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Thursday, April 4, 2002
Mideast oil embargo unlikely
Expect higher gas prices this summer as the cost of U.S. crude oil continues to rise
By Bruce Stanley
Associated Press
LONDON - A threatened Iraqi-led oil embargo against the United States would almost surely fail, energy analysts said Wednesday, but the worsening conflict between Israel and the Palestinians is keeping world oil markets on edge.
   U.S. crude prices have jumped 36 percent since the beginning of February, and consumers are likely to see higher prices at the pump as the peak summer driving season approaches.
   Crude futures prices dipped after spiking to six-month highs on Tuesday, when Iraqi Foreign Minister Naji Sabri declared in Kuala Lumpur, Malaysia, that Arab countries have the right to coordinate their policies to put pressure on Israel and its defenders.
   Fresh data from the American Petroleum Institute showing an unexpected buildup in U.S. inventories of oil and gasoline deflated some of the concern about a potential Iraqi disruption in crude exports.
   Iraqi boycott
   May contracts of light, sweet U.S. crude were 29 cents lower at $27.42 a barrel in afternoon trading on the New York Mercantile Exchange. In London, contracts of North Sea Brent crude were down 38 cents at $27.28 a barrel on the International Petroleum Exchange.
   Peter Gignoux, head of the petroleum desk at Salomon Smith Barney, scoffed at the idea that Iraq would be able to organize an effective boycott of oil exports to Western customers. Iran's Foreign Minister Kamal Kharrazi said in Malaysia that such a boycott could work if it had backing from many oil producers.
   "An Iraqi-led oil embargo just doesn't impress me at all," he said. "The 'short-term-ism' that we're seeing in this market - this rally - is based on a few comments by some of the world's most unreliable leaders."
   Ali Tahghighi, an analyst at Barclays Capital, said oil prices should stabilize, barring a major escalation in tensions in the Middle East - home to two-thirds of the world's proven oil reserves.
   "I think prices are a bit overdone right now," he said. "I don't think the possibility of a disruption justifies a continued increase like the one we've seen in the past few weeks."
   As of the close of business Tuesday, U.S. crude futures had surged by 36 percent since Feb. 1. Brent futures rose by 38 percent during the same period.
   The increase is even steeper if measured from Nov. 19, when crude futures bottomed out following the September terrorist attacks. U.S. front-month futures for light, sweet crude have ballooned from an intraday low of $16.70 a barrel on Nov. 19 to a high Tuesday of $28.10.
   'Middle East premium'
   "We think the price is really too high for the fundamentals, the economic side of the argument," said Leo Drollas, chief economist at the Center for Global Energy Studies.
   Taken by themselves, the physical supply and demand for oil would suggest an average price for Brent crude of $23.50 during the second quarter of the year, he said. Drollas argued that the Israeli-Palestinian conflict together with uncertainty about Iraqi supplies has added "a Middle East premium" of $3 to each barrel of crude.
   Costlier crude is filtering through to the pump. Drollas estimates that the U.S. retail price for unleaded gasoline was 20 percent higher on March 21 than for its average in February.
   Retail gas prices in Britain have risen more slowly, as taxes account for as much as four-fifths of the pump price - much more than in the United States.
   "The price is not as good as it was two months ago, but it's still not going to be horrific," said Gignoux. He noted that production of gasoline has increased and that retail prices are still lower than last year.
   Last embargo was 1973
   In Washington, White House spokesman Ari Fleischer expressed skepticism similar to Gignoux's about the effectiveness of a boycott.
   "The two states that have said something about this topic are Iran and Iraq," Fleischer said. "They have not been met with agreement anywhere in the Arab world."
   Middle Eastern oil producers last embargoed the West in 1973, as a result of the Arab-Israeli war in October of that year.
   Since then, the world's wealthiest nations have created the International Energy Agency to provide a cushion against any similar disruption.
   Based in Paris, the IEA can tap into 4 billion barrels of strategic oil reserves maintained by its member countries.
   That's equal to more than five years of Iraqi production, based on the IEA's estimate of Iraq's January output.
   Eager to fill the gap
   If Iraq did lead an embargo, other producers would be eager to fill the gap, analysts said. Non-Arab producers such as Russia, Mexico and Norway would likely pump more oil, as would Saudi Arabia, the world's largest crude producer and exporter.
   Unless it feels compelled to make a gesture of support on behalf of the Palestinians, Saudi Arabia is expected to quietly boost production to keep crude prices from rising so high as to jeopardize a recovery in the global economy.
   "Saudi Arabia and Kuwait won't let it get out of hand," said Tahghighi of Barclays Capital. "They see the recovery in demand as paramount."

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