- The Washington Times - Tuesday, January 21, 2003

Oil prices have spiked near two-year highs and are within reach of a record despite OPEC's promised increase in production, analysts say, because of the threat of war with Iraq and a political impasse in Venezuela.
Oil prices hit $34 a barrel in New York trading as Iraqi tensions rose last week. Analysts say prices are likely to rise to $35 per barrel or higher in the next month if crises in Venezuela and the Persian Gulf continue. In the event of U.S. military action against Iraq, prices could jump above the $40 record set during the 1991 Gulf war.
If that happens, President Bush is likely to open the Strategic Petroleum Reserve to help tame prices.
The $10-per-barrel jump in oil prices this year and uncertainties in the Persian Gulf are depressing U.S. and world economic growth.
Economists say higher prices would pose new dangers for the sluggish and fragile economic recovery.
"A messy war and higher price of oil would sap confidence, hurting spending. The economy could plunge into a deep recession," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. He estimates that a sustained oil price increase in the past year has shaved growth by 0.5 percent and raised inflation by 1 percent.
Mr. Sohn and other analysts forecast continuing economic growth this year, but note that troubles lie ahead if the White House and Pentagon fall short of a quick, decisive war.
One analyst said oil prices could soar to $50 or more, creating widespread economic pain, if Iraqi President Saddam Hussein attacks and disables oil production facilities in Kuwait or Saudi Arabia, as well as Iraq, in retaliation for a U.S. invasion.
Saddam rained destruction on Kuwait's oil fields in the 1991 war. In anticipation for new attacks, Kuwait has been bolstering security around its oil facilities.
A quick resolution to both the Iraq and Venezuelan crises would lead to a decline in oil prices and growth stimulation later this year, analysts say.
White House war planners in the summer did not anticipate the sudden loss of oil exports last month from Venezuela, which provided critical supplies to the United States during the 1991 war.
The Venezuelan oil strike, now in its 51st day, has caused prices to rise above $30 a barrel durign the past month. Yesterday, tensions continued to mount between strikers and Venezuelan President Hugo Chavez despite international efforts to resolve the impasse.
"Venezuela was considered to be a very secure supply source since World War II. This is the first time it's been disrupted," said John Lichtblau, oil economist with Petroleum Industry Research Foundation Inc. in New York.
Strikers shutting oil facilities down last month caused major damage, Mr. Lichtblau said, and it would take months for Venezuela to return to normal production levels.
The Organization of the Petroleum Exporting Countries last week agreed to raise production by 1.5 million barrels per day starting Feb. 1 to help make up for the loss of Venezuela's 2 million barrels a day.
Mr. Lichtblau says the increase is not enough and delays in the arrival of new shipments will ensure that oil prices remain high.
Saudi Arabia and other oil producers quietly raised production in the past month to show support to the United States and its allies. The replacement crude is still a few weeks' journey from U.S. refineries, where shortages are increasingly acute.
Analysts said the market reaction to OPEC's move is a warning sign that the production capacities of even prodigious suppliers like Saudi Arabia are limited and could be overwhelmed in the event of war.
"The price increase after OPEC's meeting illustrates the depth of the crisis brought on by the general strike in Venezuela," Cambridge Energy Research Associates said in a report last week.
The potential loss of another 2 million barrels a day from Iraq has added $5 to $6 to the price of a barrel of oil. Prices are likely to go much higher if a war in Iraq is prolonged and disrupts shipments from the Middle East a scenario that is not reflected in current market prices, analysts say.
Rep. Billy Tauzin, Louisiana Republican and chairman of the House Energy and Commerce Committee, is one of several lawmakers who have called on Mr. Bush to release oil from the strategic reserves.
Mr. Bush, who criticized such a move by President Clinton during the 2000 election campaign, has declined to do so but has allowed oil companies to postpone some shipments of crude scheduled to go into the reserve to increase the amount available for refining gasoline and heating oil.
Mr. Lichtblau said Mr. Bush likely wants to wait until military action begins, as his father did in 1991, before opening the reserves. In case of war, U.S. allies also would be likely to release some of their reserves, which total 1.3 billion barrels in the West.
The Center for Global Energy Studies, a Saudi-funded think-tank based in London, yesterday criticized the United States for its reluctance to use its own reserves and said the administration made a mistake by relying on OPEC to make up for the Venezuelan shortfall.
"The U.S. administration has become so focused on Iraq that it failed to act," the group said in a report.


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