Top Of The News --With Kirkuk In U.S. Hands, Oil Prices Dip

Forbes.com Dan Ackman, 04.11.03, 8:57 AM ET

NEW YORK - The U.S. military capture of Iraq's northern cities of Kirkuk and Mosul and the nearby oil fields has ended doubts that Iraqi oil would flow and eased oil prices in international markets. While the fate of Iraq's shattered economy is very much in doubt, U.S.-led forces are at least in control of the nation's oil wealth, which the Bush Administration has said it will deliver to the Iraqi people.

The Iraqis will need it. While no one knows what the cost of rebuilding Iraq will be, some in the administration have placed it at $20 billion annually for years to come. That figure would nearly exhaust Iraq's entire oil export revenue, assuming it sells 2.5 million barrels a day (slightly more than estimated exports in recent years) into the international market at $25 per barrel.

The war news led the price of London Brent oil to fall 32 cents to $24.15 a barrel. U.S. light crude dipped 36 cents to $27.10. These prices are about 10% lower than when the shooting war started and are substantially less than the near $40-per-barrel levels reached during prewar spikes; oil is still selling for more than it has in recent years. Between 1999 and 2002, the world price for oil averaged $23.20, according to the U.S. Energy Information Administration.

Whether Iraq will be able to tap its oil to pay rebuilding costs is not at all clear. The country is estimated to owe something like $60 billion to $100 billion to foreign creditors, and Kuwait is still seeking even more than that figure in reparations relating to the 1990 invasion.

Some oil traders see prices falling further with the war over--but OPEC, of which Iraq is a founding member (if not a participant in its councils in recent years), has other plans. "With all the Iraqi oil facilities now in allies' hands, there seems to be no threat to medium- or long-term Iraqi supplies and the market is marking that down," John Waterlow, oil analyst at Wood Mackenzie in Edinburgh, Scotland, told Reuters. "I think there is more downside to the market."

But OPEC has said it wants to maintain prices at a minimum of $25 per barrel and may urge production cuts to do so. Such action would mean stopping the increased production it allowed before the war to ease fears or even new production quotas, OPEC President Abdullah al-Attiyah said yesterday.

But with Iraq on its way to rejoining the international community--meaning it can sell more oil--why haven't oil prices fallen fully back to their recent averages? After all, following the last Gulf War, oil prices fell sharply. But this post-war is different, says Tina Vital, Standard & Poor's oil and gas equity analyst, in a survey published yesterday. "Today's prices reflect more than war worries; they also reflect tight supplies." Even disregarding Iraq, supplies have been squeezed by disruptions in Venezuela and recently Nigeria. "By March 2003, U.S. oil inventories had reached a 27-year low of below 270 million barrels," Vital says.

Iraq can add to that supply, but how quickly and to whose benefit are open questions.

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