$6 or $60

Excellent article by Thomas Friedman in the NYTimes today. So informative that I'll copy it for those who don't have NYTimes accounts (which are free and don't spam, btw):

Reading the papers lately, I've lost track of whether the Pentagon plans to invade Iraq from three sides or four, and whether we will be using Jordan, Kuwait or Diego Garcia as our main launching pad. But one thing I haven't seen much planning for is the impact an attack on Iraq would have on the world's oil market. Depending on how the war went, that impact could be very bad and lead to a sharp spike in oil prices, like $60-a-barrel oil. But — wait a minute — it could also be very good, and lead to $6-a-barrel oil that would weaken OPEC and, maybe, also weaken the Arab autocrats who depend on high oil prices to finance their illegitimate regimes and buy off opponents.

Raising this oil question is not an argument against taking down Saddam Hussein. He's a bad man, building dangerous weapons, who has raped the future of two generations of Iraqis. The whole region would be improved by his ouster. It is an argument, though, for thinking through all the dimensions of any attack on Iraq. We're not talking about a war in Tora Bora here. We're talking about a war in the world's main gas station.

"A proposed attack on Iraq is an extraordinarily high-risk economic adventure that could either destabilize the governments of one or more oil exporting countries by creating a prolonged period of low prices, or, if things went wrong, lead to a prolonged disruption of world oil supplies, which could be even more devastating," says Philip K. Verleger Jr., an oil expert and fellow of the Council on Foreign Relations.

Let's start with the $60-a-barrel scenario. (The price today is in the mid-$20's.) While the Pentagon keeps leaking its war plans, no one ever writes about what Saddam's war plans might be. What if Saddam responds by firing Scuds with chemical or biological warheads at Saudi Arabian and Kuwaiti oilfields? The world market could lose not only Iraq's two million barrels a day, but millions more. And what if the war drags on and we have as much trouble finding Saddam as we've had finding Osama?

Don't kid yourself: If prices skyrocket because of a war in the Persian Gulf, Venezuela, Iran, Nigeria and others will cut back their output and keep prices high to milk the moment for all it's worth.

The scenario that could produce $6-a-barrel oil goes like this: Iraq under Saddam has been pumping up to two million barrels of oil a day, under the U.N. oil-for-food program. Let's say a U.S. invasion works and in short order Saddam is ousted and replaced by an Iraqi Thomas Jefferson, or just a "nice" general ready to abandon Iraq's nuclear weapons program and rejoin the family of nations.

That would mean Iraq would be able to modernize all its oilfields, attract foreign investment and in short order ramp up its oil production to its long-sought capacity of five million barrels a day. That is at least three million barrels of oil a day more on the world market, and Iraq, which will be desperate for cash to rebuild, is not likely to restrain itself. (Now you understand why Saudi Arabia, Iran and Kuwait all have an economic interest in Saddam's staying in power and Iraq's remaining a pariah state, so it can't produce more oil.)

In addition, notes Mr. Verleger, if we invade Iraq in the late winter or spring, when world oil demand normally declines, OPEC countries will have to slash their own production even more to accommodate Iraq. This would be coming at a time when non-OPEC countries (Russia, Mexico, Norway, Oman and Angola) have been steadily boosting their output and will continue doing so. Most OPEC countries, however, can't cut back any more to make room for them. Venezuela is broke. Iran, Nigeria and Saudi Arabia need cash to deal with all their debts, their masses of unemployed and new infrastructure demands. (Watch Saudi Arabia. King Fahd is now gravely ill in a hospital in Switzerland, and the struggle to succeed him is in full swing.)

Bottom line: A quick victory that brings Iraq fully back into the oil market could lead to a sharp fall in oil incomes throughout OPEC that could seriously weaken the oil cartel and rob its many autocratic regimes of the income they need to maintain their closed political systems. In fact, give me sustained $10-a-barrel oil and I'll give you revolutions from Iran to Saudi Arabia, and throw in Venezuela.

If that scenario prevails, you could look at an invasion of Iraq as a possible two-for-one sale: destroy Saddam and destabilize OPEC at the same time. Buy one, get one free. But you better prepare for the consequences of both.