Don't Discount Saddam's Capacity to Add Fuel to This Fire

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The killings of the two Israeli soldiers in Ramallah, the escalating strife between Israel and Arabs, and the suspected terrorist attack on the U.S.S. Cole, offshore Yemen, have combined to wrench the outlook for oil back toward a price-shock scenario. Indeed, crude moved up 11% Thursday, its biggest such increase in more than two years.

This extraordinarily tight energy situation, mixed with presidential election politics in the U.S., brews a potentially explosive mix.

But added to those tensions, there's another worrying wild card, one that should not be discounted. The almost-predictable Saddam Hussein could emerge rather quickly as the harbinger of even nastier news. There is a palpable and clearly undesirable sense that he will do something to ignite the situation. Here is the rationale.

Saddam Hussein has only reason for being: to appear relevant and powerful both inside his country and in the Arab and Muslim worlds. It is always difficult for Americans and Westerners to realize the attraction that a Saddam-like figure exerts on the masses in the Middle East, and on their pervasive feeling of cultural, religious and political repression at the hands of the West.

Pulling 1 or 2 million barrels per day from the world oil supply, even if it would essentially amount to a starvation policy for the Iraqis, would propel the price of oil to $50 per barrel overnight and wreak havoc.

This is not far-fetched. Thursday morning, news reports from Baghdad raised the specter of cutting off oil exports, ostensibly because Iraq prefers to be paid in euros rather than dollars, the currency of an enemy state. The notion of oil as a weapon was also invoked earlier this week by the presumably friendly-to-the-U.S. Saudi Arabia, which hinted at possible retaliatory action to protest Israel's use of force in the Middle East. Last Monday. Saudi Crown Prince Abdullah warned that his country "wouldn't sit idly by, if Israel were to attack Syria or Lebanon."

Carried out ahead of election day, such a move by Saddam Hussein would prove an enormous challenge for Al Gore's ticket, simply because the Clinton Administration has committed itself to keeping oil prices from spiraling out of control, by using the Strategic Petroleum Reserve. And there is a strong chance that consumers in the U.S. Northeast, if they see oil above $50 a barrel and gasoline above $3 a gallon, will vent their frustration on the current administration.

Carried out after election day, assuming for a moment that George W. Bush wins the election, Saddam would relish providing a stringent test for the rookie U.S. president and reopening his Gulf War battle with George H. Bush, now through his son. That's because in Middle Eastern politics, everything is personal. Images of President Bush appear on the doorsteps of some buildings in Baghdad, affording visitors the opportunity to step on his image. That is the ultimate disrespect in that culture.

Saddam now has a chance to shape the American election and almost certainly influence its aftermath. The likelihood of him seizing the opportunity, distasteful as it may be, is high.

How will events play out in the financial markets? Discuss it on our Middle East board.

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