World Economy to Bounce Back After the Gulf Conflict

It may seem foolish, even improper, to think of finance and investments with American forces on the brink of war. But it’s inescapable. The gyrations of financial markets are part of the daily crisis story, as hopes and fears drive stocks, bonds and the price of oil.

Moreover, the world of finance is looked to for guidance. Financial experts are called upon to explain the economic underpinnings of the conflict and to gauge war’s effect on the economy.

Often their judgments are simple: A short war could mean a stock market rally. Occasionally they’re original. “I ask myself if the Middle East is critical to capital values, and I conclude it is not critical,” said an investment manager last week. “The main factors driving stock and bond markets this year will continue to be the unwinding of the debts and excesses of the 1980s--with a major imponderable in the dissolution of the Soviet Union.”

What should you think? It’s a complex world, to be sure, but there are some things you can predict for the early 1990s, whether there is war or peace.

You can think about energy, for example, but not the day-to-day price of oil. That will fluctuate hourly with news bulletins and traders’ emotions. If war breaks out, the price will spike up to $50 a barrel or more, but it will fall back again. If there is no war, the price may plummet to less than $15 a barrel--and come back up again.

But in the next five years, there will be a worldwide move to develop or expand oil and gas supplies, for reasons having almost nothing to do with the current conflict in the Persian Gulf. For nearly 20 years, it has been the trend for oil in foreign countries to be owned by governments, not international oil companies. And those government owners generally have kept oil production at high levels. But they have done less well at drilling and developing new oil to replace the stuff being pumped.

So oil production in many countries is peaking, or declining as it is in the Soviet Union. And governments from China to Iran to Venezuela are reaching out to private companies for help, says Edward Morse, publisher of Petroleum Intelligence Weekly, a leading newsletter.

That means growing opportunities around the world for U.S. technology and U.S. oil-service companies such as Halliburton, Dresser Industries, Baker Hughes and others.

You can think about the future of the Middle East, where there will be massive building and rebuilding in the next five years. Kuwait, to begin with, will be a separate country again, whether there is peace or war; take it as a certainty, Saddam Hussein is not going to beat the United States. That will mean bringing back a lot of the $100 billion the old Kuwaiti government has invested around the world and devoting it to rebuilding the country and caring for its ravaged people. About $20 billion of that money already is earmarked to pay the United States for recapturing the country.

There will be building throughout the Middle East--Iraq included if Saddam Hussein is gone from the scene. Financing will come from the area’s oil revenues, but the work will be done at the urging of the United States, which wants to see the region finally develop economically and achieve stability. The outlook promises work for U.S. engineering and construction firms--Fluor, Bechtel, Parsons, Morrison Knudsen and others.

But make no mistake, world peace will be as fragile as ever in the ‘90s. Financial managers, contacted last week, looked beyond the present conflict to a proliferation of nuclear weaponry.

Nuclear material could spread from Pakistan and India to smaller countries in the Middle East, said one businessman. Financial managers in Boston heard from Soviet experts that the chaos in the Soviet Union is such that “they don’t even know where all the nuclear weapons are.”

Your conclusion should not be that we’ll see nuclear war, but that there will be a continuing need for military power to be maintained around the world. There won’t be an arms race, but an efficient defense industry, working cooperatively with other nations, will be needed as much as ever.

One mission will be to protect the functioning of global markets, which have changed investment patterns. For example, the price of gold--the traditional haven for nervous money--hasn’t moved much at all since the present crisis began last August. One reason is that frightened investors have found other havens in the global currency markets, where they can buy marks, dollars or yen at any time.

Finally, you can think ahead to post-conflict prospects for the U.S. economy. They could be surprisingly good, says Paul Boltz, chief economist of T. Rowe Price, a mutual fund company.

The debts of the ‘80s will be a burden, Boltz concedes, but let’s not get carried away. “Government and consumer debt grew 15% a year in the ‘80s, but corporate debt didn’t. Most major U.S. companies are very well-heeled these days. And a lot of that consumer debt is mortgages on houses.” The message is it will be possible to have good growth in this economy, once the current conflict is behind us.

And that adds a hopeful perspective: In the past, we believed that war boosted the economy, gave it a kind of steroid hormone injection. Not this time. Instead, it is clear from every prediction and reaction in the business community that peace will boost the economy and cause rejoicing in the markets. Maybe we’re learning something.