Less than a week before we in America celebrate 228 years of independence, another sovereign nation was born halfway around the globe. Power was handed over on June 28, 2004 to an interim government in Iraq, two days before the officially announced target date. While the war has been fraught with controversy, both here and abroad, this peaceful transfer of power is without a doubt a good thing. The trouble in Iraq is not over, but we can hope that stability will come all the sooner.
Aside from any political perspectives, the changeover was clearly viewed as a step in the right direction by the markets. In passing this milestone, the US continues to move in the direction of exiting Iraq at some point in the future. The uncertainty associated with the war is thus reduced, a good thing for equity markets.
On the news, oil prices dropped sharply , with crude futures down about $1.30. Gasoline prices are also falling. Iraqi terminals are moving millions of barrels of crude each day, and repairs from attacks continue. These price declines are a clear sign that oil traders and others moving that market are feeling more confident about the future of Iraq’s oil industry. While it’s too early to gauge the ultimate effect on prices, the immediate reaction is indicative of a perception among market watchers that the migration of power to the Iraqis is a good thing.
There are difficulties to be overcome in the days ahead. Martial law has been mentioned as a possible last resort mechanism to keep the peace in the short term. At the other extreme, many express the firm belief that insurgence will wind down now that there’s no real reason (such as an American in a position of power) to stop the country from being rebuilt. Depending on the speed with which such challenges are dealt with, the economic revival in Iraq will build momentum.
The country represents a burgeoning market for the provision of goods and services ranging from infrastructure to consumer goods. Schools have reopened, electricity access has improved, and reconstruction is progressing nicely. Consumer goods such as cell phones and televisions are selling rapidly. The needs (and wants) of the Iraqi people form a long list, and a lucrative market for purveyors of the desired items. Companies from around the world stand to gain by providing the things the Iraqi people need and want and have long been denied.
Although some naysayers view the lack of celebration among the Iraqi people as a sign that the fledgling government lacks support or credibility, others are far more optimistic. Conditions for many have improved radically since the end of Saddam Hussein’s regime, and others are likely to see significant advances in the weeks to come. According to one poll, some 75% of Americans approve of the transfer of authority; the positive signals sent by both oil and equity markets also indicate a “thumbs up.” Only time will tell whether the route to freedom is a smooth one for Iraq, but even if it’s a rocky path, at least it’s in the right direction.