Since the US invasion of Iraq in 2003, oil exports from northern Iraq through Turkey have been sporadic at best because of frequent bombings of Iraqs northern pipeline. But as oil producers worldwide are straining to meet growth in demand, commodity investors are focused on anything that might hurt supplies.
The price of oil traded to a record high last week, bolstering fears that $100-a-barrel oil is no longer such a distant prospect. Crude oil futures rose to $90.02 in electronic trading on the New York Mercantile Exchange, but slipped back to $89.39.
In recent years the global economy has seemed immune to rising energy prices, but some analysts fear that as they spiral higher they will undermine growth, already strained because of the downturn in the US housing market. Such concerns contributed to a weakness in stock markets this week.
Oil traders, discussing the latest rise, cited a potential conflict on the border between Turkey and Iraq that could heighten Middle East tensions and possibly affect oil supplies from the region.
“Markets hate uncertainty,” said Lawrence Goldstein, an Economist at the Energy Policy Research Foundation. “The fundamentals are very supportive of high oil prices. But the latest run-up has nothing to do with market fundamentals, but has to do with fear.”
Low production
Since the US invasion of Iraq in 2003, oil exports from northern Iraq through Turkey have been sporadic at best because of frequent bombings of Iraq’s northern pipeline. But as oil producers worldwide are straining to meet growth in demand, commodity investors are focused on anything that might hurt supplies.
Turkey is an important corridor for oil exports from Iraq and the Caspian Sea. The Turkish military has threatened in recent days to cross the Iraqi border to root out Kurdish separatists who have mounted attacks inside Turkey. Oil prices have more than quadrupled since 2001 as strong demand for oil from Asia, the Middle East and the United States has outpaced the ability of producers to bring on new supplies. With little spare production capacity, the oil markets have become more volatile.
New records
After adjusting for inflation, oil prices are getting closer to historic levels reached in the early 1980s, when an energy crisis, the Iranian revolution and the outbreak of the Iran-Iraq war sent prices spiraling to about $100 a barrel in today’s dollars.
Energy analysts generally believe the market is overreacting to a possible Turkish incursion into northern Iraq. Antoine Halff, an analyst at Fimat, an oil brokerage, said he expected prices to ease once the market realised supplies would not be affected. “The rally seems bound to run out of steam,” he said.
In the meantime, though, higher crude will translate into more costly gasoline. Gasoline has declined in price in recent weeks after demand dropped with the end of the summer driving season. But that is likely to change as refiners begin passing on higher oil costs to consumers, according to Geoff Sundstrom, spokesman of the AAA automobile club in the United States.
Gasoline averaged $2.76 a gallon in the United States last week, according to AAA. Gasoline exceeded $3 a gallon this past summer. Reacting to the rally of the last week, the Organization of the Petroleum Exporting Countries ruled out an emergency release of oil supplies. When it met in Vienna last month, the oil cartel agreed to a modest production increase of 500,000 barrels a day.
The OPEC Secretary General, Abdalla Salem El-Badri, said in a statement recently that OPEC was concerned about rising prices. But he pointedly added that “there has been no interruption in crude supplies.”
“While the organization does not favour oil prices at this level, it strongly believes that fundamentals are not supporting current high prices and that the market is very well supplied,” El-Badri said. “The rising oil prices which we are currently witnessing are, however, largely being driven by market speculators.”
Most analysts say the reasons behind the price increases are complex. They include refinery bottlenecks in the United States, a weak dollar, geopolitical threats in the Middle East, the war in Iraq, violence in oil-producing Nigeria, and resource nationalism in Venezuela and Russia that is driving away foreign oil investment.
They also include strong growth in demand from China and the Middle East, where fuel prices are kept artificially low through government subsidies.
The International Energy Agency, an energy adviser to industrialised countries, recently said that it expected global oil demand to jump by 2.4 per cent next year, to 88 million barrels a day.
Some traders cited that prediction as one cause of the rally, although several analysts said the figure was unrealistically high given the slowing global economy. “There is a perception that fundamentals are more bullish than they actually are,” said Roger Diwan, an analyst at PFC Energy, an oil consulting firm.
Contributors
Investors and hedge funds have also contributed to the climb. Commodity investors seem to have shrugged off the risk of a recession in the United States - an important engine of global economic growth - after the Federal Reserve cut interest rates in September. As a result, they have returned to commodity markets in force recently, analysts said. Some investors are buying oil to hedge against the decline in the value of the dollar. Since the beginning of the year, the dollar has declined nearly 8 per cent on the euro.
