- The Washington Times - Tuesday, February 11, 2003

NEW YORK, Feb. 11 (UPI) — War between the United States and Iraq may still be only a possibility but it hasn't stopped oil traders from stocking up in the event the shooting starts in the coming weeks.

Anxious buying pushed crude for March delivery up 96 cents on the New York Mercantile Exchange Tuesday to a near two-year high of $35.44 per barrel, erasing the losses of the previous day and continuing an upward trend that is showing up at gas pumps across the nation.

"Prices are moving higher than supply and demand warrant," said Carol Thorp, a spokeswoman for the Auto Club of Southern California. "We believe that this is in part a panicked response by wholesalers and retailers to an as-yet undetermined oil supply shortfall due to an as-yet unannounced war."

The nationwide average price for a gallon of regular gasoline has climbed 8 cents in the past week to $1.60 per gallon, a full 50 cents over the price a year ago, according to the U.S. Energy Information Administration.

"We expected some increase due to the ongoing strike in Venezuela and higher demand for heating oil brought on by colder temperatures in the northern states, but not on this level," Thorp marveled.

Aside from hurried efforts to reach a peaceful compromise on Iraqi weapons inspections, the showdown between the United States and Baghdad has the appearance of coming to blows in the near future.

The latest fuel added to the fire came Tuesday in the form of a message, apparent from Osama bin Laden himself, calling for a terrorist uprising against the United States should the Americans invade Iraq.

Because NYMEX trades for oil delivered in the next month out, the business taking place in New York and on the London and Singapore exchanges is conducted on the assumption that the parcels of crude they buy now could cost twice as much in March should Persian Gulf oil exports be disrupted.

While a disruption of tanker traffic out of the Gulf is not expected to leave the United States' oil supply high and dry, it will likely push the price of oil progressively higher as it moves through the refining process and to the pumps, not to mention the anticipated skyrocketing of maritime insurance premiums and thus, the tanker rates.

Some analysts speculated Tuesday that wholesalers and gas station owners were ratcheting their prices up in anticipation of gasoline becoming hard to find and more expensive to buy.

"Because the nation is not at war with Iraq, and prices appear to be increasing on the anticipation of war, it seems that we are seeing panic pricing," suggested Rose Rougeau, spokeswoman for AAA Texas.

Oil is not in short supply. The industry publication Platts said Monday that a survey had found that OPEC production in January had increased by 500,000 barrels per day to 27.1 million barrels per day and Iraq also recorded higher exports.

To the oil exporters, the ongoing saber rattling has been a windfall that has somewhat artificially raised prices for crude. On the other hand, a peaceful breakthrough in the Gulf, coupled with the fading of the oil strike in Venezuela, could result in a sharp decline in prices.

"It is a difficult time for OPEC," said Platts Global Oil Director John Kingston. "On the one hand, oil prices are still relatively high because the market is concerned about a possible war with Iraq. On the other hand…OPEC might be forced to cut back (production) drastically in the second quarter."

In the meantime, other analysts have been downplaying concerns that Iraq could launch a scorched earth policy in its own oilfields. CNN reported that Saddam Hussein was prepared to blow up wells and infrastructure that is designed to accommodate one of the world's largest oil reserves but has fallen on hard times since the 1991 Gulf War when economic sanctions were put in place that remain in effect today.

"Although Iraq has the second largest proven oil reserves in the world, the Iraqi oil industry is being held together by Band-Aids," said a recent report issued by the James A. Baker Institute for Public Policy at Rice University in Houston. "Oil production capacity in Iraq is dropping by 100,000 barrels per day annually and significant technical challenges exist to staunching the decline and eventually increasing production."

The Baker report estimated that it would cost Iraq $5 billion alone to overhaul its oil facilities on top of the cost of rebuilding the entire nation in the aftermath of a war, and western aid and investment will be required to bring Iraq up to its potential.

"To get to the oft-quoted 6 million barrels per day will take years and require massive expansion of infrastructure, billions of dollars in investment and a stable political environment," the report concluded. "War and its aftermath could further limit, not increase, Iraq's oil production."

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(Reported by Hil Anderson, UPI Chief Energy Correspondent)

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