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The Oil Embargo: Winners and Losers
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18308 |
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Section : |
CURRENT ISSUES
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10 / 1990 |
2,011 Words |
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Thomas R. Stauffer
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The U.S.-led oil embargo of Iraq and Kuwait implies far-reaching economic repercussions, even without further escalations. Amid this crisis, however, there are both economic winners and economic losers.
So far the embargo is quite simple. The United States has effectively interdicted all significant exports of oil from either Kuwait or Iraq. The U.S. move results in a gross shortfall of about 4 million barrels per day (b/d) of oil, or 17 percent of total OPEC production. The embargo of oil exports is bolstered by a blockade of most imports to both states.
This is a large loss of oil out of the world market. The cutback is comparable with that which triggered a tripling of oil prices in 1979-80. It is also larger than the oil losses that the United States suffered in retaliation for its rescue of Israel during the 1973-74 war. Then, in contrast to the present, the United States was the victim and not the perpetrator of the embargo.
There are two cases to consider. The first is “containment,” meaning there are no further cutbacks in supply and no damage to the fields. The second and much more serious case involves the possibility of international or unintentional escalation. Scenarios could include extension of the oil embargo to Iran if it supports Iraq against their common enemies (the United States and Israel) or if oil fields are damaged or destroyed.
The stakes are enormous, even if the oil cutoff is confined to exports from Iraq and Kuwait. In the worst cast scenario - for example, if the embargo is extended to include Iran or oil-export facilities are destroyed in Saudi Arabia or elsewhere - the stakes skyrocket even higher.
We shall begin by examining the winners and losers in the present scenario - a limited embargo - and then sketch the much more ominous prospects of any escalation.
The losers
All energy consumers are the first and most obvious losers. They suffer categorically because the sudden scarcity of oil, resulting from the throttling of exports from both Iraq and Kuwait, has already precipitated a rapid runup in oil prices. These have jumped from some $14-16 just before the confrontation to $25-27 a fortnight later.
Consumers are paying across the board. All oil prices - not just those on supplies from the Gulf or OPEC - have risen in sympathy, not through any cooperation, but because oil markets are tightly connected. Other energy prices will move up as well. Natural gas prices, especially in the United States, are tied to oil prices, so that the cost of warming and running homes and business will be dragged up, tracking oil prices almost dollar for dollar.
The total consumer burden in the countries outside the former communist-bloc countries will run at least $12-14 billion per month for the duration of the present standoff. The cost could soar to nearly $20 billion per month as gas prices rise as well - and it will be higher still if additional oil production is embargoed or any capacity is destroyed.
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