- The Washington Times - Thursday, April 20, 2006

The rapid run-up in gasoline prices to more than $3 a gallon in much of the Washington area and other major cities appears to be causing drivers to cut back and poses risks for economic growth in both the United States and the world economy, analysts say.

“It is likely that higher prices are going to last and that … we have to adjust to a situation that is going to last,” said Rodrigo Rato, head of the International Monetary Fund. But the process of cutting back on driving and seeking greater fuel efficiency will have the immediate effect of slowing growth here and around the world.

“The impact of higher oil on the global economy has so far been moderate, but it remains a serious risk,” Mr. Rato said.

He made his remarks as the price of premium crude oil backed off slightly from a record near $72 a barrel in New York trading on reports from the Energy Department and American Petroleum Institute showing demand for gasoline has dropped about 1 percent from year-ago levels as drivers apparently reacted to the spring’s sharp spike in gas prices.

The high price of oil and gas also has helped entice idled refineries and production facilities on the Gulf Coast back into action. Royal Dutch Shell PLC announced that its gargantuan Mars platform will get back to pumping 140,000 barrels of oil a day next month, after it finishes repairs of extensive damage caused by Hurricane Katrina in August.

A move by U.S. drivers to cut back on gas and use more fuel-efficient vehicles — although fleeting and amounting to no more than 1 percent of U.S. gas consumption — helped deflate gas prices from record highs over $3 a gallon in the fall, and likely would help temper prices this summer as well if it is sustained, analysts say.

Outside of demand in the United States and other nations, the biggest factor driving up oil and gas prices has been the standoff between Iran and the U.S. over Iran’s nuclear program, which promises to heat up in the coming week in advance of an April 28 United Nations deadline for Iran to stop enriching uranium.

“The first Category 5 storm of the season is here. … And the ‘eye wall’ of this geopolitical fury looks like it may be tracking a direct hit on the world’s already vulnerable oil supplies,” said Peter Tertzakian, author of a book on world oil consumption called “A Thousand Barrels a Second.”

“Iran has a couple of very big oil trump cards and it knows how to brazenly flash them around,” he said, noting that Iran’s 4 million barrels a day of oil production constitutes 5 percent of the world’s supply, and Iran controls half of the Strait of Hormuz, an artery through which 20 percent of the world’s oil supplies flow.

“Any military action threatening Iran de facto threatens this strait and all that passes through it,” he said. “In addition, countries on the other side of the Persian Gulf from Iran — for example Qatar, the UAE and Kuwait — are generally considered by Iran to be complicit with the West, and whose oil fields are therefore potential targets for Iranian missiles should this geopolitical ‘storm’ really hit hard.”

Mr. Tertzakian expects that the United States, Europe and Japan will release oil from their strategic reserves if Iran retaliates against any U.N. sanctions by cutting off oil supplies. A release of oil from the reserves helped to tame oil prices and keep them below $70 for months after the Katrina-induced spike.

But because Iran controls such a large chunk of the world’s oil supplies, Mr. Tertzakian said it is not clear dipping into the emergency reserves would be as successful this time.

Iran and its allies in the Organization of Petroleum Exporting Countries have taken advantage of recent tensions to help drive the price of crude to record levels, with oil prices touching a record Wednesday after the Iranian president said prices received by oil producers remain too low.

Venezuelan President Hugo Chavez yesterday predicted oil prices would reach $100 a barrel should concern over Iran’s nuclear weapons capability lead to a U.S. invasion.

Speaking to reporters in Brazil, Mr. Chavez said the United States’ “bellicose statements and the American president’s threats against Iran” were responsible for the high cost of oil, adding that “Iran is a country that is prepared for war.”

“Hopefully there will be no war, for that would destabilize the Middle East even more and could bring oil production in Iran and other countries to a complete standstill,” he said.

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