'How far will Iraq go?'; Japan, France, Brazil among hardest hit by oil cutoffs
The West's oil lifeline may be brutally severed if Saudi Arabia and the other Gulf producers are dragged into the conflict between Iran and Iraq. But that point has not yet been reached -- and may never be. Meanwhile, Japan, France, and Brazil are the clients who stand to lose the most from the oepn but undeclared war between the two oil giants.
Ironically, both France and Brazil may find themselves caught out by their own scheming. For both took a gamble on Iraq.
France agreed to sell the Baghdad regime highly controversial equipment capable of upgrading uranium to nuclear bomb capacity -- in exchange for plentiful supplies of Iraqi crude.Brazil, too, which depends on Iraq for 45 percent of its oil, has slipped nuclear technology to the iraqis.
Only this week France took a further risk. It openly sided with Iraq by announcing that it would sell Baghdad 150 Alpha-jet combat aircraft for local assembly, despite the flare-up with Iran.
Now the combined 2.5 million barrels a day that Iraq and Iran supplied to the noncommunist countries have been cut off, industry sources here say. And even if the Iran-Iraq conflict ends swiftly -- and some military strategists predict it will -- the future oil production of both sides has been damaged by the combat.
Iraq has hammered the Bandar Khomeini petrochemical plant and the oil refinery at Abadan, the world's largest installation, with heavy artillery and aircraft. The Abadan refinery was closed down Sept. 24. On the same day Iran suspended crude oil exports from its main terminal at Kharg Island after part of it was set alight by Iraqi bombers.
The Iranian air force has counterattacked against Iraq's oil depots both in the north at Mosul and Kirkuk and in the south around Basra and nearby Umm Qasr.
As one petroleum industry source said, "It's going to take a lot of Red Adairs to put out all those flames."
Strangely enough, both sides at time of writing had refrained from bombing each other's actual oil fields. London sources who used telex to contact Ahvaz, the center of Iran's oil field operations, reported Sept. 24 that this highly vulnerable area had not then been hit by the Iraqis. "One good missile at one of the pump stations, and the whole place goes up in smoke," they said.
Baghdad has been backing Khuzestan's minority Arabs in their guerrilla activity against the Tehran regime, and diplomatic sources said the Iraqis may want to save the oil fields for a puppet "Republic of Arabistan" in the oil-rich area.
A Western oil company executive in London cautions that although the United States and Western Europe are brimming with enough oil to last 100 days, chances that Saudi Arabia and other oil sheikhdoms might get caught in the cross fire raises the specter of "supply hysteria."
Supply hysteria might occur if Iran tries to block the thin and highly vulnerable neck of water known as the Strait of Hormuz, or if Iraq carries out its threats to attack Iran's Bandar Abbas Navy base near Hormuz and tries to pry away three strategic islands in mid-straig -- Abu Musa and the Lesser and Greater Tunbs -- from Ayatollah Khomeini's revolutionary regime.
Saudi Arabia, by far the world's biggest oil exporter, Kuwait, Qatar, Bahrain , and the United Arab Emirates all ship their crude -- an estimated 12.69 million barrels a day, or half of all the oil now sold by the Organization of Petroleum Exporting Countries (OPEC) -- through the vital Strait of Hormuz.
For now, Iran declared its part of the strait a "war zone" and cordoned the area off with powerful American-made destroyers, obliging all tanker traffic to skirt along the Arab side of the Gulf.
So the West's oil lifeline hangs in jeopardy. Crude brokers in London and Rotterdam are scrambling for spare supertankers to make a run into the Gulf in case the escalating conflict shuts the strait. Since the fighting flared up last week between neighboring Iran and Iraq, charter rates for supertankers have doubled; and insurance fees have soared 300 percent, according to Lloyds of London; six of the 27 jumbo-sized supertankers (VLCCs) that languished for months without a contract were snapped up on Sept. 22 "subject to the availability of crude," which, as one shipping broker explained, means "if the straits aren't blocked off."
Rotterdam spot prices held firm, with traders wary of off-loading crude in case demand rockets. "We're waiting to see which way OPEC jumps," said Ian Goldsborough, a London oil broker. At a recent Vienna meeting, Saudi Arabia and other OPEC heavyweights decided to tighten the current slack market by cutting production 10 percent. Most OPEC countries started reductions last weekend, industry sources said.
Coupled with the loss of 2.5 million barrels a day from the Iran-Iraq conflict, these cuts mean that OPEC's sales will fall by give million barrels a day to 21.27 million barrels. "If OPEC goes ahead with the production cuts, the spot market will go crazy," said another London oil analyst.
However, Saudi Arabia aims to stabilize the world oil market, and some oil analysts and Middle East watchers in Europe predict that the Saudis may keep crude pumping at full bore to halt panic buying.
Politically, Saudi Arabia has attempted to stay on the sidelines of the Iran-Iraq conflict. But other Gulf sheikhdoms -- Kuwait, Bahrain, the United Arab Emirates, and Qatar -- have all publicly backed Baghdad's Saddam Hussein.
A European diplomatic source in contact with Gulf governments said, "They're all in a state of shock. The conservative Arabs want to see Khomeini's regime get bashed, but they don't want to see Iraq become the Gulf's superpower with absolute control over the Strait of Hormuz."
The ruling Arab sheikhs are also worried that if Iran's destroyers block the Gulf's entrance, then the Soviet and American fleets prowling nearby in the Indian Ocean might be drawn into the fray, setting the entire region ablaze.
Western military observers doubt that Iraq's undeclared war with Iran will de-generate into an all-out Middle East war with eventual superpower intervention.
Robert Litwack, ana analyst at the London-based International Institute for Strategic Studies, claims that geographically, and militarily, the flare-up is "self-containing."
Iraq ferried troops across the Shatt Al-Arab River Tuesday claiming they would sweep through southern Iran to gain control of the Strait of Hormuz. But Litwack argues that Iraqi forces could never travel the 600 mile distance and capture Iran's huge navy base at Bandar Abbas. Iraq's twelve Soviet-made missile carriers would also be outgunned by the three US-built destroyers and frigates that Iran has protecting the straits.
Iran is equally constrainted.The authoritative Air International magazine claims that lack of spare parts and maintainance has crippled Iran's once all-mighty air force.