Mideast crisis risks pushing oil to $100

July 18, 2006|By WILLIAM NEIKIRK | WILLIAM NEIKIRK,CHICAGO TRIBUNE

WASHINGTON -- The price of oil fell back from record highs yesterday, but the risk of another spike in the cost of petroleum remained high as fighting continued in the volatile Middle East.

Some oil analysts said that the hostilities should serve as both a warning and a wakeup call to America that it is time to deal with the nation's precarious energy situation and what President Bush has called the country's addiction to oil.

If fighting should take a sharper turn for the worse, analysts said they would not be surprised to see the price of oil approach or surpass $100 a barrel and pose a threat to the economy.

At the beginning of the year, such a prospect would have been dismissed as unthinkable. Today, analysts said, it cannot be ruled out, especially if the fighting leads to a supply disruption by Iran, one of the region's major oil producers.

Diplomatic attempts to halt fighting between Israel and Lebanese militants helped drive oil prices down yesterday, and Iran signaled that it is ready for negotiations on its nuclear program.

After rising to an intra-day record of $78.40 a barrel Friday, oil prices dropped $1.73 to settle at $75.30 a barrel in New York yesterday. But analysts said they weren't sure how long the softness in prices would last as fighting continues.

In St. Petersburg, Russia, the price of oil was a key issue at the Group of 8 summit of world leaders, who called for a cessation of violence in the Middle East and floated the idea of sending peacekeepers to the region - an idea that Israel rejected.

It has always been at least partially true that as the Middle East goes, so goes the price of oil. But with the worldwide demand and supply for oil nearly in balance, production in the Middle East has taken on more importance.

Any disruption, no matter how small, could cause sharp spikes in prices. Political unrest in Nigeria, a major oil producer, has documented how the slightest threat to supplies can push oil prices up.

The United States is involved in an unpopular war in Iraq, where an insurgency rages. Iran's influence has grown and Hamas, regarded by the Israelis as a terrorist organization, was elected to lead the Palestinian government. Lebanon's Hezbollah, with ties to Syria and Iran, is officially identified as a terrorist organization by the U.S.

"We are in a higher risk situation than we have been at any time in years," said Andrew D. Weissman, an energy consultant at FTI Consulting in Washington. A year from now or five years from now, he said, there's a "substantial possibility" that Americans will look back on last week "as a major turning point" in the price of oil.

"Some of the softening in prices has been due to the fact that the dollar is strengthening," said Jason Schenker, energy economist at Wachovia Securities. "I still think there might be some upside risks."

Philip K. Verleger Jr., a Colorado energy consultant, said the rise of Islamic fundamentalism in the Middle East could become a major factor in the price of oil as more radical political leaders gain power. If democratic reforms are instituted in Egypt or Jordan, he said, radical groups such as Hezbollah could gain new strength in elections.

"The implications for the supply of oil are not good," he said.

In the past, Verleger has been criticized for predicting that oil prices were going to surge much higher. But his so-called "extreme" outlooks have come true. He was one of the first analysts to predict that oil prices would rise to $60 a barrel, and then to $70 a barrel. Within a year, he said, oil prices could easily go to $100 a barrel because of the tightness of the energy market.

A major issue among economists is how much of a "risk premium" exists in today's oil price. Schenker said, for example, today's supply-and-demand situation likely would produce an oil price of no more than $55 a barrel. The rest of the price results from market fears about supply disruptions.

But Weissman took issue with this point of view. He said there is only a small, if any, risk premium in today's price, and that Americans likely will continue to pay close to current prices for oil for a long time.

The idea of a big risk premium in today's oil price "is a complete myth," he said. "I think what we are really seeing is that the price of oil is exactly what is needed for the market to balance supply and demand."

William Neikirk writes for the Chicago Tribune.

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