Created: 9/27/1983

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The dttivii'j of fiat French Super Standard aircraft to Iraq, the yo&sibili tjisruption of Portionil esporta vital to en* iwt. If Iraq rtetivtt tha Superat atlitet it lik.tlg--and io unable to significantly aaeticrcte itt financial difficulties ;na nezt ftu aontha, it atxoet certainty will attack oil tanktre calling at Iran'3 Kharj Ialand. S'j attackinj Iran'e oil lifeline, Iraq^ uould hope to foret Iran to ihe negotiating table or, failing that, to forceouere to intervene in the Gulf to anturt tha aafatj of all oil axporta, including those from

sat a, andOf/ice Of Olovil Iseuea-aadreteta to


Consent* are ooleoma and may be

Si'ltf illVllrtiiifionottfiKj ahippiiu .'di-Jiad -ai.*. ^oseiSi: <AKsljaia, oil priccj uouid rize'bu ii'O'Jth uould

parstntaja uoinii /ori Killior. bud MS redueiion in ffal/fonae*-. iaiar. a. prolonged oio-urti* Gulfi could double andripiz tha prisearrelil depcniinj on zki lanjth and scope of she auto//. We aljo Jttinatsajor increase in oil prion* en thoftmmaiaX aj/ataM. union ulreadj ta drained bi she IDC pajaJKss pt'obltn. Ik our Judgment tha initial oil prise a'noek would bi partieulut'lg doatablisirtg /or those bankinp oansJF'Jsow.trisa uith kit* exposure LOCs that do noi export oil.


Too war with Iran is slowly SLransiing Iraq's oconony. It has seviirea two ot Irak's throe oil uuipot't routos, reducing annual revenue oy two-tniras, and saddling tne econonyar-ruiatuu costs tnat nay reach SI oillion pes month, we eacimate tnat Iraqixenanye reserves will tall to oetweenpinion oy tne end ot Miillion pfltorb. .the -ar,

Basficafl has

'u-wii lutt-HU co tieierUM tnis year1 to ioraiyn suppnurs. Irak's currant account oetlcit this year will lie an ustiaatco sis uniion, its amoiLious aoveloptwnt prooraa has ooon aneiveo, ana imports nave oeen sharply reduced. I-

facca the prospoct ot! a

curront account oencit4 noarly aa larye as thisit takes tho political risks ot deeper cuts in inportsgoods, rteanwnile, its reserves will oa turtnertho tiulr: states prooably will De loss sole than this yearunancial support.

The cause ot Iray'a financial bine ia inauiflciont oil experts. loss oi its Persian Cult oil export terminals at tho Deginnin* or the war and tha closure ot the pipeline across Syria in2 have reducea Iraqi oil export capacity by BO

percent. Iraq's ona oil export route, the pipeline across

Turkey,urrant eftrouynput ot about BOO.OUQ bpd.

Iraqi strategy

Iraq now boiievos that attacking Iran's oil lifeline isHope tor enqing tne war or roopening the Gulf to Iraqiobjectives in

attacKihyn ntaiiriu reportedly would be to force Iran to tne negotiating table oi to compel tho western powers to

Iraqi utflfaos tor Increases OH imports

i-tfOtJtfit bulf on cenctiitf la, Iraq nas uurcnaaeu aui nored im tfaJirairivorar/ nuaun* oil export tern.nels called sin^itf-jiulin ttuuriny ouoys. Two or tne ouoys,apacityould oe instantwotlis. eaaliiln* uui>ys could oc installedyear,nv Iraqi gull export canityillion opd.

fcoytf* tne Pipeline Across jyrtj4 Tire pipelineapacity or ten'bp* nut was ciosttf cy tne Syrians in April Tn* ^rtans are unlikely to reopen tne aipeline on tneir own initiative dS Ion* as Saoaau Hussein reiiaiAS In power, ana ifdq cues nut naveMilitary capability to fore* tnea to oo so. Tne Soviets and tne bull states nave approacned tne Syrian* on Irak's benaif out without success. Syriao* receiving oilranSlj*ion annually.

qui lo iww Pipelines, builaln^ pipelines across Saudi Araola. Kuwait, JuMan, or lur*ey would require javeral years. Iraq nas nolo discussions wltft tne Sauflis ana Jordanians. We see little cnance or prepress soon-cey uostacle Is tne pipeline across Tur*ey villi increasea:uy to aoout jhUtiHM opd oy tne end or tnis year, proviolnu additional annual revenue ofilhun. f

Another possibility i& tnat Iraq wiii attempt Co resume oil ux^orts trom tneng tne tnroat qz attacks by tho Super titenoartfs Co ooter Iranian interference!

were intermittent or The caprossed stato ot tho wuriu iddkoe market iniylu oncoui'jyc ownwrs to acce.itrisks involved as long as insurance and craws wore avaiiaolu. To Keep tne iCnarg run attractive to snippers. Iron would reduce cruco prices to onset increases in insurance rates. Companios have oeen wliiiibj to send their ships to Iran's port olnomeliu in tne northern Cult even in-tri* race ot repeated ;ra*ii attacks, some usiny; super frqlon liolicoptors firing. Kxocot*.

Iran's Nuaction

It international tankers stopped serving Kharg Island,still exportpercent or." its current level of exports. continue to load its own ships at tCliary and shuttletiieee to anchorages in the soutnarn Gwlf. outside thethe Super L'tendard. Iran did this in tne early days or!anc was aDle to snip atUU Dpd. Interminals at sirri ami Lavan islands, at tho outer tlie rar-ga of tlie Super Ltenilard, can export about

' -irr;"1

? & j if

'll ii Ha in L

Kconofmpart of Closing trie liulf

prolonged closure ot tne Persian Culf could have irore sovcro economic repercussions for tha West than1* supply disruptions. Given the importance of Persian Cult: oil, thore is noway the United States could insulate ltselt from the economic revcruerationsajor reduction in exports from the Gulf. Va estimate that oacn year forillion bpd net loss in oil exports iron tne oulf oil prices would incroase by about ia aor barrel and OfcCD Utir urowth would ductule byerceirtago points. ajor runup in oil prices resultingrolonyod interception of Persian Gulf oil supplies would have severe repercussions on tho international financial systenF

The uconomic iapact of any disruption of Gulf oil exports in the near tern will depend heavily om

' The extent and duration ot tne disruption.

The availability ot non-Gulf energy supplies froa surplus productive capacity.

" The availability of alternative fuels such as coal and gas.

Worldwide petroleum stock levels and stockholder res'ionse.

Tnu present combination ot surplus productive capacity and weak consumption affords OtXD countries some protectionnort-torm oil supply disruption. Persian Gulf countries have boon producing someillion bpd in recent smiths, although present production capacity is aboutillion bpd. Nine orillion bpd arc now exported from enB Gulf, ot which about I

minion opa are sent thiouyri pipelines, r'reu world surplus capacity outside the Gult that couldupply cutback. Gull' dtanos atil Hon opd. mainly in Migoria, Liaya, Venezuela, ano Indonesia I

kestorn Uioond'cnco on Cult oil. ev World dependsGull oil for aOout SO percent* of its naade. Thais not as dupendent on I'ersian Cult' oil as aco mostWestern aiiio* and aomo Third Korld countries. US importsoil this year ara aboutd. US dependenceGult oil lias dropped toccHnt ofercent ot oil consumption,

The other countries in tnewestern Europe andillion Dpo iron the Gulf last year, about SS percent of tneir total oil imports andercent ol their total consumption. Host ot the remainder ot tho Cult's oil output is consumed by tho Gull countries or exported to tne LDCs.

Hanauinu an.pil, Crisis. The United Statesdo witnout Gulf oil oy drawing onillion bpdcapacity available outside tne Gulf, including 1Aironj major producers in tho Western Hemisphere. Becauseneavy free World dependence on Persian Gulf oil, hovavor,would not De immune to the shocksajor disruptionEast oil supplies. Such disruptions would load toot the burden or tha shorttail through adjustmentsdistribution systems, intervention ot orne formal IEA oil

Our analysis indicates that the demand response to rising oil prices and private stock behavior are the main determinants ot tne price impactajor, prolonged supply disruption, "rice runups roilowimj the Arab oil embargo end the Iranian revolution were due In pare to demand pressures resulting from stocKnoloer ettorts to rebuild and add to inventories. In contrast, tne oil raarkeb remained fairly stable following the outf the Iran-Iraq war, reflecting falling consumption and the existence ofillion barrels ot oxcoss stocks that stockholders were willing to doplete.

Cccuiiurctai shocks hod represent the milk ot ail iitwiitotLoa non consuming countries. Sisaal* strategicpurcnasea ana owned ny governments as opposed to inventories haldcommerciallocateu only in tiie Unitod states, Jo^an, ano ttwst uorsteny. non-oil supplies,natural toes, also couloontribution to on sett in? oil lossesisruption, as nappenua in tne United states tollcinj tne Iranian revolution.

slock drawdownsajor role tn reducing theot an oil supply disruption. It oil users anticipateaisruptionick release ot oiltne initial scra.noo build and hoardresulted in the severe economic inpact ot the ifli aDisruptions may oo tonuc down or averted. As asharp escalation in spot prices and the ensuing riseprices may tie campeneci considerably.

Weisruption o; Oil flows from the Persianprooaaly would reverse tne glut mentality tltattne oil market tor the last two years. rice decline combined with the high costonarge inventory liquidation sinceot tne year. With current commercial stockpiluslevels, we woula expect stockholders to be lass willingreduce inventories is thereupply disruption. judgment, thereood posaiDllity that attempts wouldto aoc to Inventories because of the prospects torand tne uncertainty surrounding the duration ot This oenavior would add to our oil donandjiiOjacioo supply snorttolls.

Sensitivity Analysis. Despite these uncertainties, weto asses* tne sensitivity of price and economica major supplyWe sougnt

to determine now rars vuuiu nave tu ttuv to halance supply and demand unour varying levels of disruption, but particularly it the Cult were closed. Our analysis revealed that it the Uult were closedear, oil prices could easily double or triple, bepenoing on the level of demana, the net reduction in exportsulf closure could beillion bpo. More specifically, our analysis suggests that foeillion opd not loss in supplies for one year, prices couio increase approximatelyper barreleduction in OfcX'l) UHP growthercentage points. I



Impact; ot; Oil Supplyon the Financial :sysn>ni

tinajor runup in oil prices resultingroionyed interrupt ionersian Cult oil supplies would" have severe repercussions on the international financial system, whicli is already strainoa iron LDC payments proolems. While on balance commercial loncers woulo De trading the recovery of one group ot troubled doctors tor worse conditions in another, tlie initial oil price shoes would De dostaoilizing in our Judgment, particularly tor tnosc Da nr. ing centers and countries with liign exposure to non-oil LDCa. aoreovcr, rocent Danker experience witn LDC debt moratoriums ana rescheduling* could hamper roeyling of surpluses olsewnere to the non-oil LUCs. In addition, unlike thu lastajor oil price increases, financial surpluses would accrue largely to tne OPEC meifiDers with high financial requirements (or OeDt servicing instead of tho wealthier members who in the past have provided immediate liquidity to tho international banking system. OECD governments, faced with the prospectull Hedged recessions, are unlikely to increase aid substantially, we also are concerned that INF funds may be inadequate to handle large new loan rogueats at thisnd that the prospects for increasing IMF resources are unfavorable. 1 "|

OPtC rtomDers

It tnu strait ol Horrnua were closed, we project thatcurrent account surplus over the courseearfrom Sbu-IOD billion assuming the Freeillion opd, oil prices rise So per barrel1 million Dpd shortfall, and imports of thoare allowed to rise in real toruswould oe in sharp contrast to0 billion deficitprojectl-cl4 with current oil pricesand it could surpass0 record OPEC currentSUo billion.

We projectmaller disruption of Persian Gulf Oil leadingillion bpd shortlall vould resultlancuo current accountlO billion surplus depending on

the import oenavior or non-Gulf members.

N'on-ui'KCil tJfs


wo relieve that neny or. these LOCs will have difficulty obtaining Loans to finance their higher oil bllle. Given their recenth LDC debtors, Bankers, in oor opinion, will ve reluctant to increase LLC aeot exposure and risk anotnerot raoratoriuas and reschedulings. He are concernedesources could be inadequate to oeet large new financing regueses. During past Oil price hikes, the IHK helped defray rising LUC oil isvports through special lending facilities funded oy the wealthier ofi'C newoers. Under this current scenario, nowevcr, the traditionally surplus Culf economies are losing oil revenue and many aro in deficit theetselvoa. with relatively low levelsorelyn ruservos, it is not clear that the non-Gulf oil exporters would be as xorthcoming wiih aid to other LOCs. |

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