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Oil Prices Spike

Courtesy of Dallas Morning News

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Crude Oil Prices Spike As Traders' Watch for United States, Iraq Clash


Aug 22, 2002 (The Dallas Morning News - Knight Ridder/Tribune Business News via
COMTEX) -- Increased talk of a conflict between the United States and Iraq has
caused oil traders to worry about potential supply disruptions from the Middle
East, sending crude prices up sharply this week.

Traders have added a "war premium" of up to $8 per barrel amid the recent war
discussions by the Bush administration, said John Kilduff, energy analyst and
senior vice president at Fimat USA Inc.

"Prior to the most recent attention on this, we were forecasting an attack as
early as February," Mr. Kilduff said. "Given the latest round of statements,
there had been talk of hostilities as early as October.

"If the administration could calm down the news cycle on this, I would expect
prices to retreat by $2 or $3."

Prices have risen more than 10 percent since the beginning of the month. U.S.
crude oil futures for October delivery closed at $29.24 in regular trading
Wednesday, up 47 cents. On Tuesday, oil for September delivery reached an
18-month high of $30.32 per barrel.

The prices remained high Wednesday despite a report from the U.S. Energy
Information Administration that U.S. oil supplies increased by 2.8 million
barrels last week, after a decrease of 7.2 million barrels the week before.

However, war concerns aren't the only factor pushing prices up, said Larry
Goldstein, president of the Petroleum Industry Research Foundation.

The war talk accounts for an increase of about $2 per barrel, he said. Cutbacks
by the United Nations in Iraq's oil-for-food program account for about $1 per
barrel. And because oil demand fell significantly after Sept. 11, demand this
fall will be higher compared with the end of last year.

"The war premium, while correct, is premature," Mr. Goldstein said. "I think war
is inevitable -- I don't think it's imminent."

Continued concerns about war could keep prices up and stunt an already slow
economic recovery, said Dr. Bill Gilmer, senior economist at the Federal Reserve
Bank of Dallas' Houston branch.

"It's not a plus for the U.S. economy or for the global economy to see prices go
up," he said. "If those prices persist, it would be a negative, no question."

The United States fell into a recession after the 1973 Arab oil embargo, the
1980 Iran-Iraq war and the 1990-91 Gulf War.

A conflict with Iraq probably would boost prices further in the short-term, and
perhaps longer if Iraq disrupted significant oil supplies from the Middle East,
which has two-thirds of the world's oil reserves.

In the months after Iraq invaded Kuwait in August 1990, oil prices doubled from
the high teens to more than $40 per barrel.

But the United States is better prepared now than it was 12 years ago, Mr.
Goldstein said. Now, other producers -- including Algeria, Nigeria and Venezuela
-- could make up for lost volume from Iraq, and the U.S. government seems
prepared to tap into the Strategic Petroleum Reserve faster than it did during
the Gulf War, he said.

Last November, Mr. Bush announced that the government would increase the
reserve, which is held in salt domes along the Texas and Louisiana coasts, to
700 million barrels from 550 million.

Still, if oil futures continue their upward trend, the resulting higher prices
at the gas pumps could hurt the Bush administration's efforts to sell its war
plans to the American people, analysts said.

So far, gas prices in Dallas have barely nudged this summer, remaining around
$1.34 or $1.35 a gallon for regular unleaded -- the same level as a year ago.


By Sudeep Reddy

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