Thursday, January 30, 2003

A good round up of why it is all about oil.

First up is France. Gallic pride and a fear of American unilateralism notwithstanding, France stands to lose hard cash. For much of the 1990s, French companies were falling all over themselves to cut multi-billion dollar deals with the Iraqi oil industry.

TotalFinaElf, for example, has long been pushing for the rights to get its hands on the Majnoon field which has estimated reserves of 10 to 30 billion barrels. A regime change could spell disaster.

If French oil interests would be threatened by the demise of the Iraqi regime, the consequences for Russia, another vocal sceptic with a Security Council veto, could be positively catastrophic.

Lukoil and other Russian oil companies almost lost a multi-billion dollar contract with Baghdad last year amid Iraqi fears that Moscow was caving in to American pressure.

In a blatant attempt to harden Russian attitudes against a war two weeks ago, Baghdad quietly resolved the dispute and offered several other major contracts to Russian oil and gas firms.

But Russian concerns go further than that. Russia is one of the world’s top two oil producers. High oil prices have been crucial in underpinning three years of rapid economic growth. Moscow knows that a regime change in Iraq would eventually have dramatic consequences for world prices because the lifting of sanctions would lead to an oil glut.

“Our view is that the most likely outcome of a war is that oil prices will just about collapse, by 20 per cent or so as soon as it looks as though the US will win,” said Hania Farhan, head of the Middle East Department at the Economist Intelligence Unit.

“We’re expecting prices to drop to around $19 a barrel in 2004 from 30ish now. From then on prices go lower and lower down to $15-16 a barrel in 2007.”

With the Russian Government calculating that for every $1 drop in the price of oil its economy loses as much as $2 billion a year, Moscow can only view such a scenario with alarm. President Putin can ill-afford to see economic growth collapse a year before he comes up for re-election.

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