While businesses are betting that Gulf War II will follow the pattern set by Gulf War I–short, followed by a quick drop in oil prices–everyone is pondering the alternative. The worst-case scenario above was drawn up at the Center for Strategic & International Studies in Washington by a panel including former U.S. State Department staff and economists from Goldman Sachs and Deutsche Bank, who gave it a 5 to 10 percent probability. The chance of a less significant escalation: 50 percent.
The problem with short-war scenarios is that much has changed since 1991. Iraq may defend itself more aggressively than it defended its hold on Kuwait. And the world economy is now in worse shape, less able to respond to shocks. (Interest rates are already too low to be cut much further in the United States and Japan.) A war that leads to terror attacks and severs oil supplies could send oil to $80 a barrel, says the Institute of Directors, a London association of corporate managers. In real terms that’s as high as the oil spike of 1980, and could trigger the IoD’s “move to the moon” scenario: a 30 percent drop in stocks, a collapse of housing prices, a 2 percent fall in U.S. GNP, global deflation. “I’m still optimistic,” says IoD chief economist Graeme Leach, “but the risk of something very bad happening is greater than it’s been any time since the 1930s.” With optimists like that, who needs worst cases?
