What is the short term business outlook?

With the US-led military coalition about to storm Iraq business is nervous about the short term, immediate future. But is there really much to worry about, and if so what are the likely trouble spots?

A friend in the United States recently sent me a series of charts showing stock market movements in advance of conflicts over the past 30 years. Interestingly the worst point for share prices - a good proxy for business confidence - is always in the build up to war and not during the actual hostilities. For once hostilities begin the uncertainties diminish and a new status quo emerges.

If this pattern holds true then this week may be the most uncertain and worrying week in 2003. But apart from worry itself, has business any reason to lack confidence in the near future?

The pessimistic view is that the oil price will tumble once Saddam Hussein's regime is toppled, that Opec will fall apart and that 1998 oil price levels of $10 per barrel will return. Certainly oil analysts in come research houses support such a scenario, and that is one reason why oil stocks are so cheap at a time of high oil prices.

But The Economist magazine this week is one of the growing volume of voices that argues to the contrary. Oil stocks are at a 30-year low, demand is high from a cold winter and the supply position is tight to say the least.

Saudi Arabia admitted over the weekend that it is up to capacity at 9.2 million barrels per day and will not be able to deliver the once mooted 10.5 million barrels per day to make up for lost Iraqi supplies.

Now granted a major dislocation to oil supplies due to the interruption in Iraqi oil exports due to invasion, and the halt of production in northern Kuwait, and the likely post-war confusion inside Iraq, and the position looks critical. Almost certainly US strategic reserves will be needed to avoid a huge oil price spike.

As The Economist rightly concludes all the pressures are on the upside, and the idea of an oil price collapse like the one that followed the Gulf War in 1991 is inconceivable. More likely is that after a period of sustained higher prices - may be around $45 per barrel - the oil market will settle back to its Opec price band of $22-28.

At this level the Middle East will continue to enjoy a boom in investment activity, both in the oil and non-oil sectors. Moreover, this sort of oil price level will not bankrupt the oil consuming nations and thus ensure that demand is sustained.

Meanwhile, in the short term business interests have more down to earth things to consider such as the safety of their expatriate staff in the event of a local backlash in come countries. Attacks on US citizens in Kuwait and Saudi Arabia recently have demonstrated that this is a real issue.

There is also the inevitable disruption of orders and cash flow because of a war time interruption to trade. If the coming conflict follows the pattern of the previous Gulf War then a rebound in orders, and mini-boom, can be anticipated, and this should be built into planning calculations.

That said there is always the possibility that Saddam Hussein will put up a big fight and cause a lot of damage in Iraq to oil infrastructure and keep the conflict dragging on for some time. This is the worst case scenario, but not the most probable one.