What would a war mean for Middle East economies?

Much Western media comment has focused on the likely cost of a war against Iraq to the US Treasury. But from the perspective of the countries surrounding Iraq the impact of a possible war is of even more immediate concern.

At present the UN sanctions regime has stifled trade between Iraq and its neighbours and produced a pattern of trade flows which owe more to politics than economics. Thus Jordan, for example, benefits from cheap oil with medicines, food stuffs and construction materials heading in the opposite direction.

Syria also receives heavily discounted Iraqi oil. Other countries with unusual trading relationships include Lebanon and Turkey. A regime change in Iraq would cause a big shift in trading partners, probably towards Western supplies from Dubai and elsewhere. There would also be major opportunities for oil companies, presumably mainly from the USA and UK.

However, that depends on how long a war takes, and indeed what proves to be its outcome. Wars are always uncertain events, and the best forecasts often turn out to be wrong. Conventional wisdom is that the US would take up to two months to takeover Iraq, but there is always room for error in military calculations - especially if Iraq proved to have effective weapons of mass destruction.

The most immediate impact of a war would be a spike in the oil price. That is pretty much agreed by analysts, although there is considerable disagreement about how high and for how long oil prices would stay above normal levels. Evidence from the 1991 Gulf War suggests $35-40 per barrel for a short period followed by a return to $20 per barrel.

Such an oil price surge would certainly cushion the economic blow of war to the Gulf economies. But as happened last year after September 11th there is bound to be an interruption to tourism, trade show attendance will fall and the flow of orders may dry up for a while. Equally, the bounce back on a quick conflict could be very strong, as businessmen who were in the region in 1991 recall.

The danger is that oil prices slump with the removal of the so-called war dividend, and that prices fall back to the $10 levels of 1998 which decimated local stock markets and plunged the region into a mini-recession. However, the recent actions of Opec - whose lunatic policies caused the 1998 price crash by expanding production in a declining market - augur well for the future.

So provided Opec manages supply sensibly there will not automatically be a slump in the oil price. And the idea that Iraq would immediately flood the market with cheap crude oil is clearly nonsense, as it will take some years to repair its long neglected oil infrastructure. Thereafter it is possible that the Middle East might have to learn to live with lower oil prices.

A more optimistic view is that world economic growth will pick up from its current slump and that the market for oil will expand to accommodate increased supply from Iraq, and indeed other countries like Iran, Saudi Arabia, Kuwait and the UAE. Black gold remains the main currency of the Middle East.