Reports of war don't halt slide of crude prices

Accounts of oil wells being torched in Iraq can't stop recent trend

3-month low of $28.12 a barrel

War In Iraq

March 21, 2003|By Marego Athans | Marego Athans,SUN NATIONAL STAFF

Oil prices shot up briefly yesterday on reports that three Iraqi oil wells had been torched, but soon resumed their downward slide to close at a three-month low of $28.12 a barrel.

While news of possible sabotage brought flashbacks of burning Kuwaiti oil fields during the 1990-91 Persian Gulf war, analysts said the markets apparently decided that the loss of three Iraqi wells was insignificant in a country with more than 1,500.

"You're talking about an area where you have hundreds of wells," said Raad Alkadiri, an analyst at PFC Energy, a consulting firm in Washington. "If anything, it'll just reinforce the urgency by the U.S. military to seize oil fields as soon as possible."

After nearing $40 a barrel late last month - the highest level since October of 1990, during the Persian Gulf war - crude prices have slid for six consecutive days this week.

Analysts attributed the drop to the belief that the war will be short, easing weeks of anxiety that had added a "war premium" of more than $5 to the price.

"Everybody started to recognize that even though it was just us and Estonia and some other countries, it was just against Iraq and not some incredible superpower," said Tom Kloza, chief oil analyst at the Oil Price Information Service in Lakewood, N.J. "The more the markets anticipate that this seems to be `Operation Hot Knife Through Butter,' the more downward pressure is brought to bear on world crude prices."

Pledge by OPEC

Also easing nerves, the Organization of Petroleum Exporting Countries pledged yesterday that it will pump more oil if necessary to make up for wartime disruptions. Iraqi oil exports, which average 2 million barrels a day, are effectively shut down.

"It seems the Saudis and other members of OPEC have gone to great lengths to ensure supply," said Jay Saunders, an energy analyst at Deutsche Bank in New York.

U.S. Energy Secretary Spencer Abraham also sought to calm the oil markets, saying the United States has about 599 million barrels of oil in strategic reserves - a sufficient hedge against shortages. The major oil-importing countries hold about 4 billion barrels in reserves.

"World energy supplies are more than adequate to compensate for any disruption these acts may cause," Abraham said in a statement.

Psychological reaction

But the oil market is expected to fluctuate with the "psychology of the moment" and react to each bit of news until the war is resolved, said James Placke, a senior associate at Cambridge Energy Research Associates.

Early yesterday, for example, prices spiked to above $30.60 a barrel after witnesses reported seeing orange flames in the sky following a series of explosions near the southern Iraqi oil center of Basra. Satellites also detected smoke in the area.

The fires were near the huge Rumaila oil field, Iraq's largest, which produces about 1.2 million barrels a day, roughly two-thirds of Iraq's output.

Defense Secretary Donald H. Rumsfeld said he could not confirm the sabotage, only that three or four oil wells might have been set afire.

Energy analysts said yesterday it was too soon to predict the long-term impact of the fires on the world oil situation.

Much will depend on whether the fires were an accident - perhaps collateral damage from military action - or deliberately set, and whether they are part of a broader "scorched earth" strategy by Iraqi President Saddam Hussein.

In 1991, retreating Iraqi troops destroyed more than 700 well heads in Kuwait, setting fires that took seven months to extinguish. Kuwait spent more than two years and $50 billion to restore its oil output to pre-gulf war levels.

Similar sabotage in Iraq, which has more than twice as many oil wells as Kuwait, could cause even more economic and environmental damage.

"The oil fields in Iraq are more prolific than in Kuwait; they produce more oil per day, and therefore the fires would be more difficult to put out. They'd produce more smoke," said Robert Ebel, director of the energy program at the Center for Strategic and International Studies, a Washington think tank.

The Iraqis' oil

The Pentagon also fears that sabotage could deny the United States and its allies billions of dollars in oil revenues they were counting on to help rebuild postwar Iraq.

In a Pentagon briefing yesterday, Rumsfeld warned, "It is a crime for that regime to be destroying the riches of the Iraqi people."

Speaking directly to Iraqi troops, he said, "Do not follow orders to destroy your country's oil, which is the Iraqi people's, and they will need it to rebuild their country when that regime is gone."

President Bush, in his speech Monday night giving Hussein a 48-hour deadline to leave Iraq, also told Iraqi troops, "Do not destroy oil wells, a source of wealth that belongs to the Iraqi people."

Analysts said it's too early to get comfortable with lower oil prices, because any sign of a protracted war could trigger a buying frenzy.

And even with oil prices down, don't expect prices at the pump to follow suit anytime soon, Kloza says. With consumption outpacing refinery capacity during the next three months, gas prices are likely to remain high during the spring and summer.

"It's not over for gasoline," he said.

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