Hussein Threats Send Oil Prices to Record $38.25

New fears that Iraq might prompt a worldwide oil shortage by attacking Saudi Arabian oil fields sent crude oil prices up 8% Monday to a record $38.25 a barrel, helping to drive stock prices down on Wall Street and weakening the dollar on world currency markets.

At one point during the day, light crude oil for November delivery traded at $39.20 a barrel on the New York Mercantile Exchange, the highest level since such futures began trading in 1983, an exchange spokeswoman said.

Monday’s close added $2.82 to the previous record closing price of $35.43 on Friday as traders reacted to statements by Iraqi President Saddam Hussein over the weekend that he would strike at Israel and at Saudi Arabian oil fields if the U.S.-led economic blockade begins to strangle his country.

“The effect on the market was of extreme paranoia,” said Peter C. Beutel, an oil market analyst and director of energy at the Pegasus Econometric Group Inc. in Hoboken, N. J. “The thought of losing the Saudi oil, (although it) would be difficult to knock out, was still enough to cause havoc and panic and to cause the market to become jittery.”

Analysts agreed that the price jump did not indicate any real shortage of crude oil on world markets, where supplies are ample.

Saudi Arabia, Venezuela and other oil-producing nations are expected to increase oil production by a total of 2.6 million barrels a day by the end of September to help compensate for the 4.3 million barrels a day of Iraqi and Kuwaiti crude lost to the U.S.-led embargo, the Energy Department reported Monday.

But traders foresaw no easing of energy prices soon, and that will undoubtedly increase pressure for higher retail gasoline prices, which have already reached record levels nationally. A $1 increase in the price of a barrel of crude oil translates to an increase of about 2.38 cents in the price of a gallon of refined products such as gasoline.

“It will take a sudden easing in tensions to prevent us from seeing $40 a barrel and maybe prices beyond that,” Beutel said. “That looks increasingly unlikely.”

The crude oil price jump helped drive stocks down Monday. The Dow Jones average of 30 industrial companies plummeted 59.41 points to 2,452.97, its lowest close in 14 months. The market decline also reflected concerns about the U.S. banking industry.

In addition, the rising price of crude fueled inflation fears, which pushed gold prices up and the dollar down against most major currencies, except the Japanese yen. The dollar also fell on word that the government’s budget deficit swelled in August.

Monday’s crude oil price hike came on the heels of a week of volatile trading that has seen oil prices reach new highs in reaction to news out of the Middle East. “Every time Saddam Hussein or George Bush waves the sword in the air . . . the oil markets tend to go crazy,” said Bernard J. Picchi, a senior oil analyst with the Salomon Bros. investment firm in New York.

In London, the benchmark North Sea Brent Blend grade of crude oil for October delivery traded at $40. On New York spot markets, where oil is traded for immediate delivery, a barrel of West Texas Intermediate, the benchmark U.S. grade, commanded between $37.45 and $37.55 a barrel Monday.

Prices of refined products mirrored the sharp rise in crude oil. Unleaded gasoline for October delivery soared 6.78 cents a gallon to $1.0423 in New York Mercantile Exchange trading Monday. Similarly, heating oil for October delivery jumped 6.71 cents to $1.0392. Both prices were short of their record levels. Prices for products to be delivered in later months also rose sharply.

Some analysts said the new levels of oil prices reflected changes in world markets. Although some oil-producing nations have boosted output to make up for the loss of Kuwaiti and Iraqi crude, about three-fourths of that new production is of poorer quality oil that is more costly to refine, Picchi said.

Moreover, supplies of jet fuel, heating oil and some other refined products may become tight as winter approaches, analysts said. In particular, “Far East markets have started to feel the crunch of lost product supplies,” said Tom Bentz, director of trading at United Energy Inc.

That’s in part because of the loss of about 800,000 barrels of Kuwaiti refinery production, much of which went to East Asia and Europe. Also, Saudi Arabia, formerly a major exporter of refined products, has diverted jet fuel and other refined products to fill the needs of the massive military buildup on its soil.

There are also concerns that the Soviet Union, which exports oil to Eastern Europe, may face new labor problems that could affect its oil production, said John Lichtblau, chairman of the oil industry-funded Petroleum Industry Research Foundation.

But most analysts agreed that there were few underlying economic reasons--aside from fears of war--to account for the rapidly rising oil prices.

Supplies are ample. An unnamed official of the Paris-based International Energy Agency was quoted in news reports Monday as saying that the world’s total crude oil supply situation had not changed significantly since mid-August.

Total crude production by the 13 members of the Organization of Petroleum Exporting Countries is expected to be 22 million barrels a day in September, up from 19.7 million in July, the official said.

In the United States, inventories of crude oil remain healthy. The American Petroleum Institute, the oil industry’s main trade group, reported last week that crude oil stocks were running 41 million barrels ahead of last year’s levels.

U.S. gasoline stocks also are abundant, although prices are high. There have been reports in some publications that American oil companies are actually exporting unusually large amounts of gasoline to Europe and other places that face tight supplies as a result of the Iraqi invasion of Kuwait on Aug. 2.

Such exports would be coming at a time when U.S. retail gasoline prices have reached record levels: an average of $1.3835 a gallon nationally, the authoritative Lundberg Survey reported over the weekend.

The U.S. Energy Department said Monday that it had no solid information on whether such exports had increased but added that there were clear economic incentives for such shipments.

Wholesale prices of gasoline in Rotterdam spot markets have been increasing faster than similar prices in New York since mid-July. On Sept. 14, the spot market price for gasoline in Northern Europe was 17 cents a gallon higher than the comparable price in New York, the department reported.

In response to the reports, Rep. Tom Tauke (R-Iowa) on Monday introduced a bill to restrict such exports.

Joe Lastelic, a spokesman for the American Petroleum Institute, said he had no information on whether U.S. oil companies had stepped up gasoline exports, but he defended the practice and said the companies remained net importers of gasoline products.

OTHER GULF STORIES: A6-8