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Trouble in the pipeline

Devangshu Datta | March 22, 2003

Now that Dubya has finally unleashed the dogs of war, the situation is even more confused. The future oil scenario depends on many imponderables.

One is how long the Iraq campaign will last and what sort of regime will succeed Saddam. An important corollary is how much damage there will be to Iraqi oilfields during the war. Another question arises about the fallout across the rest of the Arab world.

In the short run, stockmarkets seem to have welcomed the invasion. It is being assumed that the campaign will be fairly short and that the US energy majors or other agencies with a strong pro-American tilt will grab Iraq's oil wealth in a relatively undamaged state.

Temporarily at least, OPEC nations have boosted production to compensate for Iraq being taken out of the equation. That will probably keep prices stable in the short run.

There is a fair chance that none of these rosy scenarios will come to pass. In the most cynical sense, the US invasion is predicated by an assessment that Saddam doesn't have weapons of mass destruction and at any rate, lacks the means to deploy and use them.

If that assessment is wrong, Iraq could end up being a blasted heath with everything upto and including tactical nukes being employed.

Even if Iraq doesn't have WMD, it is inconceivable that the Americans can install a new regime without capturing Baghdad. If they end up street-fighting, there could be a long, bloody conflict as there was in Beirut in 1982.

In that case, US public opinion might turn anti-war and lead to the invasion being called off leaving chaos behind. That's precisely what happened in Somalia when the warlords killed a couple of dozen US troops.

Let's assume for the purpose of argument that the invasion wins quickly without too many US casualties. Let's also assume that a new puppet regime is smoothly installed. Let's further assume that the Arab world ignores the invasion. This would be the best-case scenario for Washington and it seems more than a little unlikely.

But even if everything goes according to plans, Iraqi oil will not flow back into pipelines anytime before mid-2004 or more likely 2005. The infrastructure of the entire country will need to be rebuilt after the sort of pounding it's taken. Ports, pipelines, refineries, power, nothing exists in Iraq anymore.

Financial arrangements will need to be made to fund that reconstruction. Perhaps the new Iraqi government will be told to license off blocks to various MNC energy majors. Perhaps it will try to run those installations on its own. Modalities, to use a word that is much beloved of diplomats, will need to be put in place.

At some stage, OPEC's resolve may break. Oil prices will rise the moment production cutbacks. At that stage, India is likely to be caught flat-footed in a scenario of sharp inflation.

Inflation in an election year is a nightmare scenario for the ruling coalition. There could be panic stations in Delhi as a result of Washington's invasion of Baghdad.

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