The latest thinking on post-war oil prices

Trying to pin down the likely movement in oil prices after the now imminent, and seemingly unavoidable, war in Iraq has become a major pre-occupation among regional economists.

Each one posits several different scenarios, so the net effect is considerable confusion and rather more possible outcomes than economists. Dr Henry Azzam, one-time National Commercial Bank chief economist and still the region's biggest name, is the latest to cast his hat into the ring.

Dr Azzam concentrates his attention on two scenarios. First, that US forces meet stiff resistance from the elite Republican Guard in the form of sporadic attacks after an initial overwhelming victory. This he suggests would prevent oil workers from getting into the oil fields and create a security threat that would undermine a return to normalcy for a couple of months.

The net impact would be oil prices at $45 per barrel followed by a slow return to the Opec price band. Dr Azzam's scenario two suggests far more widespread damage to the Iraqi oil fields, leading to sky high world oil prices for a considerable period.

In any event Iraqi oil fields are not likely to resume their 2.5 million barrels per day output over night. Dr Azzam suggests a $5 billion investment over two years will raise output to 3.5 million barrels per day, and that by 2010 - with serious involvement by all the major oil companies - output could reach seven million barrels a day, not far short of present day Saudi Arabia.

Dr Azzam is well respected for a good reason, and that is his consistent ability to resist hyperbole and keep his forecasting feet firmly on the ground. He has long experience of the Middle East and is not a Western commentator looking to sensationalise things as he has to meet business people in the region and look them in the eye.

Thus it is all the more significant that he is talking in what some might think alarmist terms. The picture he paints is one of oil prices remaining much higher, and for much longer than most Western economists assume. They are inclined to dismiss high oil prices as merely discounting a war premium and likely to fade away very quickly after the US captures Baghdad.

If these economists are wrong, and Dr Azzam is right then a lot of re-calculation needs to be done about the prospects for the global economy post-war. A serious economic slump is now a distinct possibility, with high oil prices a chief culprit.

For the Middle East, a third great oil boom is in prospect. Perhaps 20 years of low oil prices have resulted in under-investment in production infrastructure which is now about to leave the world short of oil, and only a long and slow investment in new capacity can truly be the answer.