(FORTUNE Magazine) – Normally Kuwait's Burgan oilfield isn't much to look at: acres of rust-colored pipe, a few giant fuel tanks, and the occasional natural gas flare burning in the distance. There are no rising and falling oil derricks like the ones you might find in Texas or remember from J.R. Ewing's Dallas. That's because oil doesn't need to be pumped to the surface here. The black gold bubbles up on its own and then flows naturally down to a gathering center by the sea. Just sink a pipe 4,000 feet, and presto!--you have a gusher. Kabeer Burgan, or Great Burgan, as Kuwaitis affectionately call it, produces roughly a million barrels a day. "It is a gift from God," says Khaled Muhammad, an oil company employee, as he surveys the thrumming pipes. "The oil comes up under its own pressure."

But these are definitely not normal times in Kabeer Burgan. Overhead, Sea Stallion Marine Corps helicopters shatter the quiet of the desert, and farther out huge U.S. Army convoys rumble north toward the Iraqi frontier, about an hour's drive away. Those choppers, along with tanks and ground troops, may soon be moving through even more plentiful fields on the other side of the border as they head for Basra and Baghdad. The scene in Burgan is an apt metaphor for how oil and war often mix: If Iraq just exported oranges, after all, nearly 250,000 American troops probably wouldn't be in the region.

We're not saying this is a war for oil, as the tired antiwar slogans would have it. Trust us: There are easier and cheaper ways to get all the crude we need without touching a hair on Saddam's mustache. But the future of Iraq's reserves and their impact on world oil prices and U.S. economic expansion are among the most crucial elements of the present conflict. "The objective is not oil, but in the broad equation you cannot ignore oil," says Nader Sultan, the British-educated CEO of the national Kuwait Petroleum Corp. (KPC).

No, you cannot ignore oil. Each $10 increase in the price of a barrel of oil is like a $100 billion tax hike, slowing U.S. economic growth by more than half a percent over the course of a year. The $12 or so increase per barrel since November--insiders call it the "war premium"--threatens to tip the U.S. into recession. Conversely, a sharp decline in oil prices from their current $36 a barrel--close to a 12-year high--could help reignite the economy and spur war-wary consumers to start buying again. For example, if oil prices return to the low 20s after the war, that could inject $150 billion into the economy, far more than the rebates from President Bush's 2001 tax cut.

Indeed, while rebuilding Iraq's decrepit oil industry could cost the U.S. billions of dollars, that will be more than made up for by lower oil prices over the long term. For starters, $20-a-barrel oil would probably bring prices at the pump back down to about $1.35 a gallon, well below the current average of nearly $1.71. For a typical SUV driver, that's a savings of $228 a year.

In hard-hit, gas-guzzling industries, those are make-or-break savings. The airline sector is already a basket case, with United and US Airways in Chapter 11 and American threatening to follow. And even if the war results in lower oil prices, it will be too late to avert billions in losses as Americans cut back on travel plans. But over the long term the savings from cheaper jet fuel might enable the bankrupt giants to reemerge as viable companies rather than end up in the liquidator's boneyard. And while airlines are the most obvious beneficiaries, cheaper oil prices will boost the entire economy, from manufacturing to farming. Take the price of corn--a 40% decrease in fuel costs reduces the cost of producing a bushel of corn by 3 cents, according to Iowa State University.

That is the rosy scenario, of course. When prices move in the opposite direction, the same math applies, so no one should have any illusions about the economic impact of a long war or a cutoff in oil from the Persian Gulf region. If Saddam sets fire to his wells and attacks oil facilities in Kuwait and Saudi Arabia, oil could quickly rise past $40, setting the stage for the kind of recession that ended the first President Bush's political career.

No one knows for sure which way things will go. But if you have to make a bet, the most likely scenario is that a year from now, with a new regime in Baghdad and long-dormant Iraqi wells finally pumping out crude, oil prices will be back in the mid-20s. "All expectations are that prices will come down," says Kuwait Petroleum's Sultan. "The only gray area is when." Deutsche Bank analyst Adam Sieminski is bolder: If the war is short and Saddam doesn't set fire to his fields, crude will hit $22 a barrel by this summer.

For the global economy, that kind of relief couldn't come at a better time--and it's not just Iraq that will make it happen. OPEC, believe it or not, wants prices lower too. In the past decade the cartel's leaders and other oil producers have quietly agreed that the best place for oil prices is between $22 and $28 a barrel. For while high prices may fill OPEC's coffers in the short term, the oil barons know that $40-a-barrel crude will ultimately choke off economic growth and send prices plunging. In other words, there's no reason to think OPEC won't honor its promise to keep pumping in order to make up for any production lost during a war.

Which brings us back to Iraq. Iraq matters not just because it has more than 110 billion barrels in proven oil reserves, the second-largest supply in the world after Saudi Arabia. (America, in case you're wondering, has just 30 billion barrels.) No, what both Iraq and other Middle East producers have in spades is really, really cheap oil. While it costs roughly $15 to produce a single barrel of crude in the U.S., Iraq and its neighbors can do it for $5 a barrel or less. So they can sell oil to the U.S. at $22 a barrel and still make a tidy profit.

Once the war's over, Iraq could drive prices even lower. There is no love lost between Saddam and OPEC, and OPEC's leaders understand that the only way Iraq will get back on its feet is by opening the petroleum spigot. With Saddam gone and at least some semblance of normalcy restored, Iraq may expand production, making it hard for OPEC to keep prices from busting the bottom of that $22 to $28 band. "You could easily see an OPEC fight over this," says Fareed Mohalmedi, chief economist at PFC Energy, based in Washington, D.C. "The only force that has been able to restrict Iraqi output is the U.S. Navy."

The Kuwaiti men who come to Kamel Al-Harami's weekly diwanieh (gathering) to discuss politics and play cards can appreciate more than most what lies underneath the ground north of the border. Because if Kuwait floats on oil, then Iraq positively levitates. "Iraq has vast resources, and the oil is of better quality, with less sulfur than Kuwait's crude," says al-Harami, a former KPC official who is now an oil analyst in Kuwait City. "Iraq is just an incredible opportunity once Saddam is gone."

Because of the madness of Saddam and 20 years of conflict--first with Iran, then with the U.S.--Iraq has been on the sidelines of the oil world. What hasn't changed is Iraq's oil reserves--which will become even more important in the future as older fields in the U.S. and the North Sea wind down. Remember those 1,000-barrel-a-day wells in Kuwait's Burgan field we mentioned earlier? Some Iraqi wells can produce twice that. In West Texas, by contrast, a 100-barrel-a-day find is a gusher.

What's more, since most Western oil companies have been kept out of Iraq by war and UN sanctions, and because Saddam has invested in weapons rather than Iraq's petroleum infrastructure, large regions of the country have gone unexplored by oil surveyors. Many parts of the country, especially the empty western deserts where Saddam kept his Scud missiles during the last Gulf war, are at the top of the list for exploration. "There is huge potential," says Muhammad-Ali Zainy, a former Iraqi oil official who escaped Iraq in 1982, following the execution of two of his nephews. Now an oil economist in London, Zainy notes that Iraq added some 45 billion barrels to its proven reserves from 1971 to 1980 through exploration in the south. Unexplored areas could hold more than 100 billion more barrels.

Iraq's own oil experts and technocrats are another reason cheaper oil prices could follow the removal of Saddam. Face it: These guys are good. Despite almost no maintenance, bursting pipes, and little new drilling, Iraq has upped its daily production from 2.1 million barrels in 1998 to 2.5 million in recent months. So if the war is over quickly and Saddam doesn't destroy the fields, local Iraqi engineers should quickly be able to get the oil flowing again. American authorities know that and are quietly preparing to help Iraq rebuild the fields because it's in America's interest as well as theirs: The more oil the Iraqis pump, the less the U.S. has to pay to help Iraq rebuild. "They want to work with the Americans," Zainy says of his former colleagues in Baghdad. "The very top echelon is loyal to Saddam, but the rest are loyal to the country and the oil company." The Iraqis certainly have plenty of oil to pump--even at today's depressed levels, the Iraq National Oil Co. (INOC) controls more daily oil production than any publicly traded company in the world, including giants like BP and Exxon Mobil.

What if Saddam does go for a scorched-desert policy and sets fire to his wells? No doubt that would darken our optimistic scenario, perhaps pushing oil prices past $40 in the short term, but it won't change the long-term trajectory of oil prices. Just look at what happened in Kuwait, where the Iraqi army set fire to more than half of the country's 1,200 wells as they retreated in February 1991. Working from plans developed by KPC execs like Sultan, who was in London when the war broke out, roughly 10,000 workers from Bechtel and other companies had the fires out by late 1991. The conflagration and spills devastated Kuwait's environment and the Persian Gulf--but within two years production had returned to near prewar levels. Looking back now, Sultan says the key was having the plans in place even before the fires were set. With this in mind, the Pentagon has developed a strategy for firefighting if worse does come to worst in Iraq.

Sitting in his comfortable Amman office as he prepares to fly to London and Washington, and using flawless American idioms, it's hard to imagine that Issam al-Chalabi once sat face-to-face with Saddam. Before he fled Iraq after the invasion of Kuwait, al-Chalabi was the nation's oil minister from 1987 to 1990, overseeing tasks like the rebuilding of the Basra oil terminal after the Iran-Iraq war. "My God," says al-Chalabi of his meetings with Saddam. "You always felt afraid and tense." The prospect of getting rid of Saddam and eliminating the terror that has gripped Iraq for decades has electrified the large Iraqi exile communities in cities like Amman, London, and Detroit. "Every day I wake up and dream about the liberation of Iraq," says oil economist Zainy. "You cannot imagine it--I haven't seen Iraq in 20 years, and suddenly you have your dream. What can be a better feeling than that?"

If and when Iraq is liberated from Saddam, however, those good feelings will eventually be followed by some nasty squabbles as Iraqi exiles and local experts try to rebuild their once-great oil industry. Already there are signs of divisions. Zainy has been part of the State Department's Future of Iraq project, which has 17 groups focusing on issues like energy, agriculture, and the environment. The group dealing with oil has been quiet on specifics, but participants like Zainy favor an active role both for U.S. oil-service companies like Halliburton as well as for producers like ChevronTexaco and Exxon Mobil.

More recent emigres like al-Chalabi agree that the service companies will have to be involved but believe it should be several years before the big producers are allowed into Iraq. For decades Iraqi law has forbidden outside producers to drill and export oil, a legacy of the resentment bred when foreign oil companies made fortunes but paid their host countries pennies on the barrel. The oil companies have changed--profit-sharing agreements are much fairer now than in the bad old days--but al-Chalabi says Iraq's future government should be given a chance to rewrite the laws and decide how and when foreign companies will be allowed in. Of course, that might mean a long wait for U.S. and overseas firms hoping for drilling opportunities. Kuwait promised after the Gulf war to allow foreign producers into the country--but a decade later Kuwaiti politicians and oil officials are still arguing over how to do it. So it's anyone's guess when Big Oil will arrive in Baghdad.

For the service companies, however, the opportunity is very real. The State Department has already asked for bids on a $900 million contract to repair Iraq's damaged infrastructure, from roads to schools. In the oil sector, it's not just the wells that will need work--pumping stations and pipes were targeted by the U.S. during the first Gulf war because Saddam used them as part of his military command-and-control system, according to Deutsche Bank's Sieminski. He says just fixing the damage and decay will cost up to $1.5 billion, with Halliburton and Schlumberger ideally placed to get the work. Halliburton is certainly no stranger to Iraq. The firm built Iraq's giant Mina al-Bakr oil terminal near Basra in the early 1970s and then repaired it following the Iran-Iraq war. Schlumberger, meanwhile, has roots in Iraq going back to 1934, when the firm recorded the data from some of the earliest wells drilled in the country. Those records, along with data from the following decades, still sit in Schlumberger's files.

Schlumberger and Halliburton have been out of Iraq since the first Gulf war because of UN sanctions, but both companies could be back for a long time once Saddam is gone. Repairing the damage is one thing--regaining pre-1990 production levels of 3.5 million barrels a day will require up to $5 billion over the next two to three years, says Zainy. If additional billions are invested, Iraq's daily production could double to seven million barrels by 2009.

But all that lies in the future. First, more immediate issues must be confronted--the war, the fate of Saddam and his henchmen, and the creation of a new government to rule postwar Iraq. Al-Chalabi, for one, has some advice for the U.S. officials who may soon run Iraq. While the U.S. can ensure order in the streets and maintain Iraq's borders, he explains, Americans shouldn't be making day-to-day decisions about Iraq's oil. "It's not in the interests of the Americans or the Iraqis," Chalabi adds, displaying a rare moment of passion in an otherwise measured conversation. "If Americans take control, then all the people who said this is a war for oil will be right."

In the end, after the guns have gone silent and the soldiers have returned home, it's unlikely that al-Chalabi's fears about Americans in the fields will come to pass (President Bush has made that clear) or that this conflict will be considered a war for oil. But that doesn't change the fact that one benefit in the years and decades ahead is likely to be cheaper, more plentiful energy supplies, thanks to the oil that flows naturally from Iraq's desert wells. And that will benefit Americans and Iraqis alike.