Toppling Saddam Hussein raises key economic questions because in terms of oil reserves, Iraq is second only to Saudi Arabia in importance globally, writes Cliff Taylor, Economics Editor.

This weekend ministers from OPEC countries meet in Vienna and are expected to announce an increase in production to help hold down the price of oil. Tension over possible war in Iraq and the impact of a general strike in Venezuela have combined to push prices to two-year highs in recent weeks.

However, while OPEC may calm the market for a short period, the real test for oil prices is still to come. If the US does lead an invasion on Iraq, the outcome will have implications for oil supply and prices not only in the months ahead but for years to come.

Iraq is the country with the second-biggest proven oil reserves in the world. This means that in terms of known supplies of oil that can almost certainly be recovered, it is second only to Saudi Arabia in importance. Precise estimates vary, but reliable figures put Iraq's proven reserves at around 112 billion barrels of oil, 10-11 per cent of the world total.

However, even this figure is likely to understate Iraq's true potential. It is thought to have a further 200 billion barrels of probable and possible oil resources and may even have considerably more in its unexplored western region.

Whatever the motivations for an attack on Iraq, it is thus clear that any toppling of Saddam Hussein will throw up two key economic questions. First, in the short term, what might it mean for oil prices? And second, if the current regime ends, what will happen to the oil?

The likely short-term impact on oil prices has been the subject of much recent speculation. Fear of war - combined with the impact of the Venezuelan strike - have sent the price of a barrel to more than $30 (€28.6) recently, a 25 per cent increase in a matter of months. Prices have eased slightly in recent days in anticipation of a decision by OPEC this weekend to increase production to help stabilise the market. An increase of one million to 1.5 million barrels a day - a 4 to 7 per cent rise in OPEC output - is expected.

Iraq's oil industry has been severely affected by the embargo which followed the 1991 Gulf war. Under a UN "food for oil" programme, it currently supplies almost two million barrels a day to world markets. This is not insignificant in terms of total global daily production of 76 million barrels.

Increased production from other oil-producing members could make up the shortfall in the event of war halting Iraqi supplies. The billions of barrels held in the reserves of the major industrialised countries could also help to overcome any shortfall, as happened during Desert Storm in 1991 when 2.5 million barrels a day were released onto world markets, mainly from strategic reserves, helping to hold down prices as Saddam burned Kuwaiti oil rigs on his retreat.

But if the strike in Venezuela continues, this would add pressure from another front, as it normally supplies some three million barrels a day to world markets.

The nervousness in the markets, however, relates more to the possible implications of war to the wider Middle East, which supplies about 30 per cent of the world's oil. The list of possible scenarios is long. What , for example, if Iraq aims to disrupt oil exports by targeting missiles at a couple of key ports? Or if the conflict triggers political instability in neighbouring countries, particularly Saudi Arabia, which supplies 11-12 per cent of the world's oil and has almost one-quarter of the proven reserves?

Much speculation by analysts has gone into mapping out various war "scenarios" and assessing their likely impact on oil prices. The consensus is that a short and successful US-led invasion might - at worst - lead to a sharp rise in prices for a short period, perhaps to $35, before prices fell back below current levels.

More optimistic analysts argue that a substantial war premium is already built into the oil price. They believe that, provided it became clear that the military effort would quickly succeed, a significant upward move could be avoided and the price of oil could fall back sharply, perhaps fairly quickly returning to as low as $20 a barrel.

The impact of a more prolonged conflict is very difficult to assess. If it was confined to Iraq and did not affect wider Middle East oil production, oil prices might, analyst believe, remain in the $30-$40 a barrel region.

Any more widespread impact on Middle East production could obviously lead to more serious and prolonged increases. These could take a heavy toll on international economic activity, despite the fall in reliance on oil from 45 per cent of total energy in the mid-1970s to around 35 per cent today.

The International Monetary Fund estimates that a $5 increase in the oil price would add about 0.3 of a percentage point to the inflation rate in the US and EU and reduce growth rates in both economies by about 0.4 of a point. Perhaps more serious would be the impact of any prolonged price rise - or of a lengthy political crisis - on global economic confidence, which is already fragile.

Given Iraq's substantial reserves, what would happen if Saddam were removed would also be highly significant. Considerable uncertainty still surrounds US plans for the administration of the country, if Saddam were deposed. Reports this week said that the US planned to use revenues from Iraq oil sales to help to reconstruct the country, but there has been no official confirmation of this.

The control of Iraq's oil industry will be a major issue in any reconstruction plan. Substantial investment would be needed to return its decrepit oil-production infrastructure to pre-1990 levels - up to $5 billion according to some estimates from US bodies.

However, the investment would yield a clear return to those who benefited from the resultant revenues. Clearly what happened would be of huge interest to the OPEC countries. Would the US seek to boost production and ignore OPEC quotas? Does it see control of Iraqi oil as insurance for its own oil supplies in the long term? Or does it plan to hand over control to private sector US interests?

If it comes to this, there are obviously major political as well as economic implications. These relate not only to the other Middle East countries but also to some countries whose support Mr Bush has been seeking for military action, particularly Russia and France.

Two major Russian companies, Lukol and Zarubetzhneft, have signed agreements with Saddam's regime to develop areas of the Iraqi oil fields. These are of limited worth for as long as sanctions remain but could be of enormous value if Iraqi oil can again be freely sold on world markets. These deals would, presumably, be null and void if Saddam's regime fell.

The question then is what happens to control of Iraqi oil reserves post-Saddam? Do US oil companies lead the charge, closely followed by Russia and France? And who then sets the policy for Iraqi output? Such questions are impossible to answer at the moment but will have major implications for the oil market in the years ahead.

Reserves equal 118 days' imports

Oil supplies about one third of Ireland's total energy needs, down from 45 per cent in the early 1970s. Ireland's entire oil needs are imported. The bulk of it - about two-thirds - comes from the British North Sea fields, while the other major source is Norway, from which we buy about 25 per cent of oil imports.

Like all industrialised countries, Ireland maintains oil reserves designed to minimse the adverse impact of any supply disruption. In a recent Dáil reply, Mr Dermot Ahern, the Minister for Natural Resources, said that Ireland held more than 2.1 million tonnes of oil in its reserves, equivalent to 118 days of imports. These are made up of stocks held directly by the National Oil Reserves Agency - which oversees our reserves - and stocks held by oil companies and major consumers. Most of these stocks are held in the Whitegate refinery and associated Whiddy Terminal - now owned by the US company Tosco - while some stocks are also held in storage facilities in other EU member-states.

In the event of a significant oil supply disruption, the release of the stocks would be overseen by the International Energy Agency, an autonomous OECD body of which Ireland is a member. Under that regime, member-states would be entitled to a share of available oil in the event of a reduction of at least 7 per cent in normal supply levels. The Minister told the Dáil he was satisfied that emergency stock levels were sufficient to minimise the adverse impact of any global oil supply disruptions that might result from hostilities in the Middle East.