Govt Paper

Iraq war: the spiralling effects on world economy

In the next few weeks, the struggling global economy may be put to the test if Washington chooses to invade Iraq. There are many risks involved in bombing Baghdad, the most important being a spike in oil prices.

With oil prices already over $30 a barrel, the increased pressure has been put on the global economy as more money is spent on importing oil. Should the United States attack Iraq, there is a real possibility that the Middle East oil shipments will be disrupted.

The US oil inventories are already running low due to the nearly two-month long strike in Venezuela. While it takes only one week for Venezuelan oil exports to reach the United States, it takes four to five weeks for them to arrive from the Middle East.

During an American attack on Iraq, an errant bomb could destroy or interfere with oil operations, halting Iraq's 1-2 million barrels per day (bpd) in exports. Compounding the American threat, Iraqi leader Saddam Hussein could opt to damage his own oilfields, by ordering troops to light them on fire, as was done to Kuwait in 1991.

In order to prevent a spike in oil prices, any reduction in Iraqi oil exports will need to be compensated by an increase in oil exports from Opec and non-Opec nations, alike. However, most Opec nations are already producing at capacity, such as Indonesia and Qatar; the biggest oil producers outside of Opec - Russia, Norway and Mexico - cannot increase their output since their pumps are already running at full capacity.

This likely scenario has worried economists; it could result in oil prices as high as $40 a barrel, possibly causing extensive damage to the global economy. However, the Bush administration believes that the end result of the invasion will be economic growth rather than economic recession. The fate of the economy will rest on how fast the United States can get oil flowing again after the war; once oil production has stabilized again, the United States will likely be able to increase capacity by updating Iraq's oil infrastructure.

While before the Gulf War, Iraq was exporting 3.5 million barrels per day, it is predicted that Iraq may be able to increase production up to 5 million bpd. Indeed, this scenario would provide a boon to the global economy by increasing oil supply, dropping prices down to $15 to $20 a barrel.

But successful "regime change" might not be as easy as it seems. Iraq's oil infrastructure is already in bad shape and the prediction is that it will take 5 to 10 years for Iraqi oil output to reach such levels, if at all; in addition, there is no guarantee that the new Iraqi government will be willing to export such an inflated amount of oil. However, any new administration will most likely be installed and protected by the US troops, thus reducing the government's actual independence from Washington.

The other most dangerous scenario is whether