Oil supplies and price are slippery topic for prediction

World recession, area of conflict affect petroleum market

October 04, 2001|By Marego Athans | Marego Athans,SUN NATIONAL STAFF

Normally, the scenario would be easier to predict: The prospect of a war involving major oil-producing nations would threaten world oil supplies and send prices rocketing.

But, of course, these aren't normal times.

The price of oil is down more than $5 a barrel and gasoline is down 11 cents a gallon since the Sept. 11 terrorist attacks, even as the United States mobilizes for war.

For now, the market's behavior has more to do with the threat of global recession than the threat of war.

But a military conflict, analysts say, could affect world oil supplies drastically. Or somewhat. Or hardly at all, depending on the theater of conflict and public reaction in Islamic oil-producing countries.

Think chess game. The outlook offers so many unknowns that many analysts accustomed to using the words buy and sell are urging only: "Be careful." Few lessons can be taken from the Persian Gulf war of 1991, when an international embargo immediately shut off exports from Iraq and Iraqi-controlled Kuwait and oil prices shot up to $41 a barrel."This is an all-bets-are-off scenario," said Tom Kloza, chief oil analyst at the Oil Price Information Service in Lakewood, N.J. "It hinges on how deep the recession is and whether the theater of war will expand from the fringe terrorist groups to countries that aren't regarded as international outlaws and happen to produce a lot of crude oil."

A conflict confined to Afghanistan - which is not in the Middle East but in Central Asia - could have little or no effect on supply because Afghanistan produces no oil. The country is a U.S. military target because Osama bin Laden, whom the United States blames for the attacks, is believed to be hiding there, under the protection of the ruling Taliban regime.

At the other extreme, any battle that comes to be viewed in the Middle East as pitting the West against Islam could set off uprisings and disrupt the oil flow from countries such as Iran or even Saudi Arabia, the world's largest oil producer and the second-largest source of imported oil to the United States.

In between lies a host of other possibilities involving Middle Eastern countries that export smaller amounts of oil but where a disruption of supplies could reverberate around the globe.

Iraq, for instance, exports about 2.3 million barrels of crude oil a day, 628,000 of which is sold to the United States through a United Nations humanitarian aid program.

That's only a fraction of the U.S. daily consumption, which is 19.6 million barrels a day. But if Iraq cut off its exports, the United States would have to find that oil elsewhere, as would other countries that import Iraqi oil - forcing a run on supply.

"The oil markets are very finely balanced," said Adam Sieminski, energy analyst at Deutsche Banc Alex. Brown in Baltimore. "A change of 2 million barrels is enormous" if the disruption continues for a month or longer.

How the United States negotiates the political minefields of the Middle East could determine its economic health, which is inextricably linked to oil, said Peter Beutel, president of Cameron Hanover, an energy risk management firm in New Canaan, Conn.

"If countries like Iran and Iraq cut off their oil supplies to us, we're going to find ourselves in a perpetual recession," he said. "It's no coincidence that the economic boom that we saw from 1993 to 1999 was accompanied by the lowest real oil prices that this country has ever seen. And it is no coincidence that every recession of the last 30 years has been preceded by increases in the price of oil.

"More potentially frightening," Beutel said, "is the thought that the governments that are friendly to us - the United Arab Emirates, Kuwait, Saudi Arabia - could be toppled if this turns into Islam versus the West.

"If you were to have a hostile regime in Saudi Arabia, we'd be in deep, deep trouble," he said. "You'd have what we had in the 1970s, recession exacerbated by inflation."

Still, the United States has plenty of other sources of crude oil it can tap if supplies are shut down in the Persian Gulf, said Chris Kelley, spokesman for the American Petroleum Institute - including this country's Strategic Petroleum Reserve stored in salt caverns along the Texas and Louisiana coast, new oil fields and platforms in Alaska and the Gulf of Mexico, and the many other countries that produce oil.

He points out that "Canada, one of our best friends" is the No. 1 source of imported U.S. oil. "Third is Venezuela. Fourth is Mexico. The danger of losing foreign sources is not that great."

Even the prospect of losing Iraq's oil paints a fuzzy picture, said Kloza, the OPIS oil analyst: "The initial reaction would be for the price to go up, but we proved during the gulf war and eight years afterward that we can do without Iraqi oil."

For now, although round-the-clock war talk dominates the airwaves, the oil market is still obsessed with the economy.

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