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Iraq: Baghdad's Return To Oil Market Seen In Weeks Or Months

Analysts say Iraq could return to the world oil market in weeks or months after the fighting stops. As oil prices fall, nations of the Organization for Petroleum Exporting Countries are said to be nervous that Iraq will try to overproduce as a way to pay reconstruction costs.

Boston, 8 April 2003 (RFE/RL) -- As U.S. forces broke into the heart of Baghdad, oil analysts said the war was taking a course that would bring world energy prices down.

Before the fighting began, analysts had constructed scenarios for the impact on world oil prices, depending on how long it would last and how much damage it would do to supplies from the Persian Gulf.

Although the conflict has lasted longer than the most optimistic forecasts, the outcome for world oil prices has still fallen into the "benign" scenario, said Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington.

In an interview with RFE/RL, Ebel said, "There's been no damage to the oil fields." He estimated that Iraqi oil could return to the world oil market in "three months or so," if coalition forces continue to secure the fields.

Retreating Iraqi troops have set only a few oil fires in the south and, so far, none in the older, lower-pressure fields in the north around Kirkuk, which are said to be harder to set ablaze. Compared with the massive burning at Kuwaiti wells in the first Gulf War, the impact seems likely to be small.

Fareed Mohamedi, chief economist at PFC Energy, a Washington-based consulting firm, agreed that the threats to world energy security had failed to materialize, saying, "No one is really worried about obstruction of supplies."

Ebel estimates that in a three-month period, Iraq could resume the level of output that it had during the United Nations' oil-for-food program. Although production was inconsistent, it reached as high as 2.5 million barrels per day under the program. Last month, the Middle East Economic Survey said Iraqi production could resume in as little as three to four weeks after the fighting ends.

Experts disagree only about the timing, not the direction, of Iraq's recovery as an oil producer. PFC's Mohamedi said, "By the end of the year, we'll be back up to oil-for-food levels."

Reuters and other news agencies reported that oil pumping by pipeline from Kirkuk to the Turkish port of Ceyhan has continued sporadically during the war. The problem is that Ceyhan's tanks are nearly full, while prospective buyers are struggling to sort out the legalities of possible trades.

Still, the potential of Iraq's early return to the market sent oil prices plunging to four-month lows on 7 April, with Brent crude hitting $23.40 in London, Reuters said. The slide brought quick action from the Organization for Petroleum Exporting Countries (OPEC), which called an emergency meeting for 24 April in Vienna to keep prices from falling too far. OPEC's president, Abdullah Hamad bin al-Attiyah, said decisions could be made even before then by telephone, the Dow Jones news agency reported.

Ebel, who attended a meeting of Iraqi dissidents and U.S. officials in London over the weekend, said Saudi Arabia could quickly cut 1.5 million barrels per day from its increased production on its own. The meeting recommended that Iraq, under a new government, should remain a member of the 11-nation OPEC cartel. Other producers are said to be worried that the country could overproduce to pay for reconstruction, dragging prices down below $20 per barrel.

But Ebel said it may be "a couple of years" before Iraq can resume its late-1970s production level of 3.2 to 3.5 million barrels, still lagging behind neighboring Iran. After all adjustments are made, prices could stabilize next year in the $25- to $26-per-barrel range, Ebel said.

PFC's Mohamedi said OPEC is likely to make a stand to defend its preferred price of $25 per barrel, but the outcome could depend on other factors, besides the speed of Iraq's production. One is the pace of economic recovery in the United States, which is the world's largest consumer of oil, he said.

Another factor is resistance within OPEC to Saudi Arabia's dominant role. Smaller producers like Algeria are said to be restive over the Saudi gains in market share over time. If wider sacrifices in OPEC production are needed to make way for Iraq, cooperation may be harder to achieve, Mohamedi said.

The new struggle over shares also means the return of the Russia factor as Moscow tries to guard its interests as the biggest non-OPEC producer. Ebel noted that Russia has a record of publicly cooperating with OPEC cuts while continuing to raise its production. He said, "They'll pay lip service, but nothing happens."