Iraq’s Tough Talk May Translate Into Higher Oil Prices
Iraq’s saber-rattling toward Kuwait is a bad omen for consumers concerned about oil prices.
Iraq, the most contentious member of the Organization of Petroleum Exporting Countries, is also OPEC’s leading “price hawk,” favoring OPEC policies that will sharply curtail production until average world prices rise to at least $25 per barrel from about $17 now.
Iraq’s move in the past few days to mass troops on its border with Kuwait, a chronic over-producer, is seen by oil analysts as only the latest, most hostile attempt by unpredictable Iraqi President Saddam Hussein to press the point, and Iraq is expected to make the same point at this week’s meeting of OPEC ministers in Geneva.
In response, the oil market has sent prices up sharply, largely on faith that Iraq’s growing role in OPEC marks a change in the cartel away from lax enforcement of production quotas toward greater emphasis on boosting prices.
On Wednesday, the September contract for West Texas Intermediate, the benchmark U.S. grade of crude oil, dropped slightly to $20.38 per barrel in trading on the New York Mercantile Exchange. That price was still well above the 1990 low of $15.06 per barrel for a near-month contract on June 20. Prices this year were as high as $24.20 per barrel on Jan. 22, said Peter C. Beutel, a trader at Merrill Lynch Futures in New York.
Whether prices will remain strong or falter after the current crisis ebbs depends on several factors.
Iraq and Kuwait have already agreed to discuss their differences. Arab League Ambassador Clovis Maksoud in Washington downplayed the crisis, saying the political standoff is already diffused.
Stronger oil prices would enhance the fortunes of oil companies that reported lackluster oil earnings during the second quarter. But it could mean even higher gasoline prices and other energy costs for consumers, fueling inflation later in the year.
Oil prices will strengthen if, as some analysts believe, Iraq’s growing influence provides sufficient counterbalance to the more moderate OPEC producers of Saudi Arabia, Kuwait and the United Arab Emirates.
With ample reserves, those nations favor keeping prices stable to nurture market share and to keep strong ties with consuming nations. Kuwait and the United Arab Emirates are the biggest quota cheaters and are largely responsible for the worldwide glut that has driven the price of oil down.
Hussein charges that that policy has robbed debt-laden Iraq of millions of dollars in oil revenues. And many OPEC members share his view, especially those with limited reserves or high debt.
Still, it is unclear whether OPEC will go as far as Iraq wants.
OPEC will most likely agree to an arrangement similar to that reached earlier this month among the Persian Gulf members of OPEC, led by Saudi Arabia, that would cut total cartel production to 22.5 million barrels per day from as high as 23.5 million earlier this year. That agreement included pledges from Kuwait and the U.A.E. to adhere to their quotas.
The big question remains the level at which OPEC sets its so-called minimum reference price, or target price, for a basket of world crudes. Iraq favors holding quotas until average world prices reach $25. Moderates, such as Saudi Arabia and Venezuela, favor $20; “price doves” such as Kuwait and the U.A.E. prefer keeping the current $18, according to a report by Cambridge Energy Research Associates.
“Everything is subject to change and subject to the Iraqi situation,” said Fereidun Fesharaki, head of energy studies at the U.S. government-funded East-West Center in Honolulu. “Everyone is scared stiff of Hussein.”
In any case, few analysts believe that oil prices will rise dramatically before the end of the year.
“Even if (OPEC members) were to agree to lower production to what (Hussein) wants, it’s still uncertain as to what the eventual market price would be,” said Mohammed Akacem, a visiting assistant professor of economics at the University of Colorado.
“There’s still a lot of oil out there,” said John Redpath, an oil analyst at Energy Security Analysis Inc. in Washington.
In the week ended July 20, U.S. oil inventories were 383.7 million barrels, more than 53 million barrels higher than levels a year ago, according to the American Petroleum Institute, the oil industry’s main trade group.
At the same time, demand for oil in June averaged 17.2 million barrels per day, about 1.6% lower than June, 1989, the API reported.
CRUDE OIL PRICES Source: Energy Security Analysis Inc.
