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Last Updated: Monday, 10 March, 2003, 20:19 GMT
Opec plans for war footing

Andrew Walker
BBC economics correspondent

Oil pipeline between Iraq and Kuwait
Iraq supplies only 3% of the world's oil
Energy ministers and officials from the 11 member states of the oil producers' organisation Opec will have the prospect of a war against Iraq uppermost in their minds.

Many of them hope it won't happen, but if it does, the question for OPEC will be how to respond to the inevitable disruptions to the global oil market.

But the mere prospect of disruption to deliveries is already making its mark.

The current level of oil prices - at well over $30 a barrel - owes a great deal to the war talk.

Interrupted

The assumption in the markets is that at a minimum, if and when the fighting starts, Iraqi exports will cease completely for the duration, taking about 2 million barrels - about 2.5% of world daily consumption - straight off the market.

It's also likely that some production in neighbouring Kuwait would be stopped as a safety precaution - perhaps another 500-700,000 barrels a day, according to Julian Lee, a senior analyst at the Centre for Global Energy Studies in London.

On top of that come the fears that there might conceivably be missiles fired by the Iraqi military at oilfields in other Gulf states, or terrorist attacks on tankers in the Straits of Hormuz, the only shipping route out of the Gulf.

Most observers don't think it at all likely; but the risk can't be discounted altogether.

Keep pumping

But if some degree of disruption is a near-certainty, and wider disturbances at least worth planning for, what will OPEC do?

Malaysian Prime Minister Mahathir Mohamed
Mahathir says oil should once again be a weapon
The days of oil being used as a political weapon - as it was in the mid-1970s - seem to be well and truly gone, and attempts by Mahathir Mohammed, Prime Minister of small producer and non-Opec member Malaysia, to resuscitate the mood of the Oil Shocks foundered.

Just the opposite: officials from leading OPEC countries have repeatedly said they will respond to real shortages in supply, whatever the reason.

The current President of OPEC, Abdullah al Attiyah, who is also the Energy Minster of Qatar, said in a recent BBC interview that the organisation would try to keep supply and demand in balance.

OPEC countries have already this year boosted output in response to the problems of one of their own members - Venezuela, where production was severely affected by a strike.

And it seems likely they will do what they can to compensate for any disruptions caused by a war. Indeed some analysts, including Raad Alkadiri of the Washington consultants PFC Energy, say that OPEC members have already started.

Spike

Whether they can offset the losses fully is another question.

Much depends on Venezuela, whose production levels - if the government's version of events can be relied upon - should allow Opec to cope, says Julian Lee.

Assuming that disruption is limited to Iraq and part of Kuwait, the price of oil would probably spike upwards at the start of a conflict, perhaps to over $40, but would come down soon if an early US victory seemed assured.

But if the disruption is much wider and if Venezuelan output remains low, then Julian Lee says Opec could not fill the gap - and it would be hard to see an upper limit to prices.

Some observers have warned that a level as high as $80-100 is possible: a level similar in real terms to the highs of the early 1980s, reached in the wake of the Islamic Revolution in Iran and the start of the Iran/Iraq war.

The one voice of dissent has been Iran, whose Petroleum Minister Bijan Zanganeh has been reported as saying that Iran will back politically motivated decisions and that Opec should not adopt any policy that implies support for a US military assault against an Opec member state.

The picture is confused further by the Petroleum Minister of the United Arab Emirates, Obaid bin Saif al-Nasseri who is reported to have said that there is very little spare capacity.

Reserves

What OPEC won't do, though, is respond to price rises caused by what Mr al Attiyah calls speculation.

Dubai refinery
Opec sees problems keeping tanks full if war spreads
Even now, the price now includes an element called a war premium which reflects the possibility of supply disruptions and, according to Raad Alkadiri, is in the region of $5 a barrel.

The rich oil consuming countries have another safety net - government controlled reserves of crude oil, available for emergencies.

Julian Lee says they have around 1.2 billion barrels that they could use at 12 million a day for a month in the event of any disruption, which is almost as much as comes out of the entire Gulf region.

The economic stakes are high, however.

Oil prices were a key factor in the global recessions of 1975, 1981 and 1991.

2001 was also a very weak year for the global economy - some economists count it as a recession - and again oil prices were part of the story.

Already the prospect of a war has done economic damage through its effects on business and consumer confidence, on stock markets and the oil price.

Most economists think the crisis probably won't cause another world recession, as long as it ends reasonably quickly. But the risk, they warn, undoubtedly remains.


WATCH AND LISTEN
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"Chopping up oil supplies could help stop oil prices spinning out of control"



SEE ALSO:
Oil marches higher on war fears
10 Mar 03  |  Business
War-wary oil prices keep on rising
24 Feb 03  |  Business
Headaches ahead for Opec
13 Jan 03  |  Business
Opec 'to maintain supplies in war'
24 Feb 03  |  Business


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