A risky business

The impending possibility that the US may strike Iraq has direct implications for international oil markets.

Maureen Lorenzetti

The impending possibility that the US may strike Iraq has direct implications for international oil markets. Oil prices could spike by another $10/bbl or more depending on the scope and duration of war. Then again, military action may be swift enough to mean only a minimum impact on prices, experts say.
War is an uncertain business, and companies have already prepared themselves for a sudden drop in Iraqi oil exports, US data show. US companies have been voluntarily weaning themselves from Iraqi oil now available under the United Nations oil-for-aid program. Last year the US was Iraq's biggest customer, taking about half of the country's 1.7 million b/d of oil exports. But this year that number is down to less than one-third of that total. Illegal surcharges helped drive down deals, but an equally important factor was the assumption that exports could be cut off, at least in the short ?term, because of war.

Government interference
Meanwhile, some oil companies are fretting that some western countries, the US included, may overreact to a temporary war-inspired price surge by dumping emergency oil stocks into the market, causing even more confusion and instability.
Both the US Department of Energy and the International Energy Agency recently sought to dispel that concern. DOE has said it plans to use the Strategic Petroleum Reserve only if there is a physical supply shortage; it won't release oil simply because prices increase. IEA also pledged to be mindful of market dynamics; it is working with industry to ensure that any response it considers will be a coordinated and informed one.

Back to SPR
Yet some politicians from such energy-hungry states as New York and Massachusetts still want DOE to use the SPR sooner rather than later.
Sen. Chuck Schumer (D-NY) Oct. 2 released his own analysis that projected how gasoline and heating oil prices could increase throughout his state if there is a war with Iraq. It's a picture decidedly starker than the conventional oil industry view.
"If the US goes to war with Iraq, average price of unleaded gasoline could jump to over $2.19/gal in upstate New York; heating oil prices could increase by almost $1/gal," Schumer said.
He warned that his state could be headed for "unprecedented highs" in gasoline and heating oil prices if the war on Iraq moves forward and no measures are taken to bridge likely crude oil supply gaps.
"Gas and oil prices are already high as it is. And if we enter into a war with Iraq, these prices could skyrocket to historic rates," Schumer said.
"We are staring more uncertainty and supply shortages right in the face. If a potential war goes bad and no additional oil reaches the market, even conservative estimates say gas prices would not just hit the roof, but shatter it." Schumer said that experts have shown that oil prices, currently around $30/bbl, could double if the US encounters difficulties in a war with Iraq.

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