The World Today

This is a transcript from The World Today. The program is broadcast around Australia at 12:10pm on ABC Local Radio.

The World Today - Thursday, 20 March , 2003 12:50:23 Reporter: Stephen Long

JOHN HIGHFIELD: And for the broader Australian economy, and particularly motorists, some good news in these dark times we're experiencing.

The huge premium which has been built into oil prices over recent weeks has been one of the first casualties from this suggestion of war. But West Texas Intermediate Crude has lost more than a dollar a barrel in its value overnight, the fifth straight day of falls in the oil price.

Spot prices well below US$30 a barrel have been seen in recent trading in the last few hours. That's down by more than 25 per cent on the 12-year high of nearly US$40 just a few weeks ago. Commodities analysts are saying it could well fall further in the short term.

But leading economists also remain concerned about longer-term threats including the sparse stocks of oil reserves in the United States and the threat that Saddam will actually set his oil fields ablaze.

Finance Correspondent Stephen Long reports.

STEPHEN LONG: It was a cent shy of US$40 a barrel late last month, but West Texas Crude has tanked on the eve of war. The price per barrel has fallen by 20 per cent in the past week alone.

And if the pattern of the last Gulf War is repeated, it will fall sharply again when the bombs start tumbling. David Thurtell, commodity strategist at the Commonwealth Bank, says that prospect has speculators scrambling to protect their positions.

DAVID THURTELL: In the last Gulf War the release of reserves on the day the hostilities started pushed oil down by $9 and $10 a barrel. So if you're a speculator and you're long, in an oil position, you do not want to be long if the oil price is going to fall, you know, $9, $10.

STEPHEN LONG: OPEC oil ministers met less than a fortnight ago and reassured the world they would meet any shortfall in supply relating to the Iraqi war. And David Thurtell says that's been a soothing balm for oil prices.

DAVID THURTELL: The main thing is that there's been indications that OPEC will increase production more or less the day that hostilities break out. And if it doesn't, there will be a release from strategic reserves in Western nations.

STEPHEN LONG: So can motorists expect relief in coming weeks from prices above $1 a litre at the bowser? Well, don't count the money just yet. The worry is US oil reserves at a 27-year low.

And across the OECD, inventories are also at their lowest point in many years. Then there's the instability in Venezuela, one of the world's biggest producers. Production there is only now recovering from a prolonged national strike.

David Hale is the former global chief economist at Zurich Financial Services, and he now advises major corporations across the globe. And he's warning of risks beyond the day-to-day trading.

DAVID HALE: There's no doubt that an American victory will probably set the state for lower oil prices. But again, we also have other problems in the oil market. We have Venezuela. And the Venezuela's led to a big loss now, put over the last few months, certainly here in the Western hemisphere.

So while the price of oil will clearly fall, we don't still quite know where the bottom is, and again we don't know how much damage Saddam Hussein will do to the oil fields.

STEPHEN LONG: David Hale says that the world shouldn't forget what followed the last Gulf War.

DAVID HALE: Well, what it did was it led to a major oil price shock which was a blow to the economies of East Asia. It was a modest blow to the economy of Europe and it did slow the whole world economy down. Then things got better. But in the case of the US economy, we had the most sluggish economic recovery recorded in modern times.

STEPHEN LONG: That oil price related slump in the economy helped lose George Bush Senior the presidency, and his son will be hoping he doesn't suffer the same fate as his father. But whatever the long-term risks, traders anticipate further falls in crude oil prices in coming days. David Thurtell believes they could dip by another US$5 a barrel before they turn around.

DAVID THURTELL: Once it gets to sort of the mid-twenties, on a risk reward consideration, oil's starting to represent good value again. Because if the war goes pear shaped or let's just say there's another snap of cold weather or Venezuela hits problems, if you're an oil consumer, it would've been best to get some sort of reasonably priced oil on board in those twenties. So if the oil price spikes up again, you've at least taken some oil on board.

JOHN HIGHFIELD: David Thurtell is a commodity strategist at the Commonwealth Bank and he was speaking with our Finance Correspondent Stephen Long.