War unlikely to raise oil prices over long term

LONDON -- A U.S.-led war against Iraq would likely drive oil prices higher, as markets adjusted to a halt in Iraqi crude shipments, analysts say.

However, alternative sources of oil abound, and any spike in prices would probably be brief, they add.

Hostilities wouldn't be a surprise, unlike Iraq's 1990 invasion of Kuwait and the Persian Gulf War that ensued in 1991. A gradual intensification in bellicose comments from President Bush has given oil markets plenty of time to prepare, and prices already are inflated by a so-called "war premium" that analysts estimate at $2 to $4 per barrel.

Although Iraq straddles the world's second-largest proven oil reserves, its exports have fallen sharply in recent months. Other members of the OPEC producers' cartel have more than enough production capacity to make up for any shortfall in Iraqi supplies.

"We'd probably see some pressure on oil prices to rise, but not to the same extent as in 1991," said Kamal Sharma, a currency strategist at Commerzbank in London.

Sharma's worst-case scenario is an increase in the price for light, sweet U.S. crude to $40 a barrel. "I don't think it's going to go much beyond that," he said.

A comparison with events 12 years ago is instructive. On the eve of Iraq's invasion of Kuwait, the price for light, sweet crude was around $20 a barrel. Prices peaked in New York at $41.15 on Oct. 10, 1990, then eased back to the high $20s.

Prices spiked again in January 1991 when the U.S.-led coalition launched air attacks against Iraqi forces. By the end of January, prices had fallen back to $21.02 a barrel.

"How high prices could go in the short run is a function of traders' psychology and how much they've had to drink for lunch," said oil analyst Albert Anton Jr., of the New York investment and brokerage firm Carl H. Pforzheimer & Co.

One reason for the run-up in prices during the Gulf War was the fear that Iraq would also disrupt oil exports from Saudi Arabia, the world's largest crude producer. Saudi Arabia actively supported the anti-Iraq coalition, and Iraqi President Saddam Hussein viewed Saudi targets as fair game.

This time, Saudi Arabia has refused to support a U.S.-led assault on Iraq. Other oil producers in the Persian Gulf have also withheld backing, making it less likely that Iraq would seek to interfere with their crude exports.

"It would strike me as doubtful that Mr. Hussein can stop the flow of oil in the Gulf. He doesn't have the wherewithal," said Peter Gignoux, managing director of the petroleum desk at Salomon Smith Barney.

Iraq's significance as a crude producer has also faded. Iraq pumped nearly 2.4 million barrels of oil a day during the first quarter of this year, making it the No. 3 producer in the Organization of Petroleum Exporting Countries after Saudi Arabia and Iran. Today, its exports have dwindled to fewer than 1 million barrels a day, half their level in March.

"Saddam has tried to hold barrels off the market before to manipulate it, and we've survived," Gignoux said.

If hostilities erupt, OPEC Secretary-General Alvaro Silva Calderon has that OPEC has the capacity to supply importers' needs. Analysts estimate that OPEC members other than Iraq have at least 5 million barrels a day in excess capacity.

Still, member countries of the International Energy Agency have their own defense against a drastic shortage of oil -- 3.8 billion barrels of strategic oil reserves, enough for about 80 days.

The Paris-based IEA is the energy monitoring agency of the Organization for Economic Cooperation and Development, a group of wealthy, oil-importing nations.