High oil prices jeopardize 2003 global economy

Oil prices push higher by worries over Venezuela, Iraq, leaving global economy with new year hangover.

By Daniel Rook - LONDON Oil prices hit new highs above 30 dollars a barrel Monday on the back of a strike in Venezuela and the prospect of war in Iraq, putting a global economic recovery in early 2003 in jeopardy, analysts warned.

Oil prices marched up to new 15-month highs here in early trading as a strike in Venezuela that has paralysed crude shipments entered a fifth week and a US military build-up continued in the Gulf.

The price of benchmark Brent North Sea crude oil for February delivery rose to 30.68 dollars a barrel from 30.16 at the close of the previous session.

The last time prices were so high was in the immediate aftermath of the September 11, 2001 terrorist attacks in the United States.

In New York, the reference light sweet crude February contract scaled a two-year peak above 32 dollars a barrel on Friday.

"The continued, protracted situation in Venezuela and increased troop movements in the Gulf provided the support for the market," said Commerzbank analyst David Thomas.

"There are ever-increasing concerns about military action in Iraq," he added.

The price rally is good news for oil producers that rely heavily on oil revenues to keep their economies and public finances in good shape.

But it has set alarm bells ringing in oil-consuming nations.

Motorists are already facing higher prices at the pumps, while companies from manufacturers to airlines are seeing costs pick up.

"It is a concern because higher oil prices essentially act as a tax on consumption," said Commerzbank economist Nick Parsons.

"In a world which is teetering on recession, all that happens is that it eats into firms' profit margins."

Parsons said companies find it hard to raise prices to cover increased costs in times of recession, while consumers are likely to spend less on other goods if gasoline prices rise.

"So I think that's going to dampen world economic growth and that's why we're not looking for any interest rate rises anywhere in 2003," he added.

There was little sign of any respite for oil consumers Monday, as prices pushed higher amid concerns that the strike in Venezuela might not be resolved before any war in Iraq begins.

The loss of Venezuelan and Iraqi exports would deprive the oil market of about five million barrels of oil per day, analysts estimate.

Although members of the Organisation of Petroleum Exporting Countries (OPEC) have pledged to make up any shortfall caused by the loss of Iraqi exports, experts say they would be hard pressed to replace Venezuelan supplies as well if the strike drags on.

Moreover, even if OPEC does agreed to pump more oil, the extra supplies are unlikely to arrive on world markets for several weeks yet given the time needed for members to reach a decision and to ship the oil from the Middle East to the United States.

"Hopes that OPEC will provide more oil will have to wait a while," warned Lawrence Eagles, analyst at brokers GNI.