bring down the terror masters, and spread freedom throughout the region.

Rarely has it been possible to see one of history's potential turning points so clearly and so dramatically as it is today. Rarely has a country been given such a glorious opportunity as we have in our hands. But history is full of missed opportunities and embarrassing defeats.”
In a panel at the American Enterprise Institute on March 21st and in the New York Sun Ledeen argues for the need to look beyond Iraq and go after other regimes in the region, particularly Iran, Syria, and Saudi Arabia:

Iraq is not the war. … the war is a regional war, and we cannot be successful in Iraq if we only do Iraq alone.

The story of how Mr. Bush came to embrace the vision began with a Family quarrel among Republicans. It picked up strength in the late-1990s with the failure of the Oslo peace accords between Israel and Palestinians, which strengthened hawks in Israel and Washington who were advocating more-muscular policies toward Arabs. And finally it emerged as a centerpiece of American policy with a president looking for a new theory.

It is entirely possible the attack on Iraq could produce trends that run in he opposite direction, especially if the war does not go well. The influence of radicals may grow, fertilized by anger at America's intrusion onto Arab soil. If Palestinians think increased U.S. dominance of the region means any negotiations will come more on the terms of America's staunch ally in Israel. That might leave the problem further from resolution.

It is a dream that has grown slowly over the last half-dozen years, from seeds first sown by a small group of neoconservative thinkers laboring in the quiet vineyards of policy think tanks during the Clinton administration.

One of the places the idea was born was the Project for the New American Century, which was a fledgling and unnoticed neoconservative think tank in 1998.

In a letter to Mr. Clinton put together by the group's director, former intelligence official Gary Schmitt, the group declared: "The only acceptable strategy is one that eliminates the possibility that Iraq will be able to use or threaten to use weapons of mass destruction. In the near term this means a willingness to undertake military action. ... In the long term, it means removing Saddam Hussein and his regime from power." Interestingly, the group had only one full-time staffer and an intern. But it managed to get its message signed by 18 National-Security hawks.

Such messages usually are lost in the din of the countless think tanks that reside in downtown Washington. But in this case, the message grew and became especially

important as, over the next few years, more and more of the signers moved into the foreign-policy camp of presidential contender George W. Bush.

Even before the 1998 letter to President Clinton, the idea of using regime change in Baghdad to foster Middle East stability was around.

In a 1996 memo to then newly elected Israeli Prime Minister Benjamin Netanyahu, Richard Perle, a hard-liner from the Reagan administration, proposed replacing Mr. Hussein with Jordan's King Hussein as part of an audacious plan to strengthen Israel. Mr. Perle, who headed a study group, was trying to produce a change that would secure Israel's "streets and borders" by forcing significant change in the Arab world. Mr. Perle later signed the letter to Mr. Clinton.

Through this same period, some Israeli thinkers had begun examining what drove countries to war, and moved toward similar conclusions about basic changes in the Arab world. Uzi Arad, director of Israel's Institute of Policy and Strategy and former adviser to Mr. Netanyahu, followed the research closely. The result was what he now refers to as the "Theory of Democratic Peace," where the checks and balances built into democratic systems prevent a single individual from pursuing a militaristic course that leads to war.

Mr. Arad says the research has had a fundamental impact on the way the Bush administration views the Middle East and its long history of violence. "The evidence was irrefutable: democracies do not attack democracies," he says.

The statement calling for regime change in Iraq had quietly moved to the center of U.S. foreign-policy thinking. Of the 18 who signed it, half took important jobs in the new Bush administration, including Defense Secretary Donald Rumsfeld; his deputy, Paul Wolfowitz; two top State Department officials, Richard Armitage and John Bolton; and Elliott Abrams, now the National Security Council's top Mideast official.

Both the U.S. and Israel are betting the removal of Mr. Hussein from power will pave the way for change. Mr. Ariel Sharon, who said that he hoped and believed that the uprooting of Mr. Hussein "will mark the beginning of a new era, one that is better for our region and for the entire world.", (5) had already told visiting U.S. congressmen that Iran, Libya and Syria must be stripped of nuclear weapons. Undersecretary of State John Bolton replied to him that it would be necessary to deal not only with Syria and Iran but also with North Korea. Israel's defense minister already asked American Friends of Israel to press for action against Iran.

An administration official was quoted in a New York Times dispatch as saying, Iraq "is just the beginning. I would not rule out the same sequence of events for Iran and North Korea as for Iraq."

The most prominent of Washington's neoconservative policy groups, the American Enterprise Institute, have just held what one witness, a Financial Times correspondent, described as a "victory celebration."

Richard Perle, corporate consultant and member of the Pentagon's Defense Advisory Board, told the audience that the Iraq war was going well - that "there are more anti-war demonstrators in San Francisco than Iraqis willing to defend Saddam Hussein."
The members of the group, which is described as "the Bush administration ideological vanguard," discussed what to do about Iran, considered by them as even more dangerous than Iraq, in terms of its nuclear weapons program.

These policy intellectuals and much of the administration itself live and act within a closed intellectual world, in what one commentator, Philippe Grasset, calls virtuality - where reality is both perceived and treated as they want it to be, and not as it is.

Michael Ledeen of the American Enterprise Institute describes the war as "an epochal war … Iraq may turn out to be a war to remake the world."

It has, of course, already remade the world. It has divided the world between the United States and Britain on one side, and nearly everybody else on the other.

Since in Bush ideological circles, more war is what we need, in order to right the world and make it a better place, the president would waste his time going to the United Nations with his projects. Americans are on their own now, Lone Rangers, riding toward the sunset. (6)

Former UK Foreign Secretary Robin Cook, however, expressed rather different feelings as he resigned on just the same war issue. His moving and crucial speech expresses what many others feel:
“This is the first time for 20 years that I have addressed the House from the Back Benches. (7) I must confess that I had forgotten how much better the view is from here. I have chosen to address the House first on why I cannot support a war without international agreement or domestic support. We delude ourselves if we think that the degree of international hostility is all the result of President Chirac. The reality is that Britain is being asked to embark on a war without agreement in any of the international bodies of which we are a leading partner - not NATO, not the European Union and, now, not the Security Council. To end up in such diplomatic weakness is a serious reverse. The US can afford to go it alone, but Britain is not a superpower. Our interests are best protected not by unilateral action but by multilateral agreement and a world order governed by rules. Yet tonight the international partnerships most important to us are weakened: the European Union is divided; the Security Council is in stalemate. Those are heavy casualties of a war in which a shot has yet to be fired. For four years as Foreign Secretary I was partly responsible for the western strategy of containment. Over the past decade that strategy destroyed more weapons than in the Gulf war, dismantled Iraq's nuclear weapons programme and halted Saddam's medium and long-range missiles programmes. Iraq's military strength is now less than half its size than at the time of the last Gulf war. Ironically, it is only because Iraq's military forces are so weak that we can even contemplate its invasion. Yet it is more than 30 years since Resolution 242 called on Israel to withdraw from the occupied territories. We do not express the same impatience with the persistent refusal of Israel to comply. Does not

redress the strong sense of injustice throughout the Muslim world at what it sees as one rule for the allies of the US and another rule for the rest. What has come to trouble me most over past weeks is the suspicion that if the hanging chads in Florida had gone the other way and Al Gore had been elected, we would not now be about to commit British troops. The longer that I have served in this place, the greater the respect I have for the good sense and collective wisdom of the British people. On Iraq, I believe that the prevailing mood of the British people is sound. They want inspections to be given a chance, and they suspect that they are being pushed too quickly into conflict by a US Administration with an agenda of its own. Above all, they are uneasy at Britain going out on a limb on a military adventure without a broader international coalition and against the hostility of many of our traditional allies. I intend to join those tomorrow night who will vote against military action now. It is for that reason, and for that reason alone, and with a heavy heart, that I resign from the Government.”
Mr. Cook’s comments beg the question of whether he has fears of what could happen to the UN. Could it be an au revoir to the Security Council? As the Wall Street Journal commented (8): a cleaner option would be for the US simply to drop out of the Security Council, while retaining its seat in the General Assembly and a couple of other UN affiliates. This would strip the Council of the pretense of legality and seriousness and remove it as an obstacle to genuine collective security. A new UN without a Security Council might even be better for the UN itself. It could focus on the things it does well and not embarrass itself by failing again and again on its grander ambitions. It would certainly be better for the freedom and safety of Americans.

And this brings one to consider an even more disturbing development: the growing ghost of McCarthy in the US (9). The harassment, arrest, detention and frustration of those who are against the war is becoming routine. Relatives of victims who died on September 11, who are opposed to the war, have been prevented from speaking in schools.

As Iraqi civilians and American, British and Iraqi soldiers perish in the Gulf, this war is fast claiming another casualty - democracy in the US. This process is not exclusive to America. It has a particular resonance here because of the McCarthyite era during the 1950s when those suspected of supporting Communism were forced to testify before the Senate to recant their views and divulge names of progressives. Comparisons with McCarthyism are valid but must be qualified. These popular and sporadic displays of intolerance may be gathering pace, but no federal edict has been issued to support them and many who support the war are opposed to them.

Barry Steinhardt, director of the American civil liberties union programme on technology and liberty, told the New York Times that authorities have been demanding records from internet providers and libraries about what books people are taking out and which websites they're looking at. The result is a symbiotic relationship between the mob and the legislature, whereby official repression provides the framework for public scapegoating with each gaining momentum from the other. From the outset Bush has insisted that: "Those who are not for us are against us," and so it follows that anyone opposed to his way of dealing with the terrorist threat becomes the enemy, at home or abroad. Terrorism is the new communism. Even before the first body bags have arrived, the war has already reached the home front.

Within this context, one may appreciate that the following article is a clear indication of how the US administration views the future of International Relations (10):

Saddam Hussein's reign of terror is about to end. He will go quickly, but not alone: he will take the UN down with him. Well, not the whole UN. The "good works" part will survive. What will die is the fantasy of the UN as the foundation of a new world order. As we sift the debris, it will be important to preserve, the better to understand, the intellectual wreckage of the liberal conceit of safety through international law administered by international institutions. Let us not forget who held that the moral authority of the international community and who marched against "regime change".

Shirley Williams, or Lady Williams, a willing coalition of liberal democracies isn't good enough, "anarchy", rather than international law, would prevail, destroying any hope for world order. This is a dangerously wrong idea that leads inexorably to handing great moral and even existential politico-military decisions, to the likes of Syria, Cameroon, Angola, Russia, China and France.
She fell back on the primacy of "order" versus "anarchy". But is the security council capable of ensuring order and saving us from anarchy? History suggests not. The Soviet Empire was wrestled to the ground, and Eastern Europe liberated, not by the UN, but by the mother of all coalitions, NATO.

This new century now challenges the hopes for a new world order in new ways. We will not defeat or even contain fanatical terror unless we can carry the war to the territories from which it is launched. This will sometimes require that we use force against states that harbour terrorists. Iraq is one, but there are others. The chronic failure of the security council to enforce its own resolutions is unmistakable: it is simply not up to the task. We are left with coalitions of the willing. The true alternative to the anarchy of the abject failure of the UN.

Such Positions are creating fears in Europe about US domination. (11)

The network of international institutions designed to impose rule of law over raw power will be dangerously weakened .

A war to topple Saddam Hussein without the UN's imprimatur "would create a very dangerous precedent" Russian Deputy Foreign Minister Georgy Mamedov said. European doubts about the "We want to live in a multipolar world, one with a few large groups enjoying as harmonious relations as possible with each other, a world in which Europe, among others, will have its full place," French president Jacques Chirac said on television. "Either it adopts the US-backed resolution, in which case it will seem to be

doing Washington's bidding and lose its legitimacy, or it doesn't and the US will ignore it, which will also damage its credibility."

UN Secretary-General Kofi Annan said that "if the US and others were to go outside the Security Council and take unilateral action they would not be in conformity with the (UN) charter," which could be construed as a breach of international law.

Underlying the dilemma lies a fundamental difference of approach between the US administration and its European allies. "Multilateralism is a principle for us, but for the US, it is just one of many options," says Karsten Voigt, German Chancellor Gerhard Schroder's point man for relations with Washington.

The US new National Security Strategy, which asserts that no nation should be allowed to challenge US global power and primacy may frighten or be intimidating, as may be appreciated from the following opinions.

"Their strategy talks about American citizens' security, not about freedom in the world," says Georges LeGuelte, an analyst at the Institute for International and Strategic Relations in Paris. "The Americans cannot tolerate anyone limiting their military supremacy, and other countries cannot accept that. It means a return to the law of the jungle." The thinly veiled threats that US diplomats have been issuing to Moscow and Paris, which have both indicated they would veto a UN Security Council resolution authorizing war in Iraq, are seen as a foretaste of the world that will emerge when the conflict ends.

US ambassador to Moscow Alexander Vershbow has roiled political waters there with an interview in the daily Izvestia in which he said that joint US-Russian programs in space, energy investment, and the war on terror would be endangered by a Russian veto. "This is a mistake of American diplomacy," says Sergei Markov, a member of President Vladimir Putin's foreign policy advisory committee. "The Russian elite's attitude might be called

critical mistrust, and I'm afraid Russian mistrust towards the US will be growing in the future."

"The transatlantic relationship is indispensable," German Foreign Minister Joschka Fischer said in a recent interview Chirac was almost blase about ties with the US. "Our relations and our friendship have deep roots going far beyond isolated events," he said. Officials in Berlin and Paris point out that Germany and France have more peacekeeping troops in places like the Balkans and Afghanistan than any country but the US.

When NATO countries invoked Article V of their charter immediately after the 11th September, calling the attack on America an attack on them all, European members were disappointed that Bush did not call on NATO for the war in Afghanistan. "That was seen here as a rejection of European solidarity," says Jens van Scherpenberg, an analyst at the German Institute for International and Security Affairs. Germany refloated the idea of NATO taking over peacekeeping duties in Afghanistan, an idea that Washington has rejected. "Changes in transatlantic relations do not mean it is necessary to turn away from the transatlantic alliance," says Mr. Voigt.

Central European candidate countries, however, have backed Washington openly. "One thing will not be forgotten" when the dust in Iraq settles, predicts Vladimir Handl, a European security analyst with the Institute of International Relations in Prague.
"The development of a common European consensus on security and defense policy has been seriously undermined. Political trust has been broken, and relations will have to be repaired before the process can start over again."


The US Agency for International Development said that post-war reconstruction contracts for Iraq totaling $1.9 billion will go to American firms. The government's

development agency plans to spend a total of $2.4 billion in Iraq, $1.9 billion of it on rebuilding infrastructure such as roads, bridges, and water treatment and power plants. The remaining $500 million will go to humanitarian aid.

Said USAID's administrator Andrew Natsios:
"We have never spent this much money in one year in one country; this is unprecedented," Natsios said. "Something comparable would probably be the Marshall plan."
After World War Two, the U.S. government poured $13 billion into Europe to rebuild and revive the economies of 17 countries devastated by more than five years of conflict.
One would expect that such an emphatic position would imply that some countries that would wish to enjoy a piece of the reconstruction cake could be somewhat left out in the cold, a sobering thought when one considers that Deutsche Bank recently estimated that Iraq had signed deals with foreign oil companies in recent years covering 50 billion barrels.
"Politics is about interests. Politics is not about morals," Iraq's UN ambassador explained to the Washington Post a year ago. "If the French and others will take a positive position in the Security Council, certainly they will get a benefit. This is the Iraqi policy." Thus the huge Majnoun and Nahr Umr fields were reserved for TotalFinaElf, partly owned by the French government. In the end, of course, French interests are not U.S. interests. (12)

Perhaps the following statement indicates the McCarthy’s spirit in today’s political hardline commentators “It ought to be a bracing wake-up call to Americans to realize how little collective security means to our allies when it's not their narrow interests on the line but instead the lives and tax dollars of Americans” said Gary Younge. US policy ought to be an open-door policy where all companies will have equal rights to bid for Iraqi oil deals when the fight is over - but only when Mr. Chirac and the likes of Thierry Desmarest, head of TotalFinaElf, are also gone along with the outlaw Iraqi regime they abetted.

Going back a little in history, on 11th September 1990, President George Bush senior delivered a historic speech to the US Congress on Iraq’s occupation of Kuwait. He said the crisis offered a rare opportunity for co-operation. "Out of these troubled times, a new

world order can emerge: a new era, freer from the threat of terror." And he spoke of "vital economic interests".

Iraq controls 10pc of global oil reserves. "Iraq plus Kuwait control twice that"-it could coerce its neighbours, "who control the lion’s share of the world’s remaining reserves".
Before the war, Saudi Arabia and Iraq were struggling to assert their leadership of OPEC. Against Riyadh’s will, Baghdad pressured the organization to raise its reference price in July 1990 from $ 18/bl. But after the war, with Iraq contained, Saudi Arabia assumed a dominant role in OPEC. No other member has such huge reserves of low-cost, readily available oil.

The Kingdom carries "social costs" that constrain its actions. It needs to keep prices well above $20/bl and has the power to do so.

Today’s "new world order" is not the one described by Bush senior in 1990. It is a world driven by the very opposite.

Here, it is important to note that Saudi Arabia hurries to calm Washington down, without thinking too much in OPEC. Mr. Naimi met with U.S. Energy Secretary Spencer Abraham at the Saudi minister's hotel suite. (13) Mr. Abraham wouldn't say what exactly he and Mr. Naimi discussed, though he called the talks "positive" and "substantive."

Mr. Abraham assured Mr. Naimi the U.S. will only tap its 600 million barrel strategic petroleum reserves in the case of a severe supply disruption.
"We are prepared to act very quickly," he said. OPEC members are concerned that a rush by the U.S. or other major oil-consuming nations to release emergency reserves could trigger a swift drop in world oil prices.

"There will be no shortage of oil," said Saudi Arabia's oil minister, Ali Naimi

Saudi Arabia said it will ensure the world will have enough oil in the event of a war with Iraq, even though OPEC members declined to endorse a proposal to suspend the cartel's official production limits if the U.S. invades.

Iraq exports more than two million barrels of oil a day.

Saudi Arabia has about 700,000 barrels a day of immediate spare capacity with another 500,000 barrels a day that can be brought on line within 90 days.

"The best case scenario is that Iraqi oil is out of the market for a month or so," one senior OPEC official said. At the end of three weeks, or a month, they have all of Iraq except Baghdad and the oil fields aren't damaged."

Non-OPEC supplies of crude oil, NGLs and non-conventional oil are expected to increase by 420,000 b/d in 2003.

However, if a resumption of production and exports by Iraq is delayed and global supply problems are compounded by further shortfalls from the problems in Nigeria and Venezuela, then OPEC will have to reflect further on its options heading into the second quarter. OPEC now have only about 1mn b/d of quickly available spare capacity . Saudi Arabia has boosted its normal 25-30mn barrels of crude storage within the kingdom to 50-55mn barrels, and has a large volume of crude on the water and a comparatively small volume in storage in the Caribbean. Other OPEC producers have also amassed extra volumes, both in transit and in storage near customer markets.

There will be no supply problem whatsoever if the conflict only limits Iraqi production, however: Authoritative sources (14) are monitoring events carefully as they unfold and this is the general view - especially in view of the current supply situation where incremental Gulf cargoes are having difficulty finding buyers.

Moreover, with respect to the crude oil market, Kuwait officials said they will maintain current output levels of around 2.4 million b/d even as their territory serves as a launch pad for the invasion of Iraq. It may be forced to shut in production of anywhere between 300,000-700,000 b/d from fields bordering the war zone.


Exports from Venezuela are recovering after two months of crippling industrial action, but government claims that production is back over 3 million b/d are widely regarded as out of step with reality. Strike staff and market analysts put current production at 2 million to 2.3 million b/d with global suppliers scrambling to make up for oil already lost through the strike. (15)

Venezuela brought back an estimated 860,000 barrels per day of conventional and upgraded tar sands productions, pushing output to 1.435 millions b/d. But that is still less that half its pre-strike, November output level.

Conventional oil production is seen gaining about 250,000 b/d to reach 1.65 million b/d- still well below pre-strike levels. The March average is projected at 221,000 b/d for the three upgrader joint ventures, and conventional oil is seen gaining about 250,000 b/d to reach 1.65 million b/d still well below pre-strike levels.

Now as the strike fades, Venezuelan crude, NGL and non-conventional oil production has reached a level of 1.9mn b/d, according to former PDVSA president Luis Giusti, while the country’s refining throughput was currently running at about 500,000 b/d, although most of this was hydroskimming capacity. He predicted that if Venezuela’s political situation remains as it is, by the end of 2003 liquids production would be built up to 2.3mn b/d and refining throughput would be increased to900,000 b/d. This, he said, compared with 3.2mn

b/d of crude, NGLs and non-conventional oil production and 1.2mn b/d of crude distillation capacity in operation before the strike began in December 2002.

Despite surging oil production from OPEC, relatively little of the additional output appears to have reached the market: “It is either still en route or in producer storage. OPEC, fearing a price collapse, wants to forestall a release of strategic stocks by the IEA and some members are probably boosting stocks nearer the consumers”.

At least some of the incremental OPEC oil production may be going into producer-controlled storage in the Caribbean and elsewhere, close to major oil-consuming countries. Saudi Arabia’s Vela has chartered 12 VLCCs to begin loading mid-March.
It makes little sense for producers to release extra oil onto the market under present conditions and there is no incentive for refiners to buy more than they need to meet their immediate processing requirements.

OPEC is now producing much more than is necessary to replace lost Venezuelan barrels, building up a large overhang that could depress oil prices next quarter.

If a resumption of production and exports by Iraq is delayed and global supply problems are compounded by further shortfalls from the problems in Nigeria and Venezuela, then OPEC will have to reflect further on its options heading into the second quarter. (17)

Venezuelan output has recovered faster than expected despite the firing of over 16,000 PdV employees who had gone on strike. Former PdV managers admit that total Venezuelan output, including synthetic crude, has reached 2,43 mn b/d, Venezuela has not yet started gasoline exports to the US, because of problem with its refineries, but gasoil shipments to customers in the Caribbean have begun. (18)


Nigeria is the world's sixth-largest exporter, the fifth-biggest supplier of US oil imports, and is experiencing shutdowns.

President Obasanjo recently accused the Bush administration for interfering in his countries internal affairs due to Nigeria’s refusal to US war plans on Iraq, and it is also to be remembered that an Israeli think tank had been actively advocating Nigeria to withdraw from OPEC. More than 10,000 people have been killed since Mr. Obasanjo's election in 1999 ended more than 15 years of brutal military rule.

Basically of Muslim religion, Nigeria is the most populated country in the continent. The Biafra separatist war of the 60s are to be especially remembered now there are tensions between the Muslims in the north of the country and the Christians in the south; furthermore there are increasing calls to withdraw from OPEC. West Africa, with Nigeria at the head, has been receiving special attention from the US Department of State - a visit from President Bush is expected for the beginning of 2003, since its oil is seen as ideal for the diversification of US oil supply.

Nigeria, and Algeria, have requested a discussion on OPEC Member quotas, and adding this to the fact that Venezuela has incorporated crudes produced through its associations, puts OPEC in a situation that would become more complex with the possibility of an Iraq that has greater production inside or outside of the Organization.

In a massive pullout from the Niger Delta, where ethnic violence has killed dozens of people and destroyed villages, Shell and ChevronTexaco have evacuated four oil facilities. Shell Development Petroleum Co. has shut down 370,000 barrels a day in crude output after evacuating facilities in the area. The pullout from Royal Dutch/Shell’s oil pipeline pumping stations at Ogbotobo, Opukushi, Tumo and Benisede raises the number of closed Shell facilities to 14.

Chevron announced it was shutting down nearly all of its remaining onshore and offshore operations in Nigeria, cutting 440,000 barrels of oil a day, along with 285 million cubic feet of natural gas per day. In all, oil multinationals have cut an unprecedented 800,000 barrels in daily oil production, or 40% of the West African nation's normal total of 2 million barrels a day.

The specter of further shutdowns was raised by the blue-collar National Union of Petroleum and Gas Workers of Nigeria, which asked its members to leave facilities belonging to Shell and Nigeria's state-owned petroleum and gas companies. (19)

There has also been threats to blow up oil facilities... This development came as ethnic militant leaders accused the army of attacking the Niger Delta village of Okpelama, near the company's main Escravos oil export terminal.

Earlier there was a threat to blow up Chevron Texaco, Royal/Dutch Shell and TotalFinaElf oil facilities that they occupied if the military raids continued and the government ignores calls for electoral reforms ahead of late-April elections.

The pullout cuts 440,000 barrels and 285 million cubic feet of gas a day, or nearly all of ChevronTexaco's Nigeria production. (20)

Oil multinationals in the West African area have been forced to cut an unprecedented 650,000 barrels a day, or one-third of the country's daily exports of 2 million barrels.

Oil markets

A glut of heavy sour crude has built up in Asia-Pacific as high OPEC output runs into seasonal falls in demand.

Saudi Arabia has raised output by 1 mn b/d to over 9mn b/d this year
Extra OPEC crude has been moving to Asia-Pacific since January. Officially the increment is to replace lost volumes from Venezuela. But also, unofficially, it served to increase stocks ahead of the war in Iraq.

Yet Asia-Pacific demand is set to fall by some 1.7 mn b/d to 2.5 b/d next quarter. Most of the extra OPEC crude has come from Saudi Arabia and consists of heavier sour grades. But, as the northern hemisphere summer approaches, the main requirement is for lighter and, sweeter crude to produce gasoline.

Abu Dhabi and Iran have been sup¬plying full term volumes since February, meaning that at least 1.1 mil b/d of Iranian crude will move to Asia-Pacific refineries. Saudi Arabia has also supplied full volumes for March and has, like other OPEC producers, announced plans to do the same in April. Saudi Aramco has been happy to provide extra volumes if requested by buyers.

The Gulf normally supplies all but about 2mn b/d of Asia-Pacific's net supply deficit. This dependence makes the region vulnerable to large shifts in OPEC output.
If the war is long or involves supply disruptions in the Middle East, Asia-Pacific refiners may be grateful there is now a supply glut.

Even with Iraqi exports effectively gone for the time being and by spring, the supply surplus in global oil markets could become substantial, even with a sustained disruption of Iraqi oil flows. (20) Decisive supply increases in response to the Venezuela crisis mean that global oil supplies are at record levels just as seasonal oil demand begins to wane.

Venezuela is recovering and Saudi Arabia and other major producers have boosted exports to more than make up the difference.

Unless war spreads in the Mideast or another oil supply crisis erupts elsewhere, oil markets can rest assured that the tightness of the winter oil market is rapidly giving way to a much more comfortable balance, even if Iraq’s oil remains shut in.

For the second quarter, the supply surplus could amount to as much as 3 million b/d, precipitating a much larger than usual inventory build.

The build up in output from Saudi Arabia and Venezuela means that inventory gains in these producing countries have been substantial, but are not captured in the observable portion of global oil inventories, and stocks at sea may be even higher than they seem due to the recent output surge. (21) □


(1)Financial Times, 25 March 2003: “Businesses have deep concerns about recovery”.
(2)New York Times, 23 March 2003: “War in Iraq could bring US recession, or economic growth” by Daniel Altman.
(3) Oil Market Intelligence, March 2003
(4) March 29, 2003
“Dreams of Empire Eulogies for International Law”by John Gershman
(5) “A Pro-U.S., Democratic Area Is a GoalmThat Has Israeli, Neo-conservative Roots”
By ROBERT S. GREENBERGER and KARBY LEGGETT Staff Reporters of WSJ 21 March 2003
(6) IHT “Riding alone into the sunset” by William Pfaff, March 28, 2003
(7) Extract from the Text of Robin Cook's Speech to the House of Commons, CNN March 18, 2003
(8) Wall Street Journal “Au Revoir, Security Council”
(9) The Guardian: “Democracy is under threat in the United States; anyone who objects to the conflict in Iraq is not allowed to say so.” Gary Younge, March 27, 2003
(10) “Thank god for the death of the UN” Richard Perle, March 21, 2003. (Richard Perle is chairman of the defence policy board, an advisory panel to the Pentagon.)
(11) “Europe's fears of US domination” Peter Ford, The Christian Science Monitor 14 March 2003
(12) “A War for France's Oil”, March 19, 2003, Holman W. Jenkins, jr.
(13) Global Markets, “The Legacy of war” 12 March 2003
(14) The Wall Street Journal: “Saudis Plan to Ensure Oil Supply During War”, 11 March 2003
(15) MEES 24 March 2003
(16) GLOBAL SUPPLY, “Marking Up The Difference”, March 2003
(17) MEES “PDVSA compromised by Government actions, says Giusti” 24 March 2003
(18) PETROLEUM ARGUS “Venezuela output rises” 24 March 2003
(19) Associated Press “Shell Evacuates Its Oil Facilities In Nigeria as Violence Continues” March 24, 2003
(20) Associated Press “Chevron Texaco - Nigeria”, March 23, 2003
(21) OMI “Surplus Takes Shape Despite War” March 2003

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