- The Washington Times - Tuesday, August 10, 2004

Oil prices shot up to a record $44.84 a barrel yesterday after a Shi’ite Muslim uprising forced Iraq to shut down a pipeline feeding its Persian Gulf export terminals.

Despite soaring oil prices, the average price of regular-grade gasoline eased last week to $1.877, the lowest in three months, reflecting ample stocks of high-grade fuel blends as the United States nears the end of its peak summer driving season, the Energy Department said.

Although the threat of disruptions of overseas oil supplies has been constant this summer, U.S. refineries enjoyed a remarkably trouble-free summer and experienced no major disruptions in their race to produce the clean summer fuels required by environmental regulations.

However, this month’s run-up in oil prices, which many analysts say are headed for $50 or higher, bodes ill for consumers during the home-heating season, when households once again will be confronted with budget-busting utility bills, analysts say.

The high energy prices cut into consumer spending power, particularly among low-income households that spend a large portion of their take-home pay on fuel. Economists say oil prices at $50 or higher would cut economic growth in the United States significantly.

“If oil hits $50, it would stifle growth” around the world, said Daniel Yergin, chairman of Cambridge Energy Research Associates, who says the odds are even that oil prices will rise to $50 within weeks.

Mr. Yergin noted that even the slightest threat to oil supplies has sent prices soaring because producers have about 2 percent spare capacity in case of an emergency — a margin that is slimmer than it was during the 1973 oil crisis.

Deutsche Bank yesterday warned clients that oil prices could spike to $100 if two major disruptions occur in exports in hot spots around the world, from Russia to Venezuela to Iraq.

But Mr. Yergin said he thought such a scenario was unlikely, because such high prices more likely would cause a collapse in demand among consumers first.

Prices in the $40 range already have slowed growth in the United States, although the high prices have not appeared to significantly slow double-digit increases in oil consumption in China, the fastest-growing market.

Another factor weighing against extreme oil prices, Mr. Yergin said, is that the United States and other nations would be likely to tap into their Strategic Petroleum Reserves to prevent major disruptions from causing a recession-inducing oil spike.

In all but the most dire supply disturbances, a large release of strategic reserves could prevent oil prices from exceeding $50 to $60, he said.

More than 130 incidents of sabotage in the past year have prevented Iraq, which has the potential to be one of the world’s biggest oil producers, from even maintaining the 2 million barrels a day of exports it achieved before the U.S. invasion last year.

Exports from northern Iraq already have stopped because of damage to key pipelines. Yesterday, the threat by the Shi’ite Mahdi’s Army to sabotage the Basra oil terminal, which processes 80 percent of Iraq’s exports, cut off the rest of the country’s 1.8 million barrels per day production flow indefinitely, officials in Iraq said.

U.S. Energy Secretary Spencer Abraham indicated that yesterday’s cutoff of Iraqi oil does not qualify as an emergency that would prompt the administration to inject oil reserves into the market. He said growth in consumption in the United States and Asia has been the main driver of high fuel prices.

“We will use our oil reserves if there is a severe disruption in supplies, but those reserves are not to manipulate prices,” he told CNBC. “The reason we have a Strategic Petroleum Reserve is to protect us in the event that somebody, whether it is terrorists or otherwise or, you know, just an act of nature, disrupts oil production significantly.”

Also roiling oil markets and sending premium crude prices up 89 cents in New York trading yesterday was yet another reversal in the Yukos oil company’s struggle with the Russian government, which renewed its threat to seize the company’s assets to pay back taxes.

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