The Iraqi Threat To The Global Economy Has Passed.

The Iraqi Threat To The Global Economy Has Passed. The latest by Mr. David Hale, one of the world's top quoted global economist and a regular contributor to thaistocks.com The Iraqi Threat To The Global Economy Has Passed. By David Hale, Chicago USA.

It should not be surprising that stock markets have begun to rally again after several days of caution about the Iraq War.

After two weeks, American and British forces have eliminated the primary risks which the war posed for the global economy. They have secured the four great oil fields in the Basara region responsible for two thirds of Iraq's oil production. They are also moving closer to the Kirkurk oil field, the first to be developed in the Middle East and responsible for another 17% of Iraq's oil output. The retreating Iraqi forces set fire to a few of the oil fields in the Basara region but they inflicted far less damage than was the case with Kuwait's oil fields twelve years ago. As a result, Iraq may be able to resume oil exports in another three months.

The markets are also relieved that the war has not yet produced any signs of instability in surrounding countries. There has long been concern about an Iraq war provoking political unrest in Saudi Arabia. This country is still the world's largest oil producer, so any hints of trouble could have produced great volatility in the oil price.

There is little doubt that concern about the war has had a depressing impact on the U.S. economy. During the month of February, the U.S. economy lost 308,000 jobs while Canada gained 55,000 jobs. The U.S. economy has been suffering from war anxieties and the lagged impact of last year's Sarbanes Oxley legislation on corporate perceptions of risk. The Canadian economy is free from worries about both the war and America's legacy of corporate scandals.

The war will continue to influence business and consumer psychology because it is the dominant event in the news.

Saddam Hussein is holding on in the hope that war scenes on television will turn public opinion against the United States and slow the attack. The global media has encouraged his fantasies by deploying more reporters on the frontlines then have ever been deployed in any previous war. They are providing the world with detailed coverage of every minor incident, including the accidental death of civilians or ambushes of American forces. The markets corrected last week because the media gave the mistaken impression that Fedayeen forces had slowed the offensive by attacking U.S. supply lines.

The next great challenge for the markets will be the battle of Baghdad itself. If the battle goes quickly, the markets will continue to rally. If the battle turns into a prolonged siege with many civilian casualties, investors will be more apprehensive. They will be concerned about public opinion in the Arab countries, more strains in the western alliance and the fate of the Bush tax cut package in the U.S. Congress. But whether the battle for Baghdad lasts two weeks or two months, it will not have a profound impact on the oil market because the western allies already control the key production centers.

Many Europeans believe that America has fought the war primarily to control Iraq's oil reserves. These conspiracy theorists overlook the fact that Iraq's oil production is worth only about $25 billion per annum while the war will probably cost over $100 billion. It will probably also cost another $20-30 billion to restore Iraqi output to its 1979 peak of 3.5 million barrels per day. The U.S. has fought the war because it views Saddam Hussein as a long-term threat to the security of the region and a desire to promote democratic values in the Middle East. There will be advantages to controlling Iraq's oil but they will be modest in comparison to the cost of the war and the political risk associated with it.

The markets will continue to be concerned about the cost of the war and its potential impact on both the budget deficit and the current account deficit. As foreign holdings of U.S. securities are now equal to 71% of GDP, the dollar will always be vulnerable to perceptions that U.S. fiscal policy will further depress national savings and expand the current account deficit. But while the war could easily expand the deficit by $100 billion, the cost will be modest compared to previous wars in American history. The Second World War cost 33% of GDP, the Korean War cost 5% of GDP and the Vietnam War cost 12% of GDP. The current war will cost about 1% of GDP. The cost of the occupation is unlikely to exceed 0.3% of GDP per annum. The defeat of Saddam Hussein and his sons will also reduce the long-term costs of containment in the region.

The cost of the containment policy was high. Prior to the war, the U.S. devoted about 30,000 troops, 30 ships (including a carrier battle group), and about 250 aircraft to patrolling the region. The sanctions imposed by the United Nations also led to the deaths of thousands of Iraqi children and the impoverishment of many others in addition to the half million people Saddam killed during the 1980's and early 1990's.

The media will continue to be dominated by pictures of urban battlefields for another few weeks. There could still be horrific scenes of civilian casualties or American forces suffering from chemical weapons attacks. There will be recurring debate about the political dangers posed by American unilateralism and the breakdown of the western alliance system. But the threat that Iraq posed to the global economy is now essentially over. The allies control the oil fields. Production can resume in a few months. The price of oil will retreat back towards $20 per barrel. Inflation will subside. Central banks can remain accommodative. American economic growth will resume. The debate about the war will continue but the risk of global recession has passed.

By David Hale. dhale@davidhaleonline.com

Copyright 2003 David Hale Online. All rights reserved.

The views and opinions expressed this article are his own and not necessarily those of Paul Renaud and thaistocks.com. We thank Mr. David Hale for this quality contribution and wish best regards to all our many viewers.

Paul A. Renaud.