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Iraq has floated the idea that the Arab world use oil supplies to pressure the West on Israeli policy. Such threats are empty, but they will have a psychological impact, pushing up oil prices and encouraging similar statements by other Arab countries.
Iraq released a statement April 1 calling for Arab countries to use their oil power to pressure Israel into a withdrawal from Palestinian territory. Iranian Foreign Minister Kamal Kharazi responded April 2 that the Islamic world has other options, but did not rule the proposal out completely, saying a collective decision by Islamic countries could be effective. Crude oil prices responded immediately: The benchmark price for Brent crude on the International Petroleum Exchange in London jumped 3.3 percent April 2 to $26.78 a barrel, a six-month high.
Arab countries are very unlikely to actually use an oil embargo or some other form of organized cutback as a weapon to alter U.S. or Israeli policy. However, oil-producing nations will find rising tensions in the Middle East to be a convenient tool to manipulate crude prices. Occasional, timely statements will continue from various Middle East oil producers, hinting that continued tensions could disrupt supply or even lead to an embargo.
These threats also will be empty, but will have the intended psychological effect of artificially inflating oil prices. As a result, benchmark oil prices are likely to hover in the upper $20s for the near future, thereby pumping out extra profits for Middle East oil producers.
Iraqi Foreign Minister Naji Sabri followed up on the initial Iraqi statement while attending an Organization of the Islamic Conference meeting on terrorism in Malaysia. Sabri suggested that Arab nations, which account for almost half of the world’s oil supplies, should “coordinate their policies and efforts” in defense of their Palestinian brothers.
Kharazi, attending the same conference, said that if the Arab world decided to use oil as a weapon against Israel and the United States to insure the liberation of Palestinian land, then Iran would consider it, noting that “it will be effective if all Muslim countries would take such a decision,” Agence France-Presse reported April 2.
The Iraqi proposal – which hints at an Arab oil embargo similar to that of 1973 – is unlikely to take off. Not only would it require Arab unity – a mirage clearly exposed by the high number of top leaders who did not attend last week’s Arab summit – but would also require broader support of non-Arab Muslim countries, like Iran and Indonesia, to be truly effective.
Finally, and most importantly, it would require personal sacrifice on the part of all Arab and Muslim oil-producers. Though an embargo or cutback would raise prices globally, cutting off the United States – the world’s largest oil consumer – would take a huge bite out of overall revenues. OPEC countries recall the impact of the oil price wars of the 1970s, which resulted in a sharp deterioration in the cartel’s total global market share. The same could happen again, especially with Russia and some West African countries poised on the edge of large production increases.
Major Arab suppliers like Saudi Arabia and Kuwait rely almost exclusively on oil revenues to maintain their economies and their hold on power. They are simply not willing to risk their own livelihoods, as well as the certain wrath of the United States, for the sake of the Palestinians, especially because the move has no hope of changing U.S. or Israeli policy anyway. The United States is too powerful economically, militarily and politically, and would overpower any such attempt before it even began. Officials from Saudi Arabia and Qatar have already said that the Iraqi proposal is unlikely.
That said, the statements by Iraq and Iran are significant. Oil price psychology has been shaken and stirred over the past year by unexpected events – the global economic downturn, Sept. 11 and its aftermath, the unexpectedly quick U.S. economic rebound, concern over a possible U.S. strike against Iraq and escalation in Israel. The latter three issues have pushed crude prices up by 35 percent this year alone.
This latest threat adds yet another layer to that psychology, and one that can be easily manipulated by Middle Eastern oil producers. Keeping the West, including oil traders, on edge about the future availability of crude supplies will keep prices artificially higher. A well-placed statement similar to those by Iraq and Iran may come to have the same effect as pulling 100,000 barrels of oil off the market, without the downside of an actual production cut.
Psychology can only push prices up so high, however, and the effect will diminish over time. Barring a full-scale war in the Middle East, we shouldn’t see prices rising beyond $30 per barrel. But as long as tensions in the Middle East remain high, the region’s oil producers will look to capitalize.
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