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The possibility of war in the Middle-East grows everyday and by the time the last copy of this newspaper is sold, we would know whether the United States and the United Kingdom have given the go ahead for the first shots to be fired at Iraq in Gulf War Two.

It is not for this column to argue as to whether the war is justified or not, but to examine what we as a nation should do to prepare for the inevitable economic fallout from the conflict.

Some economic pundits are arguing that a short, sharp war would eventually benefit the world economy in the long run. Their contention is that the war would end uncertainty about the world situation and bring about a stabilisation of crude oil prices in the world market.

Yesterday oil prices climbed another dollar to a barrel closer to the $40 mark, double that of the price for a barrel of crude from just a year ago.

Iraq sits on the world's second biggest oil reserve. Its known reserves are around 112 billion barrels, five times that of the United States and half of Saudi Arabia's. As much as the war is about disarming the regime of Saddam Hussein, there is no doubt that the conflict is also about oil reserves.

A conflict would stop Iraq from releasing the limited quantity it is permitted to sell to the world market. In case the Iraqis adopt a scorched earth policy and destroy oil wells and also damage the coastline of its neighbours then the supply of crude to the world market would certainly reduce sharply and create a crisis.

Time magazine quoted experts recently as saying that the industrialised nations would be cushioned against shortages because they have strategic reserves which will keep them in oil for some time until the situation returns to normal.

The same magazine also speculated that if Iraq falls to the US and its allies, the country's output could be increased and sold at lower rates bringing oil prices to a new low with benefits to the entire world economy.

Whatever happens eventually, we in Sri Lanka have to brace ourselves for a period where we may have higher oil prices at least for a short while and even shortages. The Ceylon Petroleum Corporation has already asked consumers to conserve oil and rung alarm bells about possible interruptions in supply.

Sri Lanka's economy is vulnerable to the slightest downturn in the world economy as we are an export-dependent nation. Higher world oil prices would lead to less spare cash in our market countries and impact on the sales of many of our export products.

At the same time prices of goods and services in Sri Lanka would inevitably go higher with serious consequences for consumers. In this context we have to commend the government for initiating moves to liberalise the petroleum industry.

Indian Oil is ready to enter the market and the third operator is in the process of being chosen.

At the same time we as a nation have to accept that in the next decade or so, there will be periods when we will see volatility in the world oil markets and it is time we geared ourselves to deal with this situation.

Therefore a policy of building a larger strategic reserve that could soften the blows such as what we are about to receive, as the result of a war in the Gulf must be followed.

This must go hand in hand with a wider program to conserve oil consumption. This could entail extraordinary measures such as reducing the use of vehicles and the restriction on fuel allowances for politicians and public servants.

The government has commendably thought up ways of dealing with other bad effects of the war, but now must push a stronger program to ensure we save every drop of fuel we possibly can.

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