WASHINGTON - The prospect of a war to topple Saddam Hussein has injected new volatility into world oil markets, raised fears of future disruptions, and spurred international and corporate jockeying for the untapped petroleum bonanza beneath Iraq.
Tremors are already evident. The higher prices Americans pay at the gas pump reflect a "war premium" of about $5 a barrel exacted by tight oil markets worried about interruption of supplies during a conflict, analysts say.
But this is just the prologue of what could be a long-running energy drama with potentially serious effects for the United States and world economies. There will be numerous turns in the plot, hinging on prewar diplomacy, the speed and success of a war, regional stability and what Iraq looks like afterward. Few are predicting how the drama will end.
Iraq contains the world's second-biggest proven oil reserves after those in Saudi Arabia, and in decades past used the wealth flowing from these deposits to lead the Arab world in educational opportunities and health care, developing a large middle class.
But more than two decades of war and sanctions, starting with the eight-year war with Iran, followed in 1990 by Iraq's invasion of Kuwait and in 1991 by the Persian Gulf war, have badly damaged ports and caused the state-run oilfield and refinery infrastructure to fall into serious disrepair. As a result, Iraq remains far below its potential as an oil exporter.
The economics of oil have complicated American efforts to win support at the United Nations Security Council for a tough resolution threatening war if Iraq fails to destroy any program to develop nuclear, chemical or biological weapons or long-range missiles.
Russia, which holds a veto in the Security Council, is Iraq's biggest supplier of nonmilitary goods under a U.N. program that requires Iraqi imports to be screened by the United Nations' sanctions administrators. Russia is also eyeing a major role in developing Iraqi oilfields.
U.S. and Russian officials from the top down have talked about Russia's stake in Iraq. American officials are wielding a carrot and stick to get Russian support on Iraq.
"We are in conversation with our Russian friends about their interests. And we are taking into account their considerations," Secretary of State Colin L. Powell told the U.S.-Russia Business Council yesterday. Meanwhile, U.S. officials are encouraging American investment to expand Russia's oil production capability and welcome the prospect of more Russian oil flowing to the United States.
At the same time, one senior official said, Russians have been warned that if they fail to back the United States at the United Nations, a post-Hussein regime would "stiff them" on future oilfield development.
If Iraq blocks thorough inspections, setting the stage for war, analysts expect a spike in oil prices of as much as $10 a barrel (the current price is an already-high $30 a barrel) as the United States, with Britain, prepares its forces for military action.
"The closer we come to a [military] strike, the higher it would go," said Vera de Ladoucette, director of Middle East research for Cambridge Energy Research Associates.
Whether this price increase would continue during a war is uncertain. Iraq, which is pumping 1 million to 2 million barrels a day for sale either legitimately through the United Nations or illegitimately through smuggling, might shut off supplies, forcing others in the Organization of Petroleum Exporting Countries to pick up the slack.
The key factor here is Saudi Arabia, which has the production and export capacity to flood jittery markets and force prices down. Saudi Arabia prides itself on its stabilizing role in global oil markets, and sources close to its government predict it will pump enough oil to prevent a new energy crisis during a war.
Saudi Oil Minister Ali al-Naimi assured a conference in Japan recently that the kingdom "is committed to maintaining a stable worldwide oil market, free of disruptive price swings yet responsive to changing conditions."
But if U.S. forces prove unable to secure a quick and decisive victory in Iraq, events in the region could spiral out of control and weaken the Saudis' leverage over the market, some analysts fear.
Possibilities of wartime disturbances include an Iraqi attack on oilfields in Saudi Arabia or Kuwait, disrupting supplies; an attack by Iraq on Israel that draws Israel into the conflict; or a surge of new Israeli-Palestinian violence that further inflames anti-American feeling in the Arab world.
In one nightmare scenario, oil industry consultant Herman Franssen said, terrorists inside Saudi Arabia might attempt to sabotage a major oil facility, choking off exports. Domestic unrest could even destabilize the Saudi monarchy, he said, paralyzing the kingdom's oil industry.
"A cutoff of oil from Saudi Arabia would be an utter disaster," said Franssen. "No combination of countries could make up for that for any length of time."
A sustained rise in oil prices to a level of $45 or $50 a barrel could cause a drop in worldwide economic growth of between 0.90 percent and 1.2 percent, "enough to turn [the economies of] the United States and Japan into a recession," said Gary Hufbauer of the Institute for International Economics.
If the United States prevails in a conflict, as expected, the postwar oil outlook is almost as uncertain.
One question concerns the condition of Iraqi facilities. In a prolonged war, the United States might bomb Iraqi oil facilities to deprive the Iraqi army of fuel. And there has been speculation that, in a final act of vengeance, Hussein might order his troops to set fire to Iraq's oilfields, as they did to Kuwait in 1991.
Even without added damage, it would probably take several years and billions of dollars to repair facilities - such as the Mina el Bakr terminal in the Persian Gulf - and add a second pipeline to Turkey. Until then, Iraq won't be able to boost exports significantly.
"I don't see a world awash with Iraqi oil," said de Ladoucette. "It will be 2010 until Iraq has half the capacity of Saudi Arabia."
But Iraq's known reserves are huge, and exploration may prove that they're greater still, offering a potential bonanza for international oil companies eager to develop them.
American oil firms were interested in developing Iraqi oilfields in the past, and some U.S. oilmen have reportedly been in contact with Iraqi oil ministry officials on the fringe of OPEC meetings.
A number of U.S. companies have used subsidiaries and joint ventures overseas to do business with Iraq under the oil-for-food program. These include two subsidiaries of Halliburton, the oil services company formerly headed by Vice President Dick Cheney. But American companies haven't sought major oilfield development deals during the past decade as the United States tried to contain Hussein's regime through tight sanctions.
Russia, France, China and Algeria filled the vacuum. France's Total-Fina-Elf reached agreement with Iraq to develop the giant Majnoun oilfield, but French law has barred it from signing a contract. Russia's Lukoil has a contract to develop the West Qurna oilfield, another of Iraq's biggest.
This poses a problem for the United States, which may find itself in an occupier role for as long as it takes Iraq to develop a stable government: Does it want to appear to be muscling in on the Iraqi oil business?
Russia, in particular, is worried that a new Iraqi regime would cancel its lucrative deals and sent a diplomat from its Washington embassy to meet in late August with representatives of the Iraqi National Congress, the umbrella Iraqi opposition group.
The INC is noncommittal about future deals, saying the existing contracts would be reviewed by a new democratic government. "If it's not in the interest of the Iraqi people, it will be renegotiated," said Faisal Qaragholi, the INC's operations officer in London. But he said that if an American company submitted a bid that matched that from another country, "I think the Iraqi people would choose the American."
Given the time and money required to boost Iraqi capacity - and the world's growing demand for oil - increases in Iraqi exports probably won't be sizable enough to disrupt world oil markets in the foreseeable future, said oil consultant Nathaniel Kern, head of the newsletter Foreign Report.
Over the long term, Iraq might defy OPEC and seek to expand its markets with lower prices, causing the cartel to crumble. Expanded capacity in Iraq could "have a dramatic effect on internal OPEC relations and hinder future cooperation inside the organization," says a report by AMJ Energy Consulting.
If prices fell as low as $10 a barrel, Saudi Arabia could be destabilized, Kern said. Some Americans would welcome a collapse of OPEC and a weakened Saudi role in oil markets. But the risk, said Kern, is that the United States could end up with fewer sources of oil instead of more.
Tremors are already evident. The higher prices Americans pay at the gas pump reflect a "war premium" of about $5 a barrel exacted by tight oil markets worried about interruption of supplies during a conflict, analysts say.
But this is just the prologue of what could be a long-running energy drama with potentially serious effects for the United States and world economies. There will be numerous turns in the plot, hinging on prewar diplomacy, the speed and success of a war, regional stability and what Iraq looks like afterward. Few are predicting how the drama will end.
Iraq contains the world's second-biggest proven oil reserves after those in Saudi Arabia, and in decades past used the wealth flowing from these deposits to lead the Arab world in educational opportunities and health care, developing a large middle class.
But more than two decades of war and sanctions, starting with the eight-year war with Iran, followed in 1990 by Iraq's invasion of Kuwait and in 1991 by the Persian Gulf war, have badly damaged ports and caused the state-run oilfield and refinery infrastructure to fall into serious disrepair. As a result, Iraq remains far below its potential as an oil exporter.
The economics of oil have complicated American efforts to win support at the United Nations Security Council for a tough resolution threatening war if Iraq fails to destroy any program to develop nuclear, chemical or biological weapons or long-range missiles.
Russia, which holds a veto in the Security Council, is Iraq's biggest supplier of nonmilitary goods under a U.N. program that requires Iraqi imports to be screened by the United Nations' sanctions administrators. Russia is also eyeing a major role in developing Iraqi oilfields.
U.S. and Russian officials from the top down have talked about Russia's stake in Iraq. American officials are wielding a carrot and stick to get Russian support on Iraq.
"We are in conversation with our Russian friends about their interests. And we are taking into account their considerations," Secretary of State Colin L. Powell told the U.S.-Russia Business Council yesterday. Meanwhile, U.S. officials are encouraging American investment to expand Russia's oil production capability and welcome the prospect of more Russian oil flowing to the United States.
At the same time, one senior official said, Russians have been warned that if they fail to back the United States at the United Nations, a post-Hussein regime would "stiff them" on future oilfield development.
If Iraq blocks thorough inspections, setting the stage for war, analysts expect a spike in oil prices of as much as $10 a barrel (the current price is an already-high $30 a barrel) as the United States, with Britain, prepares its forces for military action.
"The closer we come to a [military] strike, the higher it would go," said Vera de Ladoucette, director of Middle East research for Cambridge Energy Research Associates.
Whether this price increase would continue during a war is uncertain. Iraq, which is pumping 1 million to 2 million barrels a day for sale either legitimately through the United Nations or illegitimately through smuggling, might shut off supplies, forcing others in the Organization of Petroleum Exporting Countries to pick up the slack.
The key factor here is Saudi Arabia, which has the production and export capacity to flood jittery markets and force prices down. Saudi Arabia prides itself on its stabilizing role in global oil markets, and sources close to its government predict it will pump enough oil to prevent a new energy crisis during a war.
Saudi Oil Minister Ali al-Naimi assured a conference in Japan recently that the kingdom "is committed to maintaining a stable worldwide oil market, free of disruptive price swings yet responsive to changing conditions."
But if U.S. forces prove unable to secure a quick and decisive victory in Iraq, events in the region could spiral out of control and weaken the Saudis' leverage over the market, some analysts fear.
Possibilities of wartime disturbances include an Iraqi attack on oilfields in Saudi Arabia or Kuwait, disrupting supplies; an attack by Iraq on Israel that draws Israel into the conflict; or a surge of new Israeli-Palestinian violence that further inflames anti-American feeling in the Arab world.
In one nightmare scenario, oil industry consultant Herman Franssen said, terrorists inside Saudi Arabia might attempt to sabotage a major oil facility, choking off exports. Domestic unrest could even destabilize the Saudi monarchy, he said, paralyzing the kingdom's oil industry.
"A cutoff of oil from Saudi Arabia would be an utter disaster," said Franssen. "No combination of countries could make up for that for any length of time."
A sustained rise in oil prices to a level of $45 or $50 a barrel could cause a drop in worldwide economic growth of between 0.90 percent and 1.2 percent, "enough to turn [the economies of] the United States and Japan into a recession," said Gary Hufbauer of the Institute for International Economics.
If the United States prevails in a conflict, as expected, the postwar oil outlook is almost as uncertain.
One question concerns the condition of Iraqi facilities. In a prolonged war, the United States might bomb Iraqi oil facilities to deprive the Iraqi army of fuel. And there has been speculation that, in a final act of vengeance, Hussein might order his troops to set fire to Iraq's oilfields, as they did to Kuwait in 1991.
Even without added damage, it would probably take several years and billions of dollars to repair facilities - such as the Mina el Bakr terminal in the Persian Gulf - and add a second pipeline to Turkey. Until then, Iraq won't be able to boost exports significantly.
"I don't see a world awash with Iraqi oil," said de Ladoucette. "It will be 2010 until Iraq has half the capacity of Saudi Arabia."
But Iraq's known reserves are huge, and exploration may prove that they're greater still, offering a potential bonanza for international oil companies eager to develop them.
American oil firms were interested in developing Iraqi oilfields in the past, and some U.S. oilmen have reportedly been in contact with Iraqi oil ministry officials on the fringe of OPEC meetings.
A number of U.S. companies have used subsidiaries and joint ventures overseas to do business with Iraq under the oil-for-food program. These include two subsidiaries of Halliburton, the oil services company formerly headed by Vice President Dick Cheney. But American companies haven't sought major oilfield development deals during the past decade as the United States tried to contain Hussein's regime through tight sanctions.
Russia, France, China and Algeria filled the vacuum. France's Total-Fina-Elf reached agreement with Iraq to develop the giant Majnoun oilfield, but French law has barred it from signing a contract. Russia's Lukoil has a contract to develop the West Qurna oilfield, another of Iraq's biggest.
This poses a problem for the United States, which may find itself in an occupier role for as long as it takes Iraq to develop a stable government: Does it want to appear to be muscling in on the Iraqi oil business?
Russia, in particular, is worried that a new Iraqi regime would cancel its lucrative deals and sent a diplomat from its Washington embassy to meet in late August with representatives of the Iraqi National Congress, the umbrella Iraqi opposition group.
The INC is noncommittal about future deals, saying the existing contracts would be reviewed by a new democratic government. "If it's not in the interest of the Iraqi people, it will be renegotiated," said Faisal Qaragholi, the INC's operations officer in London. But he said that if an American company submitted a bid that matched that from another country, "I think the Iraqi people would choose the American."
Given the time and money required to boost Iraqi capacity - and the world's growing demand for oil - increases in Iraqi exports probably won't be sizable enough to disrupt world oil markets in the foreseeable future, said oil consultant Nathaniel Kern, head of the newsletter Foreign Report.
Over the long term, Iraq might defy OPEC and seek to expand its markets with lower prices, causing the cartel to crumble. Expanded capacity in Iraq could "have a dramatic effect on internal OPEC relations and hinder future cooperation inside the organization," says a report by AMJ Energy Consulting.
If prices fell as low as $10 a barrel, Saudi Arabia could be destabilized, Kern said. Some Americans would welcome a collapse of OPEC and a weakened Saudi role in oil markets. But the risk, said Kern, is that the United States could end up with fewer sources of oil instead of more.