April 8th, 2002


Saddam's revenge?!

Expect to pay more at the gas pumps. Iraq just cut off all foreign exports of oil for at least the next 30 days - perhaps longer - depending on whether the Israelis continue to occupy parts of Palestine.

While Iraq only exports 4% of the world's oil supply, this will have a much greater effect on the price of oil due to supply and demand, and the natural tendencies of markets to overreact to such news. In addition, there is the very real threat that Iran will also take part in the embargo, as they threatened to do recently.

What is the real cost of this embargo? In practical terms, it may mean an increased cost at the pumps over the next few months. This comes at a very bad time, since many companies were just beginning to come out of the economic slowdown. Unfortunately, businesses will find that their energy costs are going to increase, along with the cost of shipped goods, since transportation costs will also go up. Increased prices will decrease the amount of goods sold, meaning less revenue for many, many businesses. In other words, Iraq is going to hurt the U.S. economy to the tune of many billions of dollars.

What will be the result of this attack upon our economy? The answer, unfortunately, isn't one that most Americans will want to hear. Saddam Hussein's popularity and influence over the Arab world will increase considerably and he will be publicly praised by his people, even as they suffer from the embargo. Short of outright assassination (which has been tried before...) Saddam will once again retain power over Iraq.

How do I come up with such a bold assertion? Easy. The U.S. cannot afford to attack Iraq, for fear that an even worse economic disaster will unfold that will dwarf the effect of the embargo. Specifically, at the Arab League summit in Beirut recently, the Arab leaders publicly reconciled with Iraq. Crown Prince Abdullah of Saudi Arabia publicly embraced the Iraqi representative, and the Arab League issued a unanimous declaration that any attack on Iraq would be considered an attack on all of the Arab states. In return, the Iraqis renounced all territorial claims on its neighbors, including Kuwait.

How would other Arab countries respond to an invasion of Iraq? Given the lead expressed by Iraq, the implications of this should be clear. If the U.S. attacks Iraq, we could face a world oil embargo that rivals that of the 1973 oil embargo, which took seven years to recover from and caused a huge amount of debt in 3rd world nations, many of which are still in debt. Another such major embargo would almost certainly cause numerous 3rd world countries to default on their debt payments.

Why are the other Arab states doing this? In part, because it is a popular decision for practically everywhere in the Arab world. Just this weekend, there was a huge protest in the streets of Morocco where approximately 1 million people came out to protest Israel and the U.S. These protests will only spread as the violence contunues, and this only benefits Iraq, which is seen as opposing the U.S. and therefore also opposing the Israelis. The oil embargo will only further reenforce this attitude. I suspect that many Arab states will also view the oil embargo as a way to boost oil prices, which is good for business. Without support of the Arab states, the U.S. will lack ground bases from which to launch a military invasion of Iraq.

There are also other good reasons not to attack. The Chinese recently spoke out against the threat of such an attack, too, and the Chinese have access to advanced missile technology that the U.S. do not want countries like Iraq to get ahold of.

So, what can the U.S. government do about it? The answer is that they can try to force the Israelis to withdraw.The Israelis, of course, are already ignoring our demands that they withdraw from Palestine, and Sharon, the leader of Israel, has seen his popularity skyrocket since the invasion of Palestine. It is quite possible that short of major sanctions, the U.S. cannot bring about peace and force terms on the Israelis. Unfortunately, the U.S. is being seen as a partner to Israel's attacks on the Palestinians, in no small part thanks to the decision by the U.S. government to delay Colin Powell's trip to Israel until the end of the week. This is seen as a signal to the Israelis that they can keep up the attacks for several more days.

In other words, the best we can realistically hope for is that Israel retreats within the next month. Failing that, we could be looking at a prolonged or, perhaps worse, an escalated oil boycott that will prevent the U.S. economy from recovering anytime soon. We can also expect that this crisis will once again put pressure on the drilling for oil in the Alaskan wilderness...