Article: U.S. Must Retaliate... But At Whom?

No one doubts the Sept. 11 terrorist attacks on the United States will impact the global economy. The destruction of the World Trade Center bodes ill for nearly all sectors of all economies -- whether in Asia, Europe or Latin America.

The oil market, however, is a different beast entirely. Both political and economic events drive the crude market, and the next few years will be no exception. Prices will spike precariously in the weeks ahead as the United States seeks revenge. That, in turn, will probably herald a long-term decline in the value of black gold.

Even before the first of the World Trade Center towers collapsed at 10 a.m. EST, oil prices were skyrocketing. Markets hate instability, and such a devastating attack on the world's financial nerve center is about as unstable as things can get. It didn't help that the New York Mercantile Exchange, one of the world's largest trading floors for oil futures, is at the edge of the World Trade Center complex.

In response to the attacks, Brent crude -- the industry benchmark -- shot up to $31.30, the first time in 2001 that the price topped $30. Only a promise from OPEC to keep supplies flowing, even if it means bringing extra production on line, managed to drop prices down to $29.20. Meanwhile, there are some reports of price gouging at gas stations across the United States.

That price spike in crude, however, is likely a harbinger of things to come. Right now markets are holding their breath, waiting for the American response. The timing, placement and ferocity of that response will determine the future of the oil market for the next few months.

What is clear is that there will indeed be an American response. One simply needs to look at the United States' track record.

In 1998 terrorists bombed two relatively minor American embassies in Africa, killing 12 American citizens. On Sept. 11, more than 10,000 Americans were believed to be killed in attacks at the world's most important financial building and in America's military command center.

In 1998 the United States retaliated by firing about 75 cruise missiles at targets in Afghanistan and Sudan. The American response in 2001 will be chilling in its totality, to say the least. It is true the United States has a different president and national security team than it did when the embassies in Kenya and Tanzania were bombed, but U.S. President George W. Bush is hardly known for seeking multilateral, negotiated solutions.

If the ultimate target is Afghanistan, the oil markets will bubble -- but since it is so far from transport routes, they will ultimately smooth over. If the target turns out to be Iran or Iraq, however, the implications for what could become an outright war will radically shift the makeup of the oil market. Both Iran and Iraq supply about 3 million barrels daily to global markets. If either state turns out to be the guilty party, the United States will likely pull no punches. Oil assets will probably be considered legitimate targets.

America's short-term response could shock prices to fresh highs in the near term, and the cost will be a mid-term recession that could probably trigger an oil price collapse.

All of the major global economic poles are teetering on the edge of recession. Japan is poorly managed, debt-ridden and being kept alive by stimulus packages. Europe, preparing to introduce its new joint currency, is unable to take the decisive action necessary to spur growth. The major economies of France, Germany and Italy are either contracting or close to it.

Finally, there is the United States itself. The American recovery began only recently. But the destruction of the world's financial nexus, the interruption of the financial markets, the suspension of the world's largest stock exchanges, the grounding of the entire commercial air fleet, a short-term spike in oil prices, the sheer cost of rebuilding and insurance claims that could run into the tens of billions is all but sure to ground the economy for several months. Since the world needs a thriving United States to pull it back to strong performance, the economic future is grim.

The impact of a global recession on the oil markets will be deadly. As Asia, Europe and the Americas contract -- something that hasn't happened simultaneously since the Great Depression -- the bottom will fall out of the oil market.

The long-term future of the oil market depends on a single factor: Which state helped the terrorists? If the world's operating hypothesis -- that an oil-producing Middle Eastern state was involved -- holds true, then the United States must seek to reduce its dependence on energy supplies from that region. Since that region holds two-thirds of all known oil reserves, that all but translates into not just weaning the world's largest energy consumer off of Middle Eastern oil, but off of oil period.

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