Oil Prices Soar on Hopes for Iran-Iraq Cease-Fire : Markets See Prospect of OPEC Harmony; Analysts, However, Predict Flood of Crude and Lower Prices
An end to the Iran-Iraq war would scramble the forces that have dominated the world of oil in the past few years, and many energy and diplomatic analysts believe that it could eventually flood the markets and drive oil prices down even further.
But for starters, oil markets reached the opposite conclusion. Futures contracts for crude oil shot up 84 cents a barrel Monday on the New York Mercantile Exchange. Prices also surged in London.
The response apparently reflected the belief that peace would lead to harmony within OPEC. But several experts--including some in the Reagan Administration--called that an oversimplification. An Administration analyst said: “Oil prices were primed to go up. The market is trying to make good news out of anything.”
More likely, Middle East experts say, the absence of war will enable Iran and Iraq to reconstruct their damaged oil-export facilities and return to their higher, prewar oil production levels in search of revenue to rebuild their economies.
Rift Deepened
“The important thing to realize,” adds Joseph Story, president of Gulf Consulting Services in Washington and an expert on Middle East oil, “is that nobody knows.”
Hopes for peace in the region were spurred by the announcement Monday that Iran has accepted the terms of a U.N. resolution calling for a cease-fire with Iraq. There was no immediate reaction from Iraq, which accepted the resolution when it was enacted July 20, 1987.
Next to the law of supply and demand, the war between two charter members of the Organization of Petroleum Exporting Countries has been the biggest obstacle to OPEC cohesion as it has struggled in vain since 1985 to get control of oil markets.
Iraq’s refusal to abide by its quota in lieu of a quota equal to Iran is a major cause of OPEC’s current overproduction, fostering cheating by other members. OPEC members in the rest of the world were miffed at the price-depressing effects of moderate Arab nations supporting Iraq in the war and giving it upward of 300,000 barrels a day of “war relief” crude.
The rift deepened after the riots at Mecca in the summer of 1987, when 275 Iranians were killed at the holy city in Saudi Arabia. That ended a brief reconciliation between price hawk Iran and the Saudis, OPEC’s biggest oil producer, and was followed by renewed overproduction and another price slide.
May Change OPEC Focus
Although most analysts believe that it was only a secondary motivation, Saudi Arabia’s opposition to higher oil prices had the effect of penalizing Iran more than Iraq. As such, the Saudi position--though dominant within OPEC--was bitterly divisive.
Peace would smooth that over and presumably make it easier for the cartel members to focus more on economics and less on politics and diplomacy. Said Story: “There will be a lot better chance for OPEC to be cohesive after the war ends.”
Meanwhile, Salomon Bros. estimates that the war costs up to $25 billion per year--money that comes not only from Iran and Iraq but in the form of aid to Iraq from Saudi Arabia and Kuwait. That requires the sale of about 3.5 million barrels per day of oil to finance, or up to 20% of the cartel’s whole output.
To the extent that such production was no longer necessary, it would tighten world supplies sharply and nudge prices toward the $20-per-barrel mark versus the current $13-$15 range, analysts say.
But many believe that mutual suspicion would prevent Iran and Iraq from cutting back on military spending, and both countries will face domestic political pressure to fund long-ignored projects at home and rebuild their economies and infrastructure. Iraq has an estimated $60 billion debt.
“Iraq’s revenue needs are not going to decline, they will be higher,” said analyst Vahan Zanoyan of the Petroleum Finance Co. in Washington. “And their (oil) export capacity will be doubled. If this cease-fire leads to permanent peace, it’s extremely bearish for oil prices.”
Iraq is now producing about 2.7 million barrels per day and, with scheduled pipeline expansions, expects to be above 3 million sometime next year. Zanoyan said merely restoring Iraq’s shipping terminals, destroyed early in the war, would add capacity for another 2 million barrels per day.
Israeli economist Eliyahu Kanovsky of Bar-Ilan University cites an eventual end to the war as one of several reasons why the Western nations won’t face any new oil shocks in the 1990s, a prospect that some economists consider a foregone conclusion.
“When and if the war ever ends, each country is going to pump oil like mad because there are huge debts to repay and they have been delaying development. They have to catch up on that, plus the reconstruction,” Kanovsky said in a recent interview.
Iraq, whose oil reserves are believed second only to Saudi Arabia’s, is seen as the country with the greater production potential. Though Iran once produced as much as 6 million barrels per day, Middle East oil experts believe that its reservoirs have been neglected during the war and there might have been a permanent loss of capacity.
A number of officials took issue with the notion that the two countries will flood markets. The Administration analyst said: “They’re smarter than that. They don’t want to see $7 or $8 or $9 oil.” But he said each country could add 1 million barrels per day of export capacity within 18 months and that prices are likely to fall.
Another well-placed Administration official said it would take several months for a cease-fire to have much effect on oil production, and thus on the supply-demand balance that dictates overall oil prices.
“Then, it seems to me, it could add another depressant to the market,” this official said.
