West has been after Iraqi oil for neary a century
- Q&A: war on Iraq and oil
The US Energy Secretary yesterday urged Britain and its allies to follow
the Americans in building up its oil reserves. Richard Colwill, Online
Business Editor, explains the reasons behind the request.
Why the concern over oil?
Spencer Abraham, the US Energy Secretary, yesterday insisted that
stockpiling oil for emergencies was simply a matter of "overall energy
security". He confirmed reports that America has begun to build up its
strategic petroleum reserves held in caverns beneath the Gulf of Mexico
and suggested that America's allies ought to be doing the same.
Behind his words is a resolve to avoid increasing oil prices which could
be precipitated by military action against Iraq. A jump in oil prices may
have a serious effect on the global economy and in particular America's,
which is still struggling to bounce back from its technical recession of
Will Britain follow the advice and build up its reserves?
Britain is in a different situation from America. Its access to the North
Sea oil fields means that it remains the only significant energy exporter
in the European Union. America is still heavily reliant on oil from the
Gulf. This explains why the Bush Administration is so keen to drill for
oil in protected wildlife reserves in Alaska.
Recently, there has been a steady decline in oil production from the North
Sea, but the discovery of new reserves at the Buzzard field in January
could yield a further billion barrels - the biggest find in the North Sea
in 25 years.
Britain already has to comply with a European Union directive to have
enough oil stockpiled to last for 90 days. The Department of Trade and
Industry (DTI) says it has no plans to increase oil reserves.
Would a war against Iraq be bad for oil prices?
The 1991 Gulf War saw a big leap in oil prices that eventually forced
George Bush Sr out of office. So the view that oil prices could rise
putting pressure on an already weak global economy has a historical
A recent study by Credit Suisse First Boston, the investment bank,
challenges that view. It argues the oil markets have already discounted a
war, ie, the price of oil already reflects that possibility. Also, the
subdued world economy means that demand for oil is weak, so the effect of
a war on oil prices is likely to be short lived. The report says that if
America topples President Saddam Hussein, it would act as a boost to
business and investor confidence as the threat of terrorist action in the
region and elsewhere would diminish.
However, it is worth noting that this analysis is littered with caveats. A
prolonged conflict, or an outcome that left Saddam in power, as in 1991,
could have a devastating effect on oil prices and broader markets
A spokesman for BP, the oil company, said today that it does not comment
on future oil prices, but that it doesn't necessarily follow that a rise
in oil price translates into more expensive petrol at the garage
forecourt. Since the first quarter of this year, when the price rose to
around 74.9p a litre, petrol prices have remained steady.
If Saddam is deposed, would the oil markets benefit?
The potential benefits for America and its allies could be huge. Britain
and America have, among other Western allies, been attempting one way or
another to secure access to Iraqi oil for most of the last century.
Iraq has oil reserves of about 112 billion barrels, second only to Saudi
Arabia, which has 265 billion barrels. The economic sanctions in place
since the end of the Gulf War mean that Iraq can sell only a fraction of
this on the open market and is compelled to use the proceeds to buy
necessities like food and medical equipment.
Should Saddam be deposed and replaced by a more West-friendly leader, it
would remove the last obstacle to America's strategic aim of reducing its
long-term dependence on oil from Saudi Arabia.
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