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Bringing Clarity to a Fuzzy Big Picture

By Elliott H. Gue on Dec. 2, 2015

Iraq invaded Kuwait in the early morning of Aug. 2, 1990, quickly overwhelming its much smaller neighbor’s security forces and prompting government officials and some of the Kuwaiti military to retreat into Saudi Arabia. Iraq eventually grew the occupation force to about 300,000 soldiers.

The US-led coalition’s defense of Saudi Arabia, or Operation Desert Shield, officially began Aug. 9. After a series of diplomatic efforts to force Saddam Hussein to withdraw his troops from Kuwait, the coalition launched Operation Desert Storm on Jan. 16, 1991, with a massive air offensive. The ground offensive began on Feb. 24, effectively defeating Iraq’s army by the end of the day. Four days later, Kuwait had been liberated and US President George Bush declared a cease-fire.

This conflict had significant implications for global oil supply. After Iraq invaded Kuwait, Saddam Hussein controlled about 20 percent of the world’s total estimated reserves.

Iraqi forces also set fire to Kuwaiti oil fields and damaged critical infrastructure as they withdrew from the country.

In the year prior to the Gulf War, Iraq produced about 2.8 million barrels of oil per day, Kuwait flowed 1.41 million barrels per day and Saudi Arabia lifted 5.64 million barrels per day; in 1991, Kuwait produced 185,000 barrels per day and Iraqi output plummeted to 285,000 barrels per day.

Kuwaiti production didn’t recover to its prewar peak until 1993, and Iraqi output didn’t top 2.8 million barrels per day until 2011.

WTI crude-oil hovered between $20 and $25 per barrel at the beginning of 1990, before slumping to a low of about $15.30 per barrel in June. After Iraq’s invasion of Kuwait and the start of Operation Desert Shield, oil prices surged, peaking at $41.02 per barrel on Oct. 11.

These gains were short-lived. By the end of December 1990, oil prices had tumbled to $25 per barrel—the level where they began the year. And by the time US and coalition forces launched airstrikes against Iraq in January 1991, oil prices had slipped to less than $20 per barrel.

Bottom Line: At the height of the Gulf War, oil prices actually declined.

The 1990-91 experience resembles the current environment in many ways, at least from a supply and demand standpoint. At the time, Saudi Arabia, Kuwait and other OPEC members continued to flood the market with oil in an attempt to squeeze out high-cost production and regain market share lost between 1973 and 1985, when the organization scaled back output in an ill-fated effort to support prices. (See Lessons from the Past.)

And back then, some OPEC members argued that the organization should reduce output to bolster prices—one of the motivations behind Iraq’s invasion of Kuwait and threats against Saudi Arabia.

In short, the global oil market faced a significant oversupply in 1990 that limited the effect of production disruptions caused by the Iraq war. Similar conditions exist today.

 

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