"Oil War" Can Become Real War?

As talk of war against Saddam Hussein intensifies, U.S. companies have scaled back oil purchases from Iraq, making the loss of Iraqi oil less important to energy markets should fighting erupt.

Still, energy traders worry that an attack against Iraq might embroil the Persian Gulf in chaos and disrupt supplies from other countries, including Saudi Arabia. Those concerns contributed to the run-up up in oil prices last week when crude for several days jumped to $30 a barrel.

Energy analysts said Saudi Arabia, the world's largest oil producer, may well be the key to whether any U.S. attack on Iraq has worldwide repercussions on oil markets. Soaring oil prices could choke off the struggling U.S. economic recovery by forcing up the cost of everything from gasoline and heating oil to airfares.

That's one reason the Bush administration has been so busy mending frayed relations with the Saudi kingdom, including the unusual visit by Saudi Arabia's ambassador, Prince Bandar bin Sultan, to President Bush's ranch in Texas this week.

But industry analysts say the loss of Iraqi oil if other supplies are not affected should be of little consequence. Already, Iraq's exports are a fraction of what they were earlier this year.

U.S. imports of Iraqi oil dropped from more than 1 million barrels a day earlier this year to 137,000 barrels a day last month, according to industry estimates. U.S. oil companies slashed their Iraqi purchases because of concern over future supply and frustration over cumbersome purchase and pricing procedures.

Iraqi production also has been severely hampered by U.N. sanctions and a decimated oil infrastructure.

"We've seen Iraqi supplies shut down completely this year for a month and you didn't have any dramatic swings (in supply or prices)," said John Felmy, chief economist for the American Petroleum Institute, the industry trade group. "There's excess capacity throughout OPEC and non-OPEC countries."

But traders still are fretting not only about Mideast war prospects but about what the Organization of the Petroleum Exporting Countries oil ministers will do Sept. 19 when they map out future production levels.

After last June's OPEC meeting "the assumption was that they would increase production in September," said John Kingston, global director for oil for Platt's, a subsidiary of McGraw-Hill. But with OPEC countries already producing 1.8 million barrels more than the levels agreed to in June, a higher production quota is now unlikely.

And no one knows what influence the Iraqi situation might have on the meeting.

The recent oil price increases are the result of "a war premium," said John Lichtblau, chairman of the Petroleum Industry Research Foundation. "If it weren't for this nervousness, (oil) prices would be in the mid-20s."

Instead, the price of benchmark West Texas crude soared past $30 a barrel last week as Vice President Dick Cheney forcefully outlined the administration's case for attacking Iraq and Bush continued his criticism of the Iraqi regime. This week, prices have receded somewhat, closing at under $29 a barrel Wednesday, still up about 60 percent since the beginning of the year.

So far, the increases have not been felt by consumers. Gasoline prices, despite strong demand, have increased only slightly, averaging $1.40 a gallon this week, 8.5 cents cheaper than a year ago, the Energy Department's Energy Information Administration said.

"Gas prices have been surprisingly flat," EIA analyst Doug MacIntyre said. He also said heating oil inventories were adequate, but that could change as demand rises and supplies tighten.

If war breaks out, Saudi Arabia will be looked upon to make up any supply losses. Saudi officials have tried to reassure the markets that they are prepared to take actions to stabilize oil markets.

But some analysts, and some Arab leaders, fear that if Iraq is attacked, it might foment such political pressures across the Persian Gulf that Saudi officials and other major Arab producers might have to rethink their oil policies.

Daniel Yergen, chairman of Cambridge Energy Research Associates, says an attack on Iraq and cutoff of its supplies could cause prices to spike to $35 to $40 a barrel, but then retreat once buyers are assured that supplies from other countries are not disrupted.

During the 1990-91 Gulf War, oil prices spiked to $41 a barrel, but receded when it became clear Saudi fields were not threatened.

"The real problem would be if other Persian Gulf suppliers were affected by the conflict," Yergen wrote recently in an op-ed article in The New York Times. "Then prices could climb far higher."

Subscribe to Pravda.Ru Telegram channel, Facebook, RSS!

Author`s name Editorial Team