Iraq and Oil

Sanjay Paul
September 1996

A version of this article appeared as It's unlikely anybody won last face-off of U.S. and Iraq in Business Forum, Green Bay Press-Gazette, September 14, 1996.

Who won the latest skirmish in northern Iraq - Saddam Hussein or Bill Clinton? Both have been quick to claim victory - and the bounce in their domestic standings in their respective countries appears to back their claims. Saddam Hussein has made the most of the opportunity to remind his people that the villainous United States is to blame for the appalling condition of Iraq's economy. Bill Clinton, on the other hand, boasts of having brought the ruthless Iraqi dictator to his knees, and savors a pre-election foreign policy triumph.

Alas, the victory, if indeed either side can claim it, will turn out to be Pyrrhic. Iraq's economy, already in shambles, will crumble still further. The much-anticipated food-for-oil deal, which would have permitted Iraq to sell $2 billion worth of oil in exchange for desperately-needed food and medicines, is now likely to be postponed indefinitely. The sanctions imposed after the Gulf War have decimated the economy - now, with the imminent collapse of the food-for-oil deal, the prospects for amelioration in the living conditions of the Iraqi people appear to be bleak.

While Clinton need confront no such dire prospects, the absence of international support for his missile strikes will serve to undermine U.S. credibility in the region. The European countries, dubious about the propriety and wisdom of such a course of action, have been grudgingly lukewarm in their support. Their reluctance to endorse the action was also driven by business interests - the missile strikes have put paid to, at least for now, their hopes of profiting from the reconstruction of Iraq's shattered economy.

What of the Arab allies? They too have been largely silent - mainly for fear of encouraging domestic opposition. The regimes of several countries in the region have become highly unpopular in recent years leading to the growth of (in their view) undesirable opposition movements. Appearing to side with the U.S., they reckon, will provide further ammunition to the opposition.

How does Clinton's military action affect the rest of the world? By causing a spike in world oil prices, it immediately creates winners and losers in the global economy. The winners are the oil-producing nations who stand to reap windfall profits. The losers are the countries that are dependent on imported oil. The latter group includes the industrialized economies in the West (including the United States) and most of the developing world. In these countries, the fear that higher oil prices will lead to higher inflation may cause their central banks to raise interest rates - and thereby put a crimp in economic activity. The specter of stagflation - rising unemployment accompanied by rising inflation - then becomes a very real possibility.

The situation in developing countries is further compounded by the fact that even a slight increase in the price of oil will cause their import bills to balloon. The concomitant rise in their trade deficits will exert severe downward pressure on their currencies leading to a further hike in inflation and a deterioration in their standards of living.

Will such a gloomy state come to pass? If the confrontations with Iraq continue and instability in the region causes oil prices to climb further - yes. On the other hand, if the strident battle-cries in the region fade away to be replaced by anodyne diplomacy in multilateral forums such as the United Nations, the world may yet manage to avoid the worst. Good sense, one hopes, will prevail.

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