Could the war in Iraq be an economic boon? Given the scale of human suffering that the war will bring in its wake, the question may strike some as monstrously insensitive.

That said, the economic consequences of war are a matter of considerable human interest and it cannot yet be ruled out that they will be benign.

It is still possible, if improbable, that the war will quickly be brought to a successful military conclusion, and that the subsequent Pax Americana will lay the foundations for an era of unprecedented stability in the Middle East.

If so, oil prices will fall, international equity markets will rally, and business and consumer confidence across the globe will recover to levels stronger than they would have reached in the absence of war.

It is also worth noting that most wars involving the US have stimulated the US economy because of the massive concomitant increase in military spending. It has helped, of course, that all of these wars have been fought in theatres outside the US, thereby sparing America the damage to its capital stock that other combatants have sustained.

For many of those other combatants, wars have been an unmitigated economic disaster. Iraq is a good example: largely because of Saddam Hussein's belligerence, Iraqi GDP per capita is estimated to be about 10 per cent of what it was in the late 1970s.

Analysing the consequences of the war in Iraq, for the industrialised economies in general and the US economy in particular, requires that three sets of questions be answered. What will be the effect of the war on government spending, principally US military spending? By how much and for how long will the war raise oil prices and with what consequences for economic activity? And, what will be the effect of the war on spending by households and firms?

The first question is probably the easiest to answer, and the least important. Already the US administration has sought sanction from Congress for a war budget of $63 billion (€58 billion). Granted this is likely to be an underestimate, possibly a huge underestimate.

Governments, after all, are systematically given to underestimating the costs of war, partly because they tend to underestimate their duration. As economist Mr William Nordhaus has noted, wars are disproportionately fought by those "who cannot count, refuse to count, count badly or belittle costs".

But, even if the eventual direct cost of the war in Iraq proves to be twice, three times or even five times the administration's estimate, it will not matter much from an overall economic perspective.

The current estimate is, after all, little more than 0.5 per cent of GDP. Multiply it by five and the amount is scarcely 3 per cent of GDP.

In former times, when wars had an undoubted stimulatory effect on economic activity, they cost an awful lot more. The Vietnam War is estimated to have cost the US the equivalent of 12 per cent of GDP, Korea 15 per cent, the second World War a colossal 130 per cent.

What effect will the war have on spending by households and firms? It seems obvious that it will be negative. War and its attendant uncertainties sap business and consumer confidence, depress financial markets and thereby reduce financial wealth, increase risk aversion and make it more expensive for firms to invest.

Most of these effects are already evident. It is reasonable to suppose that a long and bloody war would exacerbate them.

Certainly, one can imagine circumstances (the use of weapons of mass destruction, the spreading of the conflict to neighbouring countries, terrorist attacks on the US or the UK) in which the negative influences on households and firms' spending in the industrialised countries would become a good deal stronger.

The other questions posed related to the effects of higher oil prices? Actually, this question cannot really be separated from the second one. Part of the reason why the war on Iraq has been so corrosive of business and consumer sentiment, and so damaging for equity markets, is that Iraq is a major oil producer located in the middle of an important oil-producing region of the world.

However, rising oil prices have destructive effects in their own right. They reduce the disposable incomes of households and firms, and transfer purchasing power from oil importers to oil producers.

Unless the purchasing power thus transferred is quickly recycled - and the lesson from the past is that it won't be - rising oil prices will significantly reduce demand in the industrialised world, thereby adding to the other influences depressing demand, while at the same time raising costs of production.

What might the combined effect of all these influences be? Work done under the auspices of the Washington-based Centre for Strategic and International Studies (www.csis.org) provides some estimates. The CSIS research distinguishes between three war scenarios, ranging from the benign (a quick, relatively bloodless ousting of the Saddam regime with little collateral political or physical damage) through an intermediate case to a worst-case scenario (stiff Iraqi resistance, war lasting for up to six months, some use of weapons of mass destruction, engagement of Israel, extensive sabotage of oil facilities e.t.c.)

The benign war scenario produces an economic outcome superior to a "no war" scenario because it dissipates uncertainty at very low cost.

But there are serious adverse effects on economic performance under both the intermediate and "worst-case" scenarios.

In the latter case, oil prices spike up to $80 per barrel, the US equity market falls by 30 per cent, the Federal Reserve is forced to cut US interest rates to zero, and the global economy is plunged into severe recession, with US GDP falling by 4.5 per cent this year and euro-zone GDP falling by 2.5 per cent.

In the intermediate case (unexpected resistance, war lasting up to three months, some disruption of oil supplies, limited or ineffectual use of weapons of mass destruction), the economic damage is less dramatic, but still appreciable. Oil prices spike up to $40 per barrel, equity markets fall by 10 per cent, and the US and euro-zone economies sustain GDP reductions of 1.7 per cent and 1 per cent respectively this year.

At this juncture, the benign scenario is receding, and something along the lines of the intermediate case seems the most likely. We may yet be thankful that it is the one that eventuates: something much worse is possible.

Jim O'Leary lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie