The economic consequences of peace - prediction of rise in oil prices if U.S. doesn't act against Iraq

IT WAS inevitable. The fear, the anger, the surge of patriotism have given way to vague doubts, even indifference in some American quarters. Can't we learn to live with Hussein? Does it really matter that Iraq now controls 20 per cent of world oil reserves-with its potential next victim, Saudi Arabia, controlling another 30 per cent?

Doug Bandow puts the live-and-let-Eve case like this: "As the top producer in the world, Saddam would maximize his revenues by marginally reducing production and trying to persuade other suppliers to follow suit. The result would be a higher oil bill for the U.S., but nothing like the cost of today's military operation."

This conclusion, based on the standard textbook explanation of what monopolists do, assumes a degree of rationality, not to mention financial acumen, which we have not yet detected in Mr. Hussein. Why did a country that had 0.3 per cent of the world's population and 10 per cent of the world's crude-oil reserves on August 1 need to grab another 10 per cent, in the form of Kuwait, on August 2? The answer is as plain as the fourth largest army in the world and $100 billion in debts from the war with Iran. As much as we would like to think of Saddam Hussein as simply an Arab John D. Rockefeller, the facts don't support this.

The notion that Iraqi hegemony over the Saudi fields would leave the price of oil only slightly above its current level also ignores the demand side of the equation. Hoarding and panic buying have already pushed crude-oil prices to $35 per barrel, up 75 per cent since the start of August. If Saddam had Saudi Arabia in his pocket, many economists calculate, we would be seeing $50 oil.

For what it's worth, at the end of June the Iraqi oil minister stated publicly that his country's goal was $25-per-barrel oil. At that price the oil bill for U.S. consumers would be $90 million per day higher than before the invasion. But the economic costs only start there. August's oil-price shock has already shifted the consensus GNP forecast from 1 per cent real growth to 1 per cent decline, an annualized net loss of $110 billion.

If left to its own devices the free market will always prevail. Even at $100 per barrel there would be plenty of shock but no shortages. But the process of adjusting supply to demand would include a sharp lowering of demand or, in plain language, a recession. The greater the monopolist's scope, and the larger the price hike he engineers, the longer and deeper the recession is likely to be. We have, after all, been here before. The oil-price hikes of 1973 and 1979 produced just such an effect-the great world stagflation of the Seventies and early Eighties.

Of course, these recessions were made longer and deeper than they need have been by the attempts of governments to alleviate them with price controls and the misguided superficialities of an "energy policy." It was only by abolishing such controls, and abandoning the "energy policy" that is now the object of such masochistic nostalgia, that President Reagan was able to bring about the low energy prices of the last eight years. (The New York Times describes these prices, the result of non-intervention, as "artificially low.")

But government will always be tempted to intervene in this way. If the U.S. relies on the world oil market to defeat Saddam Hussein, the greatest danger to consumers and the economy will lie in the well-intentioned interventions that the ensuing recession will stimulate. As inflation rises, an army of special-interest groups can be expected to descend on Washington seeking special treatment-benefit indexation, tax breaks, energy subsidies, even the reimposition of price controls. In short, the U.S. Administration will wage war on someone as a result of Iraq's invasion of Kuwait. Will it be Saddam Hussein or the American consumer?