Posted on 04/04/2002 3:40:06 PM PST by kaylar
GULF state dismissals of a call by Iraq this week for an Arab oil embargo against the United States should lull no-one into a false sense of security. Deepening concern that the Israel-Palestinian conflict could escalate into a conflagration across the whole region has not only pushed the oil price to a six-month high, but also cast a shadow over a project as close to the heart of the White House as the war on terrorism: securing America’s economic recovery.
Against this background, the world now anxiously waits to see whether President George Bush’s policy shift yesterday may pull the Middle East back from the brink.
The knock-on effects of an Israeli failure to respond could have the perverse effect of delivering two winning aces to Iraq’s Saddam Hussein. The first is the near impossibility of the US being able to build a Gulf state coalition to support a military strike against Iraq. Violent street demonstrations in Amman and Cairo speak of a rising anti-Western sentiment across the region. The second is sharply higher oil revenues for the regime from the surge in the price.
Fears that events are spiralling out of control have already pushed up oil prices by 36 per cent since 1 February and by an electrifying 68 per cent since the low on 19 November when prospects for the world economy in the aftermath of the September terrorist attack were at their most bleak.
This rise has already triggered price increases at the petrol pumps across America and Europe, giving rise to concerns over higher inflation, higher interest rates and a brake on a global economic recovery that has only just begun to gather speed. David Wyss, chief economist at Standard & Poors, warned this week that an external shock such as a soaring oil price "could tip the US back into recession".
Whether in fact higher oil prices prove inflationary or deflationary - a point on which economists argue furiously - is less important at this stage than the damage that spreading armed conflict in the Middle East would inflict on business and investor confidence across the world.
The Gulf region still accounts for some two-thirds of the world’s oil reserves, so there is more at stake than our distance from this conflict suggests. Both in America and the UK, general economic pointers such as retail sales and household spending have been encouraging. But this upturn is fragile and has still to work through to higher corporate earnings and investment.
Wall Street, which scans company statements intensely every day for signs of improved trading, is still beset by doubts as to whether there is as yet much of a recovery at all.
Fears of wider hostilities now offer the prospect of a long summer of sleepless nights for world markets and the international economy. The oil price began its recent rise on speculation over a US-led attack on Saddam Hussein’s Iraq. Then came the intensifying conflict between Israelis and Palestinians. News this week of the call by Iraq for a ban on oil exports to the US and the resumption of armed attacks by the Hezbollah on the Israel/Lebanon border pushed the price over $28.
Naji Sabri, Iraq’s foreign minister, said Arab countries had a right to co-ordinate their policies and to put pressure on Israel and the US in particular to cease the attacks on Palestinian strongholds.
The call drew little support from fellow Arab members of the Organisation of Petroleum Exporting Countries (OPEC). Kuwait said it had "no intention whatsoever" of using the oil weapon as a means of applying pressure to resolve the conflict. Iran, which said such a move would require action by all Muslim producers to have any effect, already has a US boycott in place: it has not sold any oil to America for seven years. And the Saudi Arabian foreign minister said this week there would be "no question" of Arab states withholding oil exports.
But it is telling that, despite this lack of support for an oil ban, and new figures showing a larger than expected 6.5 million barrel rise in US oil stockpiles last week to nearly four billion barrels, equivalent to 114 days of net imports, the oil price only slipped 38 cents on Wednesday to $27.28. Yesterday, the price touched a new six-month high before settling at $27.30.
This is uncomfortably close to the $30 level at which alarm bells start to ring in Washington, Europe and Asia. The last oil price surge just 18 months ago saw the price go to $36, igniting en route fuel protests in Britain and France. It also caused Alan Greenspan, governor of the Federal Reserve, to raise US interest rates to damp down inflation.
US gasoline prices have already risen 20 per cent since February. In Britain, the effect is more muted because taxes account for four-fifths of the price at the pumps. But petrol could rise by another 5p a gallon, or a penny a litre, in the coming weeks. Average prices have climbed since the start of the year by around 4p per litre, with premium unleaded up from 68.9p per litre to 72.9p.
The knee-jerk worry is that higher petrol prices will force up the core measure of inflation above the 2.5 per cent target ceiling for the Monetary Policy Committee. All other things being equal, a rise in the price of one commodity should mean less money available to spend elsewhere, so the general price level is not affected. However, there is likely to be a short-term upward spike in the RPI, particularly if Gordon Brown decides to press ahead with an increase in petrol duty in the Budget on 17 April to encourage "greener" fuel usage.
A rise in interest rates from their current 4 per cent level, over and above the increase already expected, would work to cool those two mighty engines that have spared the British economy from recession: house prices and consumer spending.
However, set against this would be the effect of a rise in sterling, as Britain is the only substantial oil exporter in the EU. This would work to bring down the cost of raw materials and imports. The area with the real problem would be the eurozone, where inflation is already rising.
The Middle East conflict is thought to have added a $6-a-barrel premium to oil prices above and beyond the level warranted by supply and demand. OPEC could restore the five million barrels a day output cut it imposed last year to prop up prices. But it has said it will only move in the event of a supply shortage, and that it has no control over prices driven higher by speculation.
The worry for Bush is that, even in the absence of a concerted Arab oil boycott, a higher oil price on wider conflict fears could blow a big hole in America’s recovery hopes.
Everything now critically depends on a positive response to his plea last night for an Israeli withdrawal. Without it, we could all be in trouble. In the words of an oil industry analyst at the investment bank JP Morgan yesterday, the combination of oil, politics and military factors "is rapidly creating an oil-market version of the perfect storm. Strap in tightly, this could get rough".
http://www.thescotsman.co.uk/opinion.cfm?id=363582002
On the New York Mercantile Exchange, the May crude oil futures contract dropped 98 cents to $26.58 a barrel after climbing to a six-month high of $28.35 a barrel before Mr. Bush's speech.
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