Hussein's `Forced Merger' Brings Era of Bargain Oil to a Close
WITH a single stroke, Iraq's Saddam Hussein has expanded the potential power of oil-exporting nations and installed himself at the top of the oil world. In the process, say oil industry analysts, he has closed the era of less-than-$20-a-barrel oil.
At issue now is whether he will be able to capitalize on his new position. On Monday, the UN Security Council imposed mandatory comprehensive trade sanctions against Iraq. Turkey, which maintains two pipelines that ship Iraqi oil to terminals on the Mediterranean, has agreed to abide by the sanctions. Pressure is mounting on Saudi Arabia, which also maintains pipelines for Iraqi oil, to follow suit.
Prior to the UN vote, Iraq told Turkey that it was shutting down one pipeline and reducing the flow through the other to 70 percent of capacity. Iraq said that sanctions imposed by the United States and other industrial countries were to blame for the move.
As the world tightens the economic screws on President Hussein, it is also forcing up the price of oil. Oil industry analysts say they doubt that sanctions will bring Hussein into line, unless the sanctions are enforced over the long term. The question, they say, is: Who will blink first?
Hussein ``has put himself in a very strong position,'' says Patrick Connolly, a senior consultant with Cambridge Energy Research Associates in Cambridge, Mass. Barring United States military intervention, he adds, the Iraqi leader is likely to maintain his strong position.
Oil analysts call Hussein's invasion of Kuwait a brilliant, if brutal, geopolitical move. ``You had a [forced] merger of two of the biggest competitors in the business'' - Iraq and Kuwait, says Morris Adelman, professor emeritus at the Massachusetts Institute of Technology and longtime observer of the Organization of Petroleum Exporting Countries (OPEC). ``That means the cartel is more effective than it was.''
By taking over Kuwait last week, Hussein doubled the oil reserves under his control and boosted his production by 60 percent.
That means he controls nearly as much oil production as Saudi Arabia. Since his military might is greater than the Saudis', his clout now exceeds theirs - and everyone else's in the oil world.
``The obvious message in the takeover of Kuwait is that any country is vulnerable to military attack should it increase [beyond] its quota,'' says Henry Steele, an economics professor at Houston University.
Since the mid-1980s, several OPEC members have cheated on quotas. The cheating drove down oil prices, which irked Hussein, who badly needed oil revenues to keep Iraq's debt-laden economy afloat. Kuwait was one of the most flagrant violators of the quota system, oil analysts say.
By invading Kuwait, Hussein has sent a strong message to the rest of OPEC: No more cheating. Analysts say OPEC - at least those members in the Arabian Peninsula who are vulnerable to Iraqi attack - will listen.
The implications of Hussein's new-found power are clear, analysts say. On news of Iraq's invasion, oil prices shot up. The futures price of benchmark West Texas Intermediate crude oil rose Monday to $28.05 a barrel for September delivery.
Gasoline prices shot up last week from between 2 to 25 cents a gallon across the US. Nationally, the average wholesale price for unbranded unleaded gasoline jumped 9.5 cents during the week ended Friday, according to a survey conducted by the Lundberg Letter, an industry tracker based in Los Angeles. Generally the Midwest has seen the biggest increases.
Even if other producing countries pumped at maximum capacity, the pressure on prices would remain, Mr. Connolly says, because that effort would only barely match the amount of oil that economic sanctions have taken off the market.
Oil prices are always volatile. But oil analysts agree that the era of oil under $20 a barrel is over. Connolly says he expects the price to settle between $20 and $25 a barrel. Russell Thompson, president of Operational Economics Inc., an energy consulting firm in Houston, says prices will settle between $22 and $28 a barrel for the rest of this year.
These forecasts assume that the current situation holds. Should Hussein attack Saudi Arabia, prices would shoot through the $30 a barrel level, says Kurt Abraham, international editor of World Oil magazine in Houston. Iraqi troops in Kuwait are now only about 200 miles from the tip of Saudi Arabia's largest oil field, Ghawar, he points out.
Even without Hussein's invasion, the price of oil was bound to rise, Mr. Thompson says. Several years of low prices boosted demand; importers such as the US increased their reliance on OPEC oil. As long as OPEC members produced more than their quotas, prices stayed low. But had the cartel cut its production even slightly, then prices were poised to rise sharply, he says.
``The economics were there for someone to exploit. He [Hussein] was the first to move,'' he says. Eventually, the world price could reach $40 to $60 a barrel, Thompson says.
But if a severe recession hit the US, he says, its effects would ripple around the world, cutting oil demand and keeping the price from skyrocketing to such levels.
Oil-importing countries can do little about the situation in the short term, says Lee Gerhard, director of the Kansas Geological Survey. For the past five years, oil prices have been so low that many non-OPEC producers gave up exploring for new sources and started to close down uneconomic operations.
US production, for example, has fallen 15 percent since 1985 and now stands at a 25-year low. If the US started today on a crash program to boost oil production and ignored environmental restrictions, it would take at least three years for oil production to rebound, Mr. Gerhard says.