GLOBAL ECONOMIC VIEWPOINT
OIL AS A WEAPON: AN EMBARGO WON'T WORK THIS TIME AROUND
By Ahmed Zaki Yamani
Ahmed Zaki Yamani, the oil minister of Saudia Arabia during the last oil embargo, now heads the Centre for Global Energy Studies based in London.
JEDDA -- Like an echo from the 1970s, we are hearing once again the words ''oil embargo,'' which leads quite naturally to worries about the impact of a curtailment of oil supplies on the world. Our anxiety is further sharpened by the turmoil Venezuela is experiencing, for that country is a major supplier of crude oil and products to the United States.
However, before I discuss the repercussions of such an embargo we need to be clear about certain matters.
First of all, we have to be sure that there is indeed an avowed willingness among the oil producers to use oil as a weapon. So far, only Iraq has proclaimed a suspension of its oil exports for one month (from April 8), to be extended if Israel continues to occupy Palestinian territory. Significantly, the Iraqi announcement implied that the embargo would end if there were to be a complete Israeli withdrawal from the occupied territories. A week before the Iraqi leader acted, Ayatollah Khamenei, the supreme spiritual leader in Iran, had urged a one-month oil embargo of those states supporting Israel. However, by moving first, without coordinating its policy initiative with Iran, Iraq has made it more difficult for Iran to join its embargo, since Iran does not wish to be seen as a follower of Iraq. Indeed President Mohammad Khatami of Iran is trying to wrest back the initiative by urging the Organization of the Islamic Conference to declare an oil boycott of those countries supporting Israel. It is unclear how Iran would add its weight to such a boycott of the United States, for Iran has not exported a single barrel of oil to the United States for years.
Libya has intimated that it, too, would join an embargo, but -- like Iran -- it would only want to do so along with other countries. Meanwhile, key Arab oil producers Saudi Arabia and Kuwait have stated quite clearly that oil should not be used as a weapon and are highly unlikely to embargo the United States, given the close relationship between them and the only remaining superpower. As for OPEC itself, the organization's statutes prevent it from using oil as a weapon, and OPEC recently made its position quite clear on this matter. On the other hand, one must acknowledge the way the Arabs feel about the Israeli government's treatment of the Palestinians, the Israeli prime minister's intransigence and the blind support shown by the United States for Israel's acts of terror against a population that everyone accepts has a legitimate cause. In view of such sentiments, one cannot rule out an interruption in oil supplies that arises not from any formal government decision but from a popular backlash.
On the assumption that the embargo we are dealing with is (a) confined to Iraq and (b) lasts for a month (I neglect the possibility that Iran and Libya might join in), and that (c) OPEC boosts its output by 1 million barrels per day (mbpd) from July onward, I would venture to suggest the following repercussions. Confining the embargo solely to Iraq and presuming that it lasts for a month, the price of the OPEC basket of oil averages around $23.40 per barrel during the second quarter of 2002, rising to $24.80 in the third quarter and $26.10 in the fourth quarter. This effect might seem muted to some, but it must be borne in mind that Iraq's oil exports have been averaging around 1.6 mbpd since December 2001, that is, 0.5 mbpd below normal levels, due to disputes between the Iraqi authorities and the United Nations over the pricing of Iraqi crude oil. Losing another 1.3 mbpd of Iraqi exports over one month would, of course, be no small matter, but not as damaging as would have been the case had Iraq been exporting at its usual levels.
An average basket price of $26.10 per barrel for the fourth quarter implies a peak price of more than $30 per barrel in December 2002, that is, $13 per barrel above the price in December 2001.
Should this price level be sustained into 2003, then the oil price will have risen 70 percent in 12 months, taking around 0.75 percent off the world's economic growth rate in 2003 and possibly causing the world to slide into a shallow recession. Some parts of the world are more vulnerable to oil-price increases and could suffer considerably from a $13 per barrel rise in the price of oil. It is said that for every $1 per barrel increase in the oil price, ''developing'' Asia loses 0.1 percent of GDP growth, which suggests that the region could lose up to 1.3 percent of GDP growth next year.
Of course, these adverse repercussions could be avoided if Western governments were to use part of their strategic stockpiles of oil. The United States holds at present 560 million barrels of crude oil in its Strategic Petroleum Reserve (SPR). Since the United States imports around 1 mbpd of Iraqi crude, use of just 10 percent of its SPR would replace 56 days' worth of lost crude oil imports from Iraq, a period of time exceeding by far the declared duration of the Iraqi embargo. One also has to bear in mind that OPEC could increase its output by more than the 1 mbpd I have assumed from July onward. Perhaps such considerations underpin the oil market's relatively lackadaisical response to Saddam's announcement of the embargo and its seemingly greater sensitivity to the political turbulence in Venezuela.
(c) 2002, Global Viewpoint. Distributed by Los Angeles Times Syndicate International, a division of Tribune Media Services
For immediate release (Distributed 4/15/02)