War scenarios from the Gulf

Just one fortnight after presentation, the budget looks distant, almost forgotten. All eyes are now on Iraq. Without question, what Bush and Saddam Hussein do is infinitely more important for the economy than what Jaswant Singh does.

What are the main factors in the Gulf that will impact India? Three stand out. First, whether or not Iraq’s oilfields are set on fire. Second, how long the war goes on. Third, whether there will be Iraqi or terrorist retaliation on American and British cities.

According to US intelligence reports, Saddam has already mined his extensive oilfields, and will press the button if the US attacks. The US in turn is deploying jamming devices to prevent or reduce the destruction of the oilfields. Officially, Iraq has strongly denied any plans to set fire to its oilfields. But it did just that to Kuwait’s oilfields during its retreat in the 1991 war. It would not want to hand the US its oilfields on a platter. You do not do that even to your friends, let alone your foes.

If the Iraqi oilfields are destroyed, I think the price of oil will remain above $30 a barrel for most of 2003, causing a global recession. Iraq has been producing 1.7 million barrels a day. If this capacity is destroyed, repairs and rehabilitation could take up to two years. Even the rehabilitation of the much smaller oilfields of Kuwait in 1991 took eight months. If the war destroys Iraqi production, there will be an immediate spike in oil prices. Saudi Arabia has stepped up production and has the capacity to produce maybe another 1.5 million barrels/day.

If all other members of OPEC, including Venezuela, produce flat out, the price of oil could dip to $25 a barrel. But I cannot see that happening. OPEC knows that, once the Iraq war is over and billions are invested in revamping that country’s oilfields, an additional 2.5 million barrels/day will hit the markets, sending prices crashing. Knowing that, OPEC will surely try to keep the price at $30/barrel for a year or more, till Iraqi oil floods the market.

The US, Europe and Japan are already on the edge of recession. Sustained high oil prices will tip them over the edge. Pessimists think a US recession has already begun: consumer sentiment has plummeted and sales are down.

That will certainly hit India hard. During the Asian financial crisis of 1997-99 and global recession of 2001, the Indian economy showed much resilience. Nevertheless exports, manufacturing and GDP were all hit then, and will be hit by another recession. Continuing Chinese growth will, however, give some relief.

The second big question is how long the Iraq war will last. Optimists still hope that Saddam will be ousted in a coup, or be persuaded to go into exile. That would certainly be the best possible outcome. The Iraqi oilfields would remain intact, confidence and economic growth would boom across the world. Alas, this most favourable of scenarios is also the most unlikely. A war seems certain.

Some hope that pressure from France, Germany and Russia will delay the war by a month or so, giving UN inspectors more time. I think that will simply extend the period of high oil prices and uncertainty, and make a recession more probable. As Macbeth said, if it were done, when ‘tis done, ‘twere better it were done quickly.

Next, will Saddam’s resistance be short or long? Media reports suggest that the US forces will occupy the Kurdish north and Shia south, where the local population may not be hostile and may even welcome US forces. Saddam’s strength is in the Sunni-majority, densely populated area between the Euphrates and Tigris rivers. According to media reports, the US forces will not attempt a frontal invasion of this heavily populated area, which could mean heavy US casualties. Besides, the US wants to win the peace that follows, and so wishes to minimise Iraqi casualties too. It wishes to limit bombing to military targets, sparing civilian areas. It hopes that a besieged Baghdad will soon see the futility of resistance, and surrender or oust Saddam.

Some experts think a war of this kind will be over in four weeks, giving the US victory with minimal casualties and civilian damage. Other experts, however, warn that a siege could last several months. History is full of instances of dogged resistance, the more so when the attacker is reluctant to inflict civilian casualties. I suspect that the siege will be protracted, which will be bad economic news for India.

Finally, will Iraqi or terrorist agents retaliate with biological or chemical weapons on US and British cities? If indeed Saddam has biological weapons, he can use them to most effect against US cities rather than US troops. Sleeper cells of sympathiser are already in position in the US, according to intelligence reports. A recent “orange alert” in the US was declared in anticipation of a terrorist biological or chemical attack.

If such attacks take place, they could range from amateur bungles to expert jobs that devastate US cities. We do not know the full consequences. But even a bungled job will create an atmosphere of fear and panic that will check the consumer spending which alone is preventing a US recession. The portents are ominous.

To top it all, experts have long predicted that the US simply cannot continue running a current account deficit of 5% of GDP, and say this must be reduced by curbing consumption. That will improve long-term sustainability, yet will cause either a sharp recession or long-drawn out stagnation for several years.

George W Bush is a lucky man. Luck saw him win the US Presidential election by a whisker. Luck saw him win an easy victory in Afghanistan. Will he be lucky a third time in Iraq, and win easily or without a fight? Place your bets, ladies and gentlemen, but I am betting against Bush being third time lucky.

What do you think?