Business - Surging oil prices fuel speculation

www.canada.com Charles Frank Calgary Herald Saturday, February 15, 2003

With a war in Iraq drawing ever closer, the burning question remains: what's going to happen to the price of oil?

In recent weeks, international oil prices have pushed past the $36 US-a-barrel level, prompting record gasoline prices, increases in home heating fuel prices and fears of even greater commodity price spikes once hostilities break out.

"Why are oil prices where they are? Fear," says analyst Peter Gignoux of Salmon Smith Barney succinctly.

He's right. Consumers across the country are on the verge of a nervous breakdown in the wake of gasoline prices that are in excess of 80 cents a litre; home heating bills that have doubled along with $6 US natural gas prices; and spiking electricity rates that have short-circuited homeowners' budgets.

But the chances of oil prices soaring well past $50 US a barrel, as a handful of fearmongers are postulating, remain remote.

In fact, most reputable industry observers are convinced that war in Iraq -- especially if it is a relatively short engagement -- will cause only minor, short-term oil price disturbances.

And that oil prices will quickly fall back to the range of $25 to $30 US per barrel, once the hostilities are ended.

(In the last Gulf War, for example, oil prices actually plunged $10 US a barrel on the first day of the war.)

"If a war breaks out in Iraq, crude oil prices could spike to $50 US a barrel," acknowledges Vincent Lauerman, global energy analyst with the Canadian Energy Research Institute here in Calgary. "But any war is expected to be short and oil prices would settle back down to the $25 US a barrel level by the summer."

That is, of course, comforting news. For both consumers and for the Canadian economy, which has been among the strongest in the G-8, but which must ultimately reflect economic conditions in the United States, our largest trading partner.

The U.S. economy, as most everyone is aware, has been foundering since Sept. 11, 2002. And a long-term escalation in oil prices could easily undermine the tenuous recovery now taking place.

But a quick look back to 1990 when Iraq unilaterally invaded Kuwait, ultimately bringing about a military response from a U.S. led UN coalition, suggests that, after an initial period of volatility, oil prices are likely to stabilize at a comfortable level.

As researchers at Raymond James and Associates argued this week: "Creeping uncertainty prior to the actual invasion of Iraq (similar to the circumstances today) caused oil prices to rally in the weeks prior to the actual attack. Once the tanks started rolling, however, oil prices began to decline and by the time a ceasefire was declared (six weeks later), prices were actually below the levels they were prior to the original Iraqi invasion of Kuwait."

There are, of course, significant differences between today's volatile global circumstances and events in 1991.

For starters, there is no international consensus in support of an invasion of Iraq, a circumstance that could lead to a longer period of hostilities than was the case 13 years ago. That could extend the time needed to resolve any conflict. There is also legitimate concern the Iraqis will damage their own oilfields, which are responsible for roughly 3.4 per cent of world oil supplies -- a scenario that is especially critical in light of the civil unrest in Venezuela.

And, of course, there are fears that should Iraqi strongman Saddam Hussein employ the biological or chemical weapons he is said to harbour -- especially against Israel -- the conflict could easily escalate beyond Iraq's borders.

Those are not unreasonable concerns. And they are likely to keep oil prices at current or slightly higher levels until events begin to unfold in Iraq.

What will happen if the war drags on or takes an unanticipated turn or two is, of course, a whole other issue.

However, Organization of Petroleum Exporting Countries could -- and will -- raise crude-oil production by three million barrels a day within a month to make up for any global supply shortfall caused by a U.S.-led attack on Iraq, Algeria's oil minister insisted this week.

That would be enough to insure the continuation of current oil pricing levels, which have jumped about 45 per cent since the beginning of January, while keeping global economies from overheating.

The bottom line? It remains in the interest of everyone involved -- oil producers and consumers alike -- to keep the world running on a business-as-usual schedule while Iraq and Saddam are dealt with as expeditiously as possible.

Charles Frank is the Herald's business editor.

He can be reached at frankc@theherald.southam.ca or 235-7370.