- The Washington Times - Thursday, August 19, 2004

Oil prices shot up to $48.70 a barrel yesterday after Shi’ite militants set fire to Iraq’s oil headquarters in Basra and threatened to start torching wells and pipelines.

Oil already had turned sharply higher in the last week of New York trading after production at Iraq’s main oil facilities in the south was cut in half by the mere threat of attack.

Yesterday, after burning the warehouses of the South Oil Co. to the ground, militants loyal to militant Shi’ite cleric Muqtada al-Sadr told Al Jazeera television that they will intensify attacks against oil facilities if the Iraqi interim government and U.S. troops press their offensive against Sheik al-Sadr’s forces in the holy city of Najaf.

“The Iraq situation is taking a turn for the worse. … The insurgents are getting extremely bold,” said Alaron Trading analyst Phil Flynn. “There is a strong possibility we could see $50 oil tomorrow.”

Economists are warning that if oil crosses the $50 threshold and stays there, it will seriously threaten economic growth in the United States and elsewhere in the world.

Oil is an indispensable commodity not only in providing gasoline and heating oil for consumers but also in fueling growth in manufacturing, transportation and most other businesses. The depressing effect of high oil prices on both consumers and businesses has been driving down stocks for weeks.

Consumers have gotten a reprieve from record-high oil prices so far this summer because oil companies are using up stocks of summer fuels they accumulated this spring when oil was in the “cheaper” range of $35 to $40. Gasoline prices have ticked up slightly recently after easing about 5 percent during July.

The disconnect is likely to end in the fall, however, as refineries are forced to replenish their crude supplies at record-high prices and ramp up production of home heating fuel and winter gasoline blends, analysts say.

One reason gas prices have not followed oil prices into record territory is consumers this summer pulled back on traveling and spending, apparently spooked by gas prices around $2 a gallon.

If the softer trend in consumer spending continues, it should help to dampen both oil and gas prices, analysts say, but to the detriment of economic growth.

“The longer oil prices stay at lofty levels, the greater the risks to growth,” said Joseph Quinlan, chief market strategist with Banc of America Capital Management.

Most economists had expected consumers to play a more subdued role in the economy in coming months, letting businesses take the lead in driving growth, but that assumption is now in doubt, he said.

Dispirited reports from corporate chief executives in recent weeks suggest they too are scaling back their spending and hiring, he said, leaving few engines of growth in the economy.

Unrest in Iraq has been the critical factor driving oil prices into the $50 range, he said, even as threats to supply faded in Russia, Venezuela and other areas.

“Transferring sovereignty back to Iraq was supposed to lower the geopolitical risk premium built into oil prices,” he said. “Reality has been far different. The level of violence has only escalated.”

Wall Street gurus increasingly are calling on President Bush to make use of the Strategic Petroleum Reserve to thwart the insurgents, calm markets and bolster growth.

The administration has said it will release oil from the reserves only in the event of a major supply disruption. While Iraq has shut down half its production, as of yesterday it was still pumping about 1 million barrels a day.

“The worst-case scenario is for Iraq to stop production altogether,” said Fadel Gheit, energy market analyst at Oppenheimer Funds.

If Mr. Bush were to release reserves in response, he said, “I guarantee you oil prices will drop by more than $10 in a few days” as the specter of further oil releases would drive speculators out of the oil market.

“Out of control” speculation by hedge funds or commodity traders is what’s bidding up oil prices, he said, and many speculators may be planning to cash in their bets and take profits once prices reach $50.

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