Pros & cons of 'Gulf War II'

The New Year may witness some ugly scenes in the Middle East and North Africa region. A severe US onslaught upon Iraq could easily inflame civil strife across the Arab world, where feelings toward America are hostile given Washingtons pro-Israeli stance and its growing insensitivity to the plight of Palestinians in the West Bank and Gaza. This, in turn, could encourage further terrorist outrages on Western and Israeli targets.

The UN Security Council members are presently studying Baghdad's 12,000-page dossier on weapons of mass destruction and weapons inspectors are continuing with their painstaking work of visiting geological research facilities and other sites, but war is probably inevitable. The hawks in the US administration, led by Vice President Dick Cheney and Defence Secretary Donald Rumsfeld, appear intent on `regime change' and seriously punish President Saddam Hussein, irrespective of the UN opinions. President George W. Bush's re-election prospects in 2004 will receive a powerful boost from a quick victory over Iraq.

GLOBAL CONSEQUENCES

The costs of `Gulf War II' could be heavy both in terms of human suffering and lost economic output. Three global recessions were triggered by oil-shocks and turmoil in the Middle East (the source of two-thirds of total proved oil reserves) post 1970. History may repeat itself. The Financial Times (London), commented: "Conflict with Iraq could prove the straw that breaks the camel's back for the US economy." Morgan Stanley-global investment bank, echoing the FT's views said: "Taking everything into account, war with Iraq would almost inevitably mean a double-dip recession," and "The question is whether this is a price America is willing to pay for its strategic objectives."

Falling US GDP growth will ultimately affect most of the world and exert downward pressures on the currencies of both emerging markets and commodity-exporting countries. This would affect the South African rand, the Brazilian real, the Australian dollar and Korean won.

Spencer Abraham, US Energy Secretary has warned: "If the industrialised world experiences an economic slump, its markets for the developing world's products will contract, again damaging developing economies, particularly those whose growth is tied to increased trade and exports." In Africa, much higher levels of trade and private investments are urgently needed for supporting economic growth and combating poverty.

The International Monetary Fund estimates that every $15 hike in oil prices, if sustained for 12 months, reduces world GDP by 1% and causes balance of payments difficulties for non-oil developing nations. Every $1/a barrel increase adds about $27bn to the annual global oil-import bill. Most African countries are net oil importers.

Businesses that are heavily reliant on fuels, namely airlines and shipping, are especially vulnerable to inflating energy prices. And the general public will have to pay more for heating their homes and running their cars.

THE COST OF WAR

The Washington-based Centre for Strategic and International Studies has attempted to quantify the financial costs of likely war. It presents four possibilities: (1) No military conflict but continuing instabilities which undermine growth by adding `risk-premium' to oil prices; (2) A short campaign lasting four to six weeks and costing around $55bn which results in `regime change' and leave the US economy growing strongly; (3) War lasting for three months, involving some collateral damage and affecting business/consumer confidence; (4) The worst-- case scenario, where hostilities persist for over six months and cost in the region of $120bn.

The centre assumes that the damage to regional energy infrastructure (oilfields, pipelines and export terminals) could drive oil prices to $80 and stay at about $40 for the foreseeable future. Under such an outcome, to which it attaches 5-10% probability, the global economy would plunge into the worst ever `deep-recession, in modern history.

Professor William Nordhaus of Yale University argues that invading Iraqi will also involve higher non-military expenses in terms of peacekeeping, reconstruction and nation-building.

THE WAR: PROS AND CONS

Most investors in advanced countries have experienced the worst `bear market' since the 1930s. Geopolitical uncertainties since 911, poor corporate profits and some high-profile corporate scandals in America have led to big losses in world share prices during 2002. Hence, institutional investors are becoming more `risk-averse' i.e. preferring safe-haven assets like US Treasuries, money market funds and gold. Last year, fixed-income securities had outperformed global equities.

However, weaker stock markets are bad for real economy as businesses and households cut back their expenditures, leading to falls in production and employment. Also, a sustained period of risk-aversion could hit the US dollar because of declining capital inflows, thereby making it difficult to finance the country's ballooning external trade deficit.

However, a short, successful war, confined to the borders of Iraq-could be beneficial to the global economy. Improvements to Iraqi oil infrastructure can restore output capacity to 3.5m b/d within a few months and increasing OPEC supplies should reduce crude prices to below $20.

Larry Lindsey, former chief economic adviser to President Bush, remarked: "When there is a regime change in Iraq, you could add 3-5m barrels of production to world supply...successful prosecution of the war would be good for the economy."

Stock markets may rally strongly, as lower energy prices and removal of uncertainty boost capital and consumer expenditures.

For producers of stainless steel, nickel, copper, aluminium, lead and manganese, a prolonged campaign and higher defence spending can underpin demands for industrial metals.

BHP Billiton, the world's largest diversified mining group, stands to benefit from stronger prices of base metals. Also, African bullion producers like AngloGold, Harmony, Gold Fields and Ashanti could increase revenues because hostilities usually lead to robust gold demands and prices. In the aftermath of the Iraqi invasion of Kuwait in August 1990, gold surged to $420/oz.

MOTIVES

The real objectives of the Bush administration appear gaining direct access to `black gold' rather than saving the world from Iraq's potential chemical or biological weapons.

According to the Pew Global Attitudes survey, chaired by Madeleine Albright, former US Secretary of State, some 70% of French public believe the US's intentions are largely `oil-motivated'. Iraq's proven reserves - 115bn barrels - are almost four-times greater than America's 30.4bn barrels. Tariq Aziz, Iraqi Deputy Prime Minister, bluntly put it: "The aim of US policies is the oil in the Gulf."

True, conquering Iraq will present a tremendous gift for US oil majors likes of ExxonMobil and ChevronTexaco. The country's untapped oil resources are estimated at between 220-300bn barrels and potential output capacity could surge to 6-8m b/d within the medium-term, given substantial foreign capital and technical inputs. The official opposition-Iraqi National Congress-- would obviously grant exploration and development rights to US oil giants.

The two elderly statesmen Nelson Mandela and Jimmy Carter, have criticised Washington's heavy-handed stances. The former President Carter, cautioned US administration that unilateral action against Iraq could have 'catastrophic' consequences. President Bush should be equally concerned about North Korea, where the unstable dictator, Kim Jong 11, actually possesses at least two nuclear missiles, thus posing threats to Northeast Asia, including Japan. But, attacking North Korea is not an easy option while, Iraq, with its air defences systematically destroyed by almost daily US and British bombing, is relatively a `piece of cake'.

US-AFRICA TIES

The turmoil in the Persian Gulf could provide a silver lining for offshore West Africa (which is competing for foreign investments) and may promote closer political and commercial links between Africa and the $10 trillion US economy.

The Canadian-based energy bank, Waterous & Company, says: "With international oil companies reassessing their Middle Eastern options, African countries are much more attractive to investors now."

America, the biggest energy market (consuming around 20m b/d) is seeking to secure alternative energy supplies from non-- Middle Eastern sources. African oil reserves could serve as a bulwark against possible disruptions to Persian Gulf supplies. One American official said: "This part of the world is very strategic for US."

A recent National Energy Policy report-- compiled by the Vice President's office identified Africa as the "fastest-growing sources of oil and gas for the US market." Added attractions are that West Africa's high-grade crude (low in sulphur) is nearer to US refineries on the Eastern Coast (half the distance of Middle Eastern supplies). The region poses fewer political headaches for policy-makers. "West African oil doesn't have the strategic bottlenecks that other nations have," says Ed Royce, the chairman of the House of Representatives' Africa Subcommittee.

The National Intelligence Council (thinktank) estimates that by 2015, African exports-led by Nigeria and Angola-should represent 25% of US oil-imports, compared with 15% today.

Oil majors are focusing on the Gulf of Guinea, where probable reserves could total 60bn barrels (compared with 14.5-15bn in the North Sea). Deutsche Bank comments: "The opportunities for expansion are tremendous.' ChevronTexaco plans to invest a further $20bn over the next five years.

Walter Kansteiner, US Under-Secretary of State for Africa, is keen to stress that America's interests extend beyond hydrocarbons sector. He says: "What we are fighting for is Africa. The private sector will get Africa up and going. It won't be just official development assistance."

Under a new initiative, African countries boosting good governance and economic liberties will be main beneficiaries of an annual $5bn US government private-investment scheme. America has pledged to improve market access through the African Growth and Opportunities Act, support capital market development and provide loan guarantees. President Bush's tour of Africa (whenever that takes place) will enhance the continent's profile within the international arena.

The global economy could suffer, however, nasty shocks from messy-long hostilities in the Middle East. The World Bank warns: "The global rebound might quickly lose momentum and there is a significant risk that world could slip back into recession.