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no war ...i very real possibility.

  1. quid

    73 Posts.

    As far as the financial markets are concerned, we're already in combat with Iraq. Both stocks and bonds already have a war premium factored in, meaning that prices are lower than they otherwise would be, given such fundamentals as the state of the economy, corporate profits and the rate of inflation (see story).

    Both businesspeople and consumers are also assuming war is inevitable. Most firms are putting major projects on hold, waiting to see what develops in the Middle East, while consumers remain fretful (although they are still spending -- see story).

    However, there is one market where the thinking is going the other way, and that's petroleum futures. Rather than rising in anticipation of war-induced shortages, prices for petroleum to be delivered throughout next year and the year following are declining.

    After futures reached as high as $31 per barrel, oil for delivery next month traded below the $26 at the end of last week. And if you want to lock in delivery for December 2003, you'll pay in the neighborhood of $23 per barrel.

    When it comes to geopolitical developments that might have an impact on the availability of oil and its price, oil traders have their ears closest to the ground. If they thought a war was coming that would constrict supplies, they would be bidding prices higher -- not just in the spot market, but in the futures market as well. See Futures Movers.

    Tricky tea leaves

    So does this mean oil traders think one way or another on the key question of whether Saddam Hussein will comply with U.N. demands and give up his weapons of mass destruction? It's a definite maybe.

    Since the risks of noncompliance with U.N. demands are enormous, it's not unreasonable to assume that Saddam knows that he must give up his weapons today, in order to remain in power tomorrow.

    And what a tomorrow it could be. Once the United Nations is satisfied that Iraq's weapons are destroyed, it would undoubtedly recommend that the economic sanctions that for years have constrained Iraq's oil exports and international trade be lifted.

    This would be good news and bad news.

    The good news is that Iraq would jack up its oil output, thus putting downward pressure on oil prices.

    Oil could quickly fall to $20 per barrel or less -- especially since the Organization of Petroleum Exporting Countries is already producing more than its stated quotas. This would give corporate profits a shot in the arm -- not to mention household buying power.

    The bad news is that Saddam would once again have prevailed in an international confrontation, thus boosting his stature among critics and enemies of the United States. He also would have enough money to rebuild his weapons stockpile, if he chooses.

    Dr. Irwin Kellner, chief economist for CBS.MarketWatch.com, is the Weller professor of economics at Hofstra University.

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