Is Iraq War
Fuelling GCC's
Economic Boom?
By Emilie Rutledge
14 August, 2005
Aljazeera
Since
the US-led invasion and occupation of Iraq, the price of oil has steadily
climbed upwards. A barrel of oil today costs twice as much as it did
on the eve of combat, back in March 2003.
At the same time
all six Gulf Cooperation Council (GCC) states - Bahrain, Kuwait, Oman,
Qatar, the United Arab Emirates, and Saudi Arabia - have experienced
levels of economic growth not witnessed since the 1970s.
According to a recent
Institute of International Finance report, the GCC's aggregate nominal
GDP grew by 17% in 2004 and is likely to grow as impressively this year.
OPEC members Kuwait,
Qatar, Saudi Arabia and the United Arab Emirates pumped 4% more oil
in 2004 than in 2003, leading to a huge increase in revenues.
In the past three
years, the value of Saudi oil exports has equaled the revenue generated
in the 1990s.
This period of exceptional
economic performance has enabled governments in the Arab Gulf to substantially
increase fiscal spending, which in turn has increased private-sector
confidence and stimulated strong growth in non-oil sectors.
There is little
doubt that the continued occupation of Iraq contributes to the upward
trajectory of oil prices, which in turn has helped fuel the GCC's economic
boom. Paul Horsnell, a senior energy analyst at Barclays in London,
said, "If there had been no invasion, then the current oil price
would be lower."
The question is
to what extent. The "Iraqi factor" is only one part of the
story. The contention that we have reached, or are approaching "peak
oil" the top of a bell-shaped world oil production curve
combined with unprecedented global demand and lack of spare capacity
are probably all more significant factors.
A former British Petroleum executive, geologist Colin Campbell, argues
that the world has already consumed half of its proven oil reserves
and that in effect we are close to the top of the oil production curve.
This has led some
analysts to contend that the world has entered a new "oil price
paradigm". Venezuelan President Hugo Chavez has said "The
era of cheap oil is over," and Chevron's current advertisements
state "One thing is clear: The era of easy oil is over."
The idea that we
have reached peak oil is a matter of conjecture and difficult to predict
due to the lack of transparent and reliable data on world oil deposits,
but the idea may be fuelling speculation on the world's oil markets.
Until recently,
the oil futures market remained low and stable even when the spot price
shot up, but this has now changed, and the futures markets are in the
unusual situation of being in contango.
This indicates that
traders expect higher prices for some time. Indeed, the US Energy Information
Administration (EIA) has forecast that the average price per barrel
of oil will remain above $50 throughout 2005 and 2006.
High prices have
so far done little to dampen demand. Since 2003 there has been a growing
and seemingly greedy demand for oil. The world consumes 84 million barrels
per day (bpd) but according to the International Energy Agency, this
will rise to 88 million bpd by the end of 2006.
China, which is
now the world's second-largest consumer of oil, has over the past few
years accounted for approximately 40% of the growth in global demand.
The EIA forecasts that Chinese demand will double by 2025.
India, another rapidly
industrialising Asian state, is importing more oil than ever. Demand
is still growing in developed economies, especially the US, where gasoline
for motor vehicles accounts for most of its demand.
It is interesting
to note that Ford's current range of cars achieves, on average, fewer
miles per gallon than its Model-T did 80 years ago
The huge increase
in demand for oil has coincided with supply constraints. This is primarily
a result of limited ability to extract additional oil quickly enough
but also due to factors such as lack of refining capacity.
Even though OPEC
continually agrees to increase production levels the most recent
announcement was on 15 June for an extra 500,000 bpd these have
not helped reduce the price and have even led some to question whether
this extra production has actually come on stream.
Indonesia recently
became the first net-oil importing member of OPEC. Non-OPEC states such
as Russia are widely thought to be extracting oil at full capacity.
In contrast with the previous embargo and supply-driven price rises,
the current oil price boom may be the first occurrence of a "demand-led
shock".
Some in Washington
had hoped that by now Iraqi oil would be flooding the market, rendering
OPEC obsolete and acting as a counterbalance to Saudi Arabian influence.
This has not happened,
partly because Iraq's pipeline infrastructure has been sabotaged no
less than 257 times since 2003 but also because its oil infrastructure
is in a dilapidated state.
In the final months
of the UN Oil for Food programme, Iraqi oil exports averaged at 2.5
million bpd. At peak levels, prior to sanctions, Iraq produced 3.5 million
bpd. Last month Iraq managed to export only 1.6 million barrels daily.
Even if Iraq could
produce significantly more oil than at present, it would not necessarily
bring the price down but simply fill the gap between current OPEC quotas
and forecast demand for 2006.
Although the occupation
of Iraq has added to the "terrorist/instability premium" in
the oil price and contributed in a small way to the lack of spare capacity,
it is not the main factor for the current oil price and is therefore
does not significantly contribute to the GCC's current economic boom.
The fundamental
factor is the remarkable rate of growth in the world's voracious appetite
and demand for oil. Indeed, there is a danger that the situation in
Iraq could adversely affect non-oil GCC economic growth.
A prolonged US occupation
accompanied by present levels of violence may adversely affect foreign
direct investment flows, lead to capital flight and make diversification
away from dependence on hydrocarbons more difficult. The sooner peace
and stability return to the long-suffering Iraqi people the better it
will be for the economies of the GCC and the world.
[Emilie Rutledge
is an economist who is currently based at the Gulf Research Center in
Dubai].