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World: Attack On Iraq Has Short Term Impact On Oil, Stock Markets

  • Robert Lyle

Washington, 4 September 1996 (RFE/RL) -- The U.S. missile attack on Iraq had immediate, but probably not long term, effects on global oil and stock market prices.

News of the cruise missiles fired by American forces sent oil prices up sharply on the assumption that any conflict in the Middle East would raise the price of oil. But it sent prices on stock markets down on the assumption that conflict will cause problems for civilian economies everywhere.

But the effect on stock markets was short lived. The British and German stock exchanges fell overall during the day. However, in the United States and Japan, with markets open later in the day, stocks recovered.

New York Stock Exchange averages dropped by more than 100 points in the early hours of trading on Tuesday, but had recovered by afternoon and had risen by 25 points. In fact, the stock of oil-related businesses led the recovery -- Exxon corporation stock rose by over $2 a share, for example, while Texaco stock prices went up by nearly $3 a share -- on the expectation that these companies would make more money with higher oil prices.

Prices on markets go up and down on the expectation of those doing the buying and selling and their best judgments at what prices may be at various periods in the months ahead.

In the case of oil, there were two considerations for those buying and selling the commodity. One was the general supply of oil on world markets and the other was the anticipated move by the United Nations to allow Iraq to sell about 700,000 barrels of oil per day in trade for food and medical supplies.

However, with the fighting, the United Nations suspended the program and the United States said it would not be allowed to proceed for some time. The expectation on markets is that it will be after the November U.S. Presidential election at the earliest.

Iraq has not been selling oil into world markets since the 1991 Gulf War and its production now is among the lowest of all OPEC (Organization of Petroleum Exporting Countries) members.

Still, Leo Drollas, deputy director and chief economist at the Centre for Global Energy Studies in London, says elimination of the Iraqi oil comes at a time when industry stocks are low. Oil use world wide during the first three quarters of this year is running about 500,000 barrels a day more than previously estimated, while supply from sources other than OPEC countries is down by about 600,000 barrels a day, he said.

"We need the stuff (Iraqi oil) a lot more than we thought," says Drollas.

William Randol, an industry analyst with Lehman Brothers investment banking firm in New York, says there is a "pretty fragile supply and demand" balance in world oil markets right now. He estimates prices will remain at $1 or $2 dollars a barrel higher than they were last week until early next year.

Prices on crude oil for delivery in October were up 80 cents to just over $23 per barrel at the close of trading Tuesday. Prices for heating oil went even higher.

The U.S. dollar was not much affected by the market fluctuations Tuesday, but Britain's pound sterling went up in value because the United Kingdom is the world's eighth-largest oil producer. Iraq's currency, the dinar, was seriously hurt by the missile attack. It fell in value against the American dollar by over 28 percent on world markets, recovering a little later in the day.

Oil industry experts say they do not expect Russia to profit much from the current short supply of oil on world markets because the country's oil industry has not yet modernized enough to be able to take advantage of any rise in world oil prices. Russian oil production in 1995 was down 46 percent from 1988.

However, the U.S. Energy Department says oil and gas use in Russia and other former communist countries is also down considerably, so the rising cost of world oil will not hurt as much in the region as it might have a few years ago.