COVER

DOVES OF WAR

NORA UNDERWOOD January 28 1991
COVER

DOVES OF WAR

NORA UNDERWOOD January 28 1991

WAR VICTORIES, MARKET HOPES

COVER

OPTIMISM PROPELS STOCKS AND OIL

New York City oil broker Thomas Bentz spent most of last week monitoring several flickering computer screens, a television set and at least six telephones in his 20th-floor office near the southern tip of Manhattan. Since Iraqi President Saddam Hussein invaded Kuwait last Aug. 2, Bentz and hundreds of other oil traders in financial centres around the world have been working frantically to predict the future price of crude oil—fearing that a full-scale war could send prices skyrocketing to $60 (U.S.) a barrel or higher. Bentz was at home on the night that the U.S.-led coalition forces launched an air attack on key military targets in Iraq and Kuwait. But by the time he arrived at work at 7 a.m. the following morning, oil prices were plummeting, a sure sign of optimism among traders that the war would not disrupt oil supplies from the Middle East. “Tensions were building and building for weeks,” Bentz said. “It felt like the air was finally let out of the balloon.”

A similar—and surprising—sense of relief swept financial markets around the world in the

first 24 hours after the attack. Business leaders, investors and economists generally agreed that a swift victory for the multinational coalition would result in lower prices for gasoline and heating oil, giving consumers and industry more money to spend on other goods. Less tangibly, but equally important, they said that a speedy victory could dispel a dark cloud of pessimism that has hung over Canada, the United States and their major trading partners since last August. Declared Edward Yardeni, chief economist with the New York-based investment firm Prudential-Bache Securities Inc.: “The economy could get a tremendous boost if this war comes to a successful resolution quickly.”

Panic: Last week’s sudden optimism contradicted earlier predictions that the outbreak of war would trigger a wave of panic among investors, driving stock prices down and forcing oil prices up. Declared Finance Minister Michael Wilson on the morning after the initial bombing raids: “Markets have done what they tend to do from time to time—confound the experts.” Wilson added that the economic con-

sequences of war in the Persian Gulf could turn out to be far less than earlier feared. But he cautioned that the ultimate impact of the conflict on the recessionary economies of Canada and the United States would depend on how the war progressed and how quickly it ended.

In the immediate aftermath of last week’s assault, however, most investors appeared confident of an early victory over Iraq. In New York on Thursday, the Dow Jones industrial average of 30 stocks shot up by more than 114 points to close at 2,623—its biggest one-day g gain in three years. On Fri= day, stocks rose again in less I frenetic trading, and the Dow Jones closed the week at 2,646. Markets in Tokyo, I London and Toronto were 00 also buoyed by investor optimism. The Toronto market climbed by 45 points over two days of warfare, closing the week at 3,210.

But it was the price of oil that fluctuated most wildly last week. Early in the week, as the UN deadline neared, anxious traders bid up the price of a barrel of the benchmark West Texas intermediate crude by $4.71, to $32. “This market is like a cricket dancing on a hotplate,” said Peter Beutel, an energy analyst for Hoboken, N.J.-based Pegasus Econometrics Group Inc. Beutel added: “There is a psychological fear something dreadful could happen to oil production in the event of war.”

Jittery: Soon after the fighting began, however, most oil traders appeared to cast aside those concerns. The consensus among analysts was that U.S. warplanes had weakened, or perhaps even eliminated, Iraq’s ability to launch strikes against large oilfields and pipelines in Saudi Arabia, the world’s largest oil exporter. As a result, oil prices dropped by $10.56, to $21.44—the largest one-day drop in history. In a further attempt to calm jittery traders and avert hoarding by large commercial buyers, U.S. Energy Secretary James Watkins announced that Washington will sell more than 33 million of its 586 million barrels of oil from its reserves over a 30-day period.

In fact, most analysts say that the increase in the price of oil since Iraq’s invasion of Kuwait last August was a result mainly of psychological pressures rather than any real shortfall in supply. Declared Richard Carl, an energy analyst with Toronto-based investment dealer Loewen Ondaatje McCutcheon & Co. Ltd.: “There is more oil out there than we ever expected.” For his part, Charles Shultz, president and chief executive officer of Gulf Canada Resources Ltd. of Calgary, said that he expected crude-oil prices to fall to below $20 a barrel once the Middle East conflict is resolved. He added: “The fact is that there is no shortage of

oil, even with Kuwait and Iraq out of business since Aug. 2.” The main reason: Saudi Arabia has stepped up production to replace oil formerly exported by Iraq and Kuwait.

With the spectre of a widespread and bloody war appearing to recede, most economists also predicted that there would be a sudden postwar surge in consumer confidence and spending. That, in turn, could hasten North America’s recovery from the recession.

“If the war is short, consumer confidence will rebound,” said economist Carl Beigie of McLean McCarthy Ltd., a Toronto-based investment firm. Beigie added that consumer confidence would probably remain at current levels if war is prolonged.

Cut: Lower oil prices might also ease the pressure on interest rates, reduce the cost of mortgages and make it easier for businesses to borrow money for expansion.

For months, Bank of Canada governor John Crow has been keeping rates high to fight inflation, in part because of concerns about rising oil prices. But last week, most major Canadian banks cut their prime rate—a benchmark for other loan rates—by half a percentage point to 12.25 per cent, its lowest level in two years. Some banks and trust companies also cut mortgage rates by a quarterto a half-percentage point to 12 per cent for most terms.

Still, some experts caution that Canada’s economy is so weak that even a postwar surge in consumer spending would do little to counteract the recession. Sherry Cooper, chief

economist at the Toronto-based investment dealer Bums Fry Ltd., for one, cautioned that any buying spree will likely be brief. Regardless of the duration of the Gulf crisis, she added, Canada’s unemployment rate will likely rise to more than 10 per cent over the next year, from its current level of 9.3 per cent.

If initial successes of U.S. and coalition air

forces pointed to a shorter conflict, experts noted, that could reduce the chances of large wartime profits for major North American defence contractors. Indeed, most manufacturers of large military equipment said that they have yet to reap any large new orders from the Gulf crisis. They added that they were unlikely to benefit even from a war lasting several months. The reason: the United States and its major allies still possess huge inventories of

tanks, planes and ammunition stockpiled during the Cold War. “If you lose 1,000 M-l tanks, are you going to buy a bunch more? I don’t think so,” said Lawrence Korb, a former assistant U.S. defence secretary who is now a program director at the Brookings Institution in Washington. “The army will still have 7,000, which is more than enough to handle the crises that may arise in the new world order.”

Moreover, many manufacturers said that it would take them at least several months to fill any new orders that did materialize. General Motors of Canada Ltd.’s London, Ont., plant, for one, supplies both the Canadian Forces and the U.S. Marine Corps with armed troop carriers. GM spokesman Dennis Lang said that while the marines are currently using an unspecified number of the vehicles in the Gulf, the factory already has enough orders for the carriers to keep it busy until early 1992. “It would take us until a year from now to begin production on a new order,” he said.

Deadline: Manufacturers of gas masks, boots and other small items, however, had increased production as the Jan. 15 deadline approached. Now, many of those companies say that they may be left with unsold inventory. Ottawa-based Simunition Technologies Inc. began selling survival kits to journalists and civilians last fall. The kits, priced at $350 each, include a gas mask and a Swedishmade protective suit. Last week, the company was packaging 100 kits each day, having just received 10,000 new gas masks from its supplier in Montreal. “People think that this was a big bonanza,” said Simunition’s managing director, David Luxton. “But it’s tough to figure out how long the demand will last.”

Meanwhile, some Canadian oil industry specialists say that they hope to win contracts in Saudi Arabia and Kuwait when the war is over. Robert Sayers, president of Red Deer, Alta.based Red Flame Oilwell Fire Blowout Specialists, is one of only a handful of contractors worldwide who specialize in extinguishing and capping burning oil wells. Last year, he capped three wells in Iran that had been ignited by Iraqi troops shortly before the 19801988 Iran-Iraq war ended. Said Sayers: “I became an instant millionaire, thanks to the Iranians.” Last week, Sayers was standing by in case his services are required again.

But amid last week’s optimism, there was also a sobering note of caution. Although economic prospects appeared to be improving, citizens of the world’s leading industrial nations were already paying a human price to repel Saddam Hussein’s aggression.

JOHN DALY with PATRICIA CHISHOLM in Toronto

PATRICIA CHISHOLM

OIL’S ROLLER-COASTER RIDE

Prices in U.S. dollars per barrel of West Texas intermediate crude

SOURCES: AMERICAN PETROLEUM INSTITUTE, PLATT'S OILGRAM PRICE REPORT