FRIDAY OCTOBER 13 2000 Memories of 1973 oil crisis sends markets into panic BY CARL MORTISHED, INTERNATIONAL BUSINESS EDITOR THE SIGHT of Israeli helicopters pounding Gaza City and Ramallah pushed oil prices to ten-year highs yesterday, just when many Western consumers might have thought they had escaped the worst of recent rises in fuel costs.

Sparking memories of the Gulf War, traders in London and New York panicked as violence spread across Israel sending Brent crude surging from around $32 a barrel to above $35.

Western consumers are threatened with a further dent in their wallets as the price of crude oil soared on international markets.

Traders in London and New York panicked at the sight of Israeli helicopters attacking the headquarter's of President Yassir Arafat's Palestinian Authority and pushed the oil price to ten-year highs.

The renewed excitement in oil markets will be a blow to Gordon Brown, the Chancellor, as he seeks to calm consumer ire over the price of petrol. Oil this week began to feed into inflation indices and yesterday's events will overshadow talks with fuel protesters who nearly brought the nation to a standstill last month.

Anxiety that Iraq could cut its exports sent the price boiling even higher on New York's NYMEX exchange, at one point reaching $37 per barrel, not far from the $42 peak when Saddam Hussein set fire to Kuwait's oilfields in 1990.

Fears that a new Middle East conflict will disrupt oil supplies have overshadowed efforts by Western governments to calm energy markets. Successive initiatives, including a US government sell-off of 3 million barrels of oil from its strategic reserves and a commitment from Opec to raise output by 800,000 barrels a day have failed to stem the relentless rise in crude oil.

The violent spasm in the Middle East will put in doubt British government talks with farmers and hauliers who last month blockaded the nation's refineries in their protest over fuel taxes. The Government insisted throughout the crisis that Opec is to blame for the high price of crude.

Few oil experts believe that Opec will seek to intervene in the Israeli-Palestinian conflict using oil as a weapon. Saudi Arabia has ruled out any repetition of the 1973 Arab oil embargo when oil prices quadrupled. The wild card in the pack remains Iraq which is the fourth largest Opec producer, pumping 2.6 million barrels per day. More than 2 million barrels are exported and President Saddam Hussein has periodically used the threat of an exoport embargo to irritate his enemies and to negotiate a lifting of UN sanctions.

Iraq exports are limited by a UN oil for food programme and Iraq has disrupted exports four times already, coinciding with a rollover of the programme, using oil to negotiate an end to sanctions.

However, oil market experts suspect Iraq will be reluctant to do more than rattle its sabre. It wouldn't make sense, said Leo Drollas of the Centre for Global Energy Studies. It would antagonise France, Russia and China, which have been supporting Iraq in seeking to end sanctions.

Violence in the Middle East will only focus attention on the region which has the greatest impact on the price of oil.

Only Saudi Arabia has the power to have a significant impact on oil supplies. The desert kingdom currently pumps over 8 million barrels a day but it has the capacity to increase output by some 1.7 million barrels and do so within just two months.

Other Opec countries, such as Iran, Venezuela and Algeria have little ability to raise output. An investment famine over the past two years caused by the collapse in oil prices to just $10 in 1998, is only now being reversed. Iran has lured TotalFina and Gazprom with the promise of big oil production contracts and is now courting other investors.

Iraq, too, is soliciting funds from overseas. With 112 billion barrels of oil in the ground, second only in reserves to Saudi Arabia, the country has the potential to raise output to five or even six billion barrels of oil per day. The country is already smuggling significant amounts of oil by truck to Western markets. Shell was recently fined $2 million (#1.4 million) by the UN when a cargo on a Russian vessel was found to have partially originated in Iraq.

The current tightness of supply and demand in the oil market has brought the Saudis back into the role of swing producer, a role in which they came to prominence in the 1970s but lost as production in Russia, the North Sea and other non-Opec regions grew.

The slim margin between output and consumption means that any perceived disruption to supply excites the futures market. Adding to the fever this week is an oil worker's strike in Venezuela.

Fedepetrol, the main oilworker's union is attempting to wrench some of the profit from oil prices from the government purse. Venezuela's 40,000 oil workers earn less than $10 a day.

Opec's members have a stated intention of keeping oil prices between $22-$28, high by the standards of recent years. They have waged a long campaign against high taxes on fuel, claiming they receive just 15 cents of every dollar of refined oil.

However, most Opec members have little incentive in supporting a blockade. As Mr Drollas points out, Saudi Arabia cannot afford such political adventurism. The Saudis would not precipitate such chaos and atagonise their protector. The United States has been a key player in the energy crisis. Figures from the American Petroleum Institute released yeseterday pointed again to fall in stocks of heating oil in the United States. The news will be worrying for Vice-President Al Gore for whom a cold winter and soaring fuel prices can only mean votes for his opponent in the coming presidential election. Shortages of products such as gasoline and heating oil, caused by bottlenecks in US refineries, have led the rise in world crude oil prices. Tightening US regulations on fuel have exacerbated the shortage as refineries scramble to buy light crude oils, such as Brent, to turn into gasoline The focus on the US market angers Opec countries, in particular the Gulf Arab states whose principal market is Asia and whose product, a high-sulphur heavy crude, is little used in the US. For them, the oil crisis is just desserts, and a well-earned bonus.

http://www.thetimes.co.uk/article/0,,19015,00.html

-- Martin Thompson (mthom1927@aol.com), October 12, 2000

Answers

What I can't figure out is why is the price of oil affected by the shortages of the end-products like heating oil? I always thought the price was arrived at by surplus or shortage of the raw product itself. Maybe, some day, I will come to understand this, I guess I need an Economics 101 primer.

-- LillyLP (lillyLP@aol.com), October 12, 2000.