Oil price sparkling impact on Iraq
Name:Tongwei Student ID：S07653
Research paper supervisor:Dr.Seku Conde
Minzu University of China
2007-2008 Academic Year
Abstract:This paper is about after the Iraq war, the oil price sparkling impact on the economy of Iraq. There are two main aspects in the paper: the economy structure in Iraq after the war and the international oil price impact on economy in Iraq. By analyzing the relation between the demand and supply and the reconstruction of Iraq, the paper gets the conclusion: The increase of the international oil price improves the profit and makes the GDP in Iraq better, but the essential status of the economy doesn’t become better because of the capital plunder and the reconstruction.
Keyword: equilibrium, reconstruction, inflation, oil price
Part1. The background of Iraq economy and situation
(1) Iraq economy：
The backbone of the economy is oil, and it plays the most important role in Iraq. Iraq's economy is dominated by the petroleum sector, which has traditionally provided about 95% of foreign exchange earnings. In the 1980s, financial problems caused by massive expenditures in the eight-year war with Iran and damage to oil export facilities by Iran led the government to implement austerity measures, borrow heavily, and later reschedule foreign debt payments; Iraq suffered economic losses of at least $100 billion from the war. After the end of hostilities in 1988, oil exports gradually increased with the construction of new pipelines and restoration of damaged facilities. Current GDP per capita of Iraq grew 56% in the Sixties reaching a peak growth of 57% in the Seventies. But this proved unsustainable and current GDP per capita consequently shrank by 23% in the eighties. [1]
(2) The Iraq war:
The war is illegimate, and the war is not justicial. The essential is that US wants to control the oil in the Middle-East. The 2003 invasion of Iraq, from March 19 to May 1, 2003, was spearheaded by the United States, backed by British forces and smaller contingents from Australia, Poland and Denmark. A number of other countries were involved in its aftermath. The invasion marked the beginning of the current Iraq War.
According to the President of the United States George W. Bush and Prime Minister of the United Kingdom Tony Blair, the reasons for the invasion were "to disarm Iraq of weapons of mass destruction (WMD), to end Saddam Hussein's support for terrorism, and to free the Iraqi people." Blair said the actual trigger was Iraq's failure to take a "final opportunity" to disarm itself of nuclear, chemical, and biological weapons that U.S. and coalition officials called an immediate and intolerable threat to world peace. In a January 2003 CBS poll, 64% of Americans approved of military action against Iraq. 63% wanted President Bush to find a diplomatic solution rather than going to war with Iraq, and 62% believed the threat of terror would increase if war was waged with Iraq. [2]
(3) The international oil circs:
After the war, the oil price goes up sustaining. The main reason is that the demand and the depreciation of the US dollar. During fiscal year 2004-05, oil prices reached levels unattained since NYMEX (New York Mercantile Exchange) crude futures were launched in 1983. NYMEX WTI (West Texas Intermediate benchmark crude oil) and IPE (International Petroleum Exchange) Brent futures averaged US$48.8 and US$46.5 a barrel, respectively, during the year compared to US$33.7 and US$31.0 a barrel, respectively, in 2003-04. NYMEX WTI and IPE Brent peaked at US$60.5 and US$59.3 a barrel respectively on 27 June 2005 and touched a low of US$38.4 and US$35.9 a barrel respectively on 2 July 2004.The rise in oil prices during fiscal year 2004-05 was due to various factors, namely OPEC’s limited spare capacity in oil production, the financial problems encountered by Yukos, the major oil-supplying company in Russia, geopolitical tension in the Middle East, violence in Nigeria, increased activity by hedge funds and US refinery problems.[3] The table below shows movements in world oil prices for the years 2001-02 through 2004-05. The chart below shows the daily movements in international oil prices during 2004-05. [4]
After trading below US$40 a barrel in June 2004, oil prices rose above US$40 a barrel in July 2004 on weak weekly US crude stocks reports. Against this background, OPEC cancelled its 21 July 2004 ministerial meeting in Vienna, but decided to go ahead with the second stage of the agreement reached at its 3 June 2004 meeting, in terms of which supply quota would increase by a further 500,000 barrels per day (bpd) with effect from 1 August 2004. Financial problems faced by the major Russian oil-supplying company, Yukos, put more pressure on oil prices. In August 2004, market conditions worsened and oil prices went up further. With little spare capacity left to OPEC members, except Saudi Arabia, the world oil market became more vulnerable to supply disruptions and further price spikes. This in turn attracted more buying interest from hedge funds betting that prices could go even higher. Moreover, political tensions in the Middle East, violence in Iraq and Yukos’ plight undermined traders' confidence in the security of supply. As a result, many countries, including the United States, India, South Korea, Taiwan and China, increased their strategic inventories, reducing supply to an already tight market. At the close of August 2004, however, oil prices eased to some extent as big speculators cashed in profits on news that Iraq would resume its oil exports.[5]
Part2. The model of demand and supply about the oil market
N. Gregory Mankiw says: the crucial ingredient of the price is the demand and supply about the commodity. [6]Oil is also a kind of commodity, so it is determined by the international D and S.
1. The factors impact on the demand and supply of the oil
First, the whole trend of the world economy, After growth of less than 2 per cent for over two years, the world economy is gaining momentum. Following the setbacks caused by the prospects of war in Iraq and the outbreak of severe acute respiratory syndrome (SARS) early in 2003, economic growth in an increasing number of countries shifted to a measurably higher gear in the second half of the year, raising the growth of gross world product (GWP) for 2003 as a whole to 2.5 per cent. Despite some lingering uncertainties and downside risks, the economic recovery is expected to strengthen and broaden further, raising global economic growth to 3½ per cent in 2004. The growth of world trade is expected to reach 7½ per cent in 2004, up from 4.7 per cent in 2003. The improved performance and outlook does not, however, compensate for the subdued growth of the previous two years when world per capita output failed to increase.[7]
Second, international financial market. Developing countries received an estimated $95 billion in net capital flows in 2003, a modest increase from 2002 and only slightly more than one half of the average annual amount in the mid-1990s (see table II.2). FDI and official loans and grants were the only net sources of capital inflow. While FDI was still the most resilient capital flow, it was unchanged from the relatively low level of 2002 (see following section). For the transition economies, FDI and commercial bank lending were the main sources of net capital inflow in 2003.
Private financial flows: Foreign investor sentiment towards emerging markets improved as 2003 progressed, bolstered by improvement in the domestic situation of a number of countries, including Brazil, Turkey and Uruguay. This was reflected both in new flows to selected emerging economies and in the reduction of the spread between the yield on emerging market bonds and that of the risk-free benchmark United States Treasury bonds during the year (see figure II.6). The decline in the yield spread was particularly sharp on bonds of a number of Latin American countries and Turkey, which had earlier been pushed to very high levels by financial crises and political concerns. Yield spreads on Russian bonds reached a historically low level towards the end of the year. In addition, the sovereign credit ratings of a number of developing and transition economies were upgraded, including raising Russian sovereign debt to investment grade. Positive investor sentiment was also supported by the improving international economic environment, low interest rates and the strengthening global economic recovery.
Official flows: Official financial flows to developing countries in 2003 reflected a mix of reduced anti-crisis multilateral lending, especially by the IMF, and increased aid flows. Net IMF flows are beginning to decline as crisis concerns in developing countries begin to recede. In addition, it will be important to ensure that the recent increase in aid does not falter.[8]
2. The curve:
The equilibrium of the D and S;
Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.
The demand curve shows how the quantity of a good depends upon the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand [...]
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