The War With Iraq: Why the U.S. Won't Stop

FORECASTS & TRENDS E-LETTER

By Gary D. Halbert

December 17, 2002

THE WAR WITH IRAQ: WHY THE U.S. WON’T STOP

IN THIS ISSUE:

1. Al Qaeda Believes The US Is Weak & Won’t Go To War.

2. US Plans To Occupy Iraq With Permanent Military Force.

3. Regime Change: Implications For Saudi Arabia & Iran.

4. After Iraq War, The US Could Control World Oil Prices.

5. Market Implications & What To Do About Them.

Introduction

The Bush administration decided to allow the weapons inspections in Iraq, even though few believe the inspections will yield anything productive. The inspections are nothing more than a cover while the US finalizes its plans for a war on Iraq, probably in January or February.

There are many who hope that the weapons inspectors in Iraq will find nothing and that the threatened war against Saddam Hussein will never happen. In this issue, I discuss why my best sources believe a war with Iraq is virtually inevitable, regardless the outcome of the weapons inspections.

The Big Picture

I read so many articles and analyses which suggest that the only reason the United States will wage war in Iraq is so that President Bush and his cronies in “big oil” can control Iraq’s vast petroleum reserves. I have not believed this from the beginning, and I still don’t. There are others who contend that the only reason the Bush administration has continued to saber-rattle over Iraq was to insure a Republican victory in the mid-term elections and regain control of the Senate. I didn’t believe that one either.

I believe that what is driving the war on Iraq is something very different.

In a nutshell, the US will not back down from a war on Iraq because of the message it would send to al Qaeda and terrorists around the world. After eight years of Bill Clinton, the terrorists believe the US is fundamentally weak and will not resort to war. Should Bush back down, this would send a message that could accelerate terrorist attacks on America.

Secondly, should the US defeat Saddam Hussein and occupy Iraq, we would be in a position, as never before, to reshape the Middle East and combat al Qaeda. Some of my sources believe that the Bush administration has made a decision to occupy Iraq with a permanent military presence to fight terrorism across the Middle East.

Clearly, there are risks associated with a war on Iraq. American lives will be lost. But whether we agree or disagree, it appears the Bush administration will attack Iraq, eliminate Saddam Hussein and establish a powerful US military presence in the region for years to come. Again, we can agree or disagree, but here’s why this is likely.

Al Qaeda: The US Is Fundamentally Weak

Al Qaeda has persistently argued that the United States is fundamentally weak when it comes to war. From Beirut in the 1980s to Desert Storm, Bosnia, Somalia and some would even argue the Afghan war, al Qaeda has maintained that the US has failed to act decisively and conclusively. Unwilling to take casualties, Washington either has withdrawn under pressure or has refused to take decisive but costly steps to impose its will. Al Qaeda has argued repeatedly that the United States should not be feared because, at the end of the day, we lack the will and commitment to fight a real war.

In that context, and with Bush having made Iraq the focus of the War On Terror, a decision to back down now would send a clear message to al Qaeda. Specifically, that the US doesn’t have the stomach for a real war (unlike Afghanistan), especially not against a heavily armed country like Iraq which is believed to have chemical and biological weapons.

Bush’s New Foreign Policy

Several sources I read believe that President Bush has adopted a new, more aggressive foreign policy in the wake of 911. Specifically, as the world’s lone superpower, he is thought to believe we should use our military might to its fullest in the War On Terror, stamp out al Qaeda and its sources, and if we liberate oppressed masses along the way, that’s all the better.

Additionally, my sources believe that President Bush has decided, once and for all, that the US must have a dominant, permanent military presence in the Middle East. Not for the sake of occupying Iraq, but rather to be able to fight the War On Terror directly and bring peace and stability to the region, instead of having to depend on others.

From a military standpoint, Iraq is the perfect spot in the region. In addition to removing Saddam Hussein and allowing a new democratic government to form, there is no better spot in the Middle East for the US to establish a permanent military force. Iraq sits in the middle of and shares borders with Jordan, Syria, Turkey, Iran, Kuwait and Saudi Arabia. It also borders on the Persian Gulf, which is convenient for our naval forces.

If this analysis is correct, and if the US defeats Saddam Hussein, the United States could quickly become the most powerful military force in the region. Iraq already has military bases which could easily be taken over by our forces. The US would be able to deploy a substantial ground and air force capable of bringing pressure to bear within a 360-degree radius. Some of my sources believe this is the intention of the Bush administration.

Of Course There Are Risks

The most obvious risk is that Saddam Hussein proves to be a more formidable enemy than the US thinks. US military planners seem to be working on the assumption that large numbers of Iraqi generals will surrender early-on in the attack. This may be true, but there may also be a significant number in and around Baghdad that will fight to the end to protect Hussein. Of course, there is also the question of whether or not Hussein will use chemical or biological weapons against our forces. It remains to be seen if public support for the war would remain if large numbers of US casualties are incurred.

There is also widespread hatred of the US in the Middle East. It is uncertain whether or not a US attack on Iraq would spawn an anti-US Islamic coalition around the region. While it can be argued that the US could defeat Saddam Hussein and occupy Iraq, with or without an anti-US coalition, it could make things more difficult and costly.

There is another argument that a US invasion in Iraq would strengthen al Qaeda, at least initially. The thought is that there would be so much outrage over the US occupation that al Qaeda would see its ranks swell with new recruits. That may be true, but there is no indication that al Qaeda is having difficulty recruiting now.

Then there is the question of our allies. Most of Europe opposes a war on Iraq. They will oppose it even more if the plan is to establish a permanent US military force in Iraq. But the question is, what can Europe do if the US really has its mind made up? Answer: not much, really.

Likewise, the Russians oppose the war on Iraq, at least publicly. However, as I have suggested in previous issues, I believe the Russians will come along, at least privately. Remember that Iraq owes Russia something like $8-10 billion, and that’s a lot of money to the ailing Russian economy. And just in the last few days, Iraq cancelled some large, lucrative drilling contracts with LUKOil, the largest Russian oil company. If the US promises to repay the Russians from Iraqi oil sales and re-institutes the drilling contracts, I think it’s safe to assume the Russians can get onboard, perhaps even if they learn that the US plans to maintain a permanent military force in Iraq.

Implications For Saudi Arabia & Iran

The Saudi royals have two fears: 1) growing al Qaeda power within the kingdom; and 2) the United States. Currently, they fear the former more than the latter. But how does that change if the US has a couple of hundred thousand soldiers, plus plenty of equipment and air power inside Iraq? I would say it changes things a lot! The implications for Saudi Arabia are huge. If the US places a large, permanent military force in Iraq, we no longer have to placate the Saudis. If Saudi Arabia continues to refuse to take strong action against its known al Qaeda operatives, the US could simply send a few armored divisions in to do the job for them.

While the situation is different, US occupation of Iraq, with a large, permanent military force, poses a similar problem for Iran. As another member of the Axis of Evil, our presence in Iraq could lead to regime change in Iran as well – one way or the other.

War For “Big Oil”? We’ll Soon Find Out.

It is said that the price of oil depends largely on the existence of, or non-existence of, a couple of million barrels per day. Without the extra couple of million barrels per day, oil can be at $20, or even at $30 per barrel as it is today, or even higher. But with that extra million or two barrels per day, which is within Iraq’s production capacity, the price of oil could fall to $15 per barrel or even $10. With the US in control of Iraq’s vast oil resources, the US could effectively control the price of oil worldwide. $10 oil, by the way, is devastating to the Saudis, but it would be a boon to the world economy.

Every time I write anything about the war on Iraq, I get e-mails from people who assure me that the war is about nothing but handing Iraqi oil over to big US oil companies. I would expect that the Bush administration would allow US oil companies to assist in operating Iraq’s oil fields, production facilities and exploration, in addition to the French and the Russians. But to assume the US is simply going to “give” Iraq’s vast reserves to Big Oil is a bit much I think.

It looks like we will find out one way or the other pretty soon. Most of the military strategists I listen to believe the Bush administration wants to invade Iraq in January or February. Who knows if that is the timetable? But whenever it happens, and assuming the US is successful in defeating Saddam Hussein, the price of oil should begin to drop shortly after the Iraqi production comes back online. If it doesn’t, then I will give more credence to the argument that this war is more about Big Oil than the War On Terror.

Conclusions

It looks increasingly as if the US will not only attack Iraq and remove Saddam Hussein, but will also establish a permanent military presence in the oil-rich country. Our military presence in the region, some believe, will lead to regime change in other Middle East countries such as Iran and perhaps even Saudi Arabia. Stratfor.com, the highly respected global intelligence service, offered the following on December 11:

“For the United States, fighting and winning a war against Iraq has become a strategic imperative. Although it is true that this war could engender greater support for al Qaeda among the Islamic masses, the consequences of not attacking Baghdad -- from Washington's perspective -- could be worse. But even more important, a victory and U.S. occupation of a conquered Iraq would reshape the political dynamic in the Middle East. The United States would be in a position to manipulate the region on an unprecedented scale.”

Several sources I follow believe that January or February is the most likely time for a US invasion of Iraq to begin. However, I wonder if such speculation is based more on seasonal/weather concerns in Iraq, as opposed to good intelligence. It remains to be seen how long the Bush administration chooses to allow the inspection game to continue.

What is a reasonable assumption, I believe, is that if the inspectors find any weapons of mass destruction, or if the inspectors are prohibited from visiting key sites, the US will launch the war shortly thereafter.

With the US in control of Iraq’s vast oil resources, we would be in a position to control world oil prices. Specifically, oil prices should fall significantly when Iraqi production comes back online. This would be very bad for Saudi Arabia but very good for the global economy.

Only time will tell if this analysis is correct.

Market Implications

On the assumption that there will be a war on Iraq, and that it will be a relatively short war that is successful, the market implications could be very similar to what they were in 1991 during Desert Storm. Currently, the stock markets are very vulnerable to any perceived bad news. The markets have moved up significantly since the October lows with no serious downward corrections along the way. The Dow Jones and the S&P 500 could easily fall back to the 7,500 and 840 areas, respectively (which would fill some chart gaps), if it becomes clear we are going to war with Iraq.

Treasury bonds, as was the case in Desert Storm, could see a bounce on the upside if it becomes clear that we are going to war. But with interest rates as low as they are, this may not be a move worth pursuing.

If the war goes well, the equity markets could turn sharply higher, just as they did in Desert Storm. The S&P 500 Index rose 35% in the 12 months following the Desert Storm low. If this is correct, then the “war correction” could provide another excellent buying opportunity.

I continue to recommend market timing strategies for a good portion of your equity and bond portfolios, especially given the many uncertainties in the outlook just ahead. My new 12-page Special Report on Market Timing is available free of charge at our website www.profutures.com. You will see it on the homepage.

Holiday Publishing Note

Because Christmas is next week, I probably will not publish another E-Letter until the week of December 30.

Christmas is a very special time at the Halbert house, especially with two young children (ages 12 & 10).

Let me wish you a joyous holiday season with your loved ones!

All the best,

Gary D. Halbert

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