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War effects economy { July 30 2002 }

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   http://www.nytimes.com/2002/07/30/international/30COST.html

http://www.nytimes.com/2002/07/30/international/30COST.html

July 30, 2002
Profound Effect on U.S. Economy Seen in a War on Iraq
By PATRICK E. TYLER and RICHARD W. STEVENSON


WASHINGTON, July 29 An American attack on Iraq could profoundly affect the American economy, because the United States would have to pay most of the cost and bear the brunt of any oil price shock or other market disruptions, government officials, diplomats and economists say.

Eleven years ago, the Persian Gulf war, fought to roll back Iraq's invasion of Kuwait, cost the United States and its allies $60 billion and helped set off an economic recession caused in part by a spike in oil prices.

For that war, the allies picked up almost 80 percent of the bill. Today, however, as the Bush administration works on plans to overthrow Saddam Hussein, the United States is confronting the likelihood that this time around it would have to pick up the tab largely by itself, diplomats said.

Unless the economic outlook brightens, the government could well find itself spending heavily on the military even as the economy recovers falteringly from last year's recession.

Senior administration officials said Mr. Bush and his top advisers had not begun to consider the cost of a war because they had yet to decide what kind of military operation might be necessary. Whatever choice is made, experts say, the costs are likely to be significant and therefore may ultimately influence the size, scale and tactics of any military operation.

Already, the federal budget deficit is expanding, meaning that the bill for a war would lead either to more red ink or to cutbacks in domestic programs.

If consumer and investor confidence remains fragile, military action could have substantial psychological effects on the financial markets, retail spending, business investment, travel and other key elements of the economy, officials and experts said.

If oil supplies are disrupted, as they were during the 1991 gulf war, and prices rise sharply, the economic effects would be felt in the United States and around the world.

All of that could present a complicated political problem for President Bush, both in the Congressional mid-term elections in November and as he manages a war and looks ahead to his re-election campaign in 2004.

"I think a good case can be made that voters will want to understand the case for a war or any kind of extended military action better than they do now because the economic considerations are considerable," said Kim N. Wallace, a political analyst for Lehman Brothers in Washington.

Saudi Arabia, Kuwait and Japan divided the cost of the 1991 war with the United States, but today none has offered to assist with financing a new military campaign. In fact, each has signaled that it is not eager to be asked, diplomats say.

"Just open a map," said a member of the Kuwaiti royal family in close consultation with Washington. "Afghanistan is in turmoil, the Middle East is in flames, and you want to open a third front in the region?"

"That would truly turn into a war of civilizations," he added.

If Mr. Bush decides on a large-scale invasion plan for Iraq involving as many as 250,000 troops, as some commanders advocate, the country would face a significant military mobilization and call-up of reserves as early as this fall to be ready for a military campaign early next year.

James R. Schlesinger, a member of the Defense Policy Board that advises the Pentagon who held senior cabinet posts in Republican and Democratic administrations, said he believed that the president would opt for a significant ground presence in Iraq. He said he did not think that fear of economic instability by itself would cause the United States to refrain from trying to unseat the Iraqi leader.

"My view is that given all we have said as a leading world power about the necessity of regime change in Iraq," Mr. Schlesinger said, "means that our credibility would be badly damaged if that regime change did not take place."

The Persian Gulf war cost $61.1 billion, according to the Congressional Research Service, of which $48.4 billion was paid by other nations.

The House Budget Committee's Democratic staff said that in 2002 dollars, the cost of the war was $79.9 billion, providing a very rough benchmark for what a conflict of similar dimensions might cost today.

Representative John M. Spratt Jr. of South Carolina, the senior Democrat on the House Budget Committee and a member of the Armed Services Committee, said the United States would come up with whatever money was necessary. But he said planning for a war now would have to recognize the nation's deteriorating fiscal condition and the need to address other priorities.

"While it's not beyond our means, we can't have it all," Mr. Spratt said. "Since there is no surplus in the budget from which the cost could be paid, there will be trade-offs, making initiatives like Medicare drug coverage harder to do, and there almost certainly will be deeper deficits and more debt."

James A. Placke, a former senior diplomat specializing in the Persian Gulf and now a senior associate of Cambridge Energy Research Associates, said the market reaction to any invasion of Iraq was at best uncertain. "Given the marked lack of enthusiasm for this venture, I wouldn't think the market reaction would be very good," he said.

"When weapons start going off in the Middle East, markets generally go down, gold prices go up, and oil prices shoot to the moon," he added, "and I expect that this is the short-run pattern that we can reasonably anticipate."

The United States is best prepared among the Western powers to withstand fluctuations in oil markets through drawdowns from its Strategic Petroleum Reserve, which today holds about 580 million barrels of oil. But Richard N. Cooper, a Harvard economist who headed the Central Intelligence Agency's top analytical body during the 1990's, cautioned that "psychological factors come into play" even in the face of prudent preparation.

He pointed out that after Iraqi forces invaded Kuwait in August 1990, oil prices climbed rapidly from a low of $15 a barrel and peaked at $40 in October 1990, although it was well known that the United States would release oil from the strategic reserve. Prices remained high for more than a year in what many experts saw as a tax on worldwide consumers that allowed Saudi Arabia and Kuwait to pay down the American and allied bill for the war.

"I am firmly of the school that the Iraqi invasion of Kuwait precipitated the American recession in 1991," Professor Cooper said, adding that while he generally praised the first President Bush's handling of the war, "the one area of fault was that they dallied on their commitment to release oil supplies from the Strategic Petroleum Reserve."

Last Nov. 13, a month after the United States began bombing Afghanistan to dislodge the Taliban and Al Qaeda, the president's advisers debated whether Iraq should be the focus of phase two of the campaign against terrorism. Mr. Bush directed Energy Secretary Spencer Abraham to add more than 100 million barrels to the Strategic Petroleum Reserve.

Since Jan. 1, oil shipments into the reserve have reached record levels, about 150,000 barrels a day. One oil strategist in London noted that United States government acquisitions for the reserve were accounting for more than half of the growth in demand for oil this year.

With a capacity of 700 million barrels, the reserve could be used to disperse 4.2 million barrels of oil a day to jittery markets more than enough to make up for the 1 million barrels a day of Iraqi crude lost because of military operations.

"What I am hearing from Washington," said Adam Sieminski, an oil markets analyst for Deutsche Bank in London, "is that serious consideration is being given to a coordinated Strategic Petroleum Reserve drawdown by the United States, Germany and Japan if military action takes place because this Bush does not want to make the mistake his father did."

Still, the fear is that Mr. Hussein, who set afire oil fields in Kuwait a decade ago, might strike out with chemical, biological or radiological weapons at Kuwait or Saudi Arabia, the world's largest oil producer with the largest capacity to expand its oil production to stabilize oil supplies.

"Everybody's nightmare is Saudi Arabia," said an Energy Department oil analyst. "People are deathly afraid of any military campaign spreading to Saudi Arabia." That country contains one half of the spare production capacity in the Organization of Petroleum Exporting Countries.



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