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Will already high crude oil prices go up even further, fall back to a more "normal" range in the mid-$20s, or muddle through in the event the U.S. attacks Iraq? Much depends on the duration of a conflict and the amount of damage to infrastructure. Iraq's output now stands at about 1.7 million barrels per day. "The ideal outcome is a short, intense campaign...minimizing damage to Iraq's oil infrastructure and leaving its Gulf neighbors unaffected," U.K.-based energy-analysis firm Wood Mackenzie reports. "Under this scenario, the price spike would be short. There is spare production capacity in OPEC to cover the loss of Iraqi oil." When gauging oil-price forecasts, observers note the uncertainty of Venezuela resuming full production, with some pundits saying that won't occur until the fourth quarter of 2003. And, they note that as a precaution, Kuwait in early March began to shut in several of its large fields in northern Kuwait, removing some additional barrels from the market. Iraq's production has been very erratic in recent years, ranging from 3 million barrels per day last September to only half a million at one point in December. From July 2000 to the present, its oil production has averaged 1.6 million barrels a day, including the days when supply was disrupted while the country renegotiated with the U.N. to renew its oil-for-food program. Wood Mackenzie believes "the restoration of Iraqi production capacity to 3.5 million barrels per day by 2005-06 is likely under most scenarios." Production in the near term could depend on whether the Iraqis destroy some of their wells, as some analysts have theorized. In a television interview in February, President Saddam Hussein denied this, saying it would be foolish to destroy that which contributes significantly to the Iraqi economy. "In the aftermath of war, should it occur, there is no telling where oil prices may trade immediately," says a report from Petrie Parkman & Co.'s Tom Petrie and Steve Enger. "If Iraq produces at more or less normal levels-about 2.2 million barrels per day in 2003 in our modeling-and OPEC-10 [which excludes Iraq] is willing to cut output to match the seasonal decline in demand in the second quarter, the projected inventory levels support a mid-$20s price for West Texas Intermediate." The report cautions, however, that longer term, an "insecurity premium" that has so far supported high oil prices may continue, due to questions in Iraq after a war, events in North Korea, and elsewhere. 'This could be an extremely important factor in where oil prices actually trade during the next couple of years...we are raising our 2004 WTI oil price call to $24 per barrel from $22 and our 2005 call to $23 from $20." Wood Mackenzie analysts say short-term concerns are understandable, but they are more concerned about the long-term outlook. Any short-term price spike is likely to revert to normal prices in six months, it says. The challenge then for OPEC will be to balance expanding Iraqi, Russian and Caspian output. "All this points to the prospect of over-supply and lower prices [until 2010]." -Leslie Haines
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