February 21, 1998 in Nation/World

Gulf Crisis Keeps Oil Prices From Sliding Even Further Oil Supplies So Plentiful That Even A War Shouldn’t Drive Gasoline Prices Higher

Associated Press
 

Oil prices are at their lowest level in years and talk of war in the Gulf has done little more than prevent a further slide.

Oil supplies are so plentiful, analysts say, that even a U.S. air strike against Iraq is expected to have little impact at the pump unless the war spreads to other countries.

“It’s not going to hurt anyone’s pocketbook,” said Jeff Kerr, an analyst with Petroleum Intelligence Weekly.

A mild winter in the United States and Europe and faltering economies in Asia have forced prices down. In November, the Organization of Petroleum Exporting Countries contributed to the decline by raising its ceiling for production. Supplies now are very high, and gas prices are the lowest they’ve been since May 1994.

“Normally a political crisis would have pushed prices up,” said Leo Drollas, deputy director of the Center for Global Energy Studies in London. “What this has probably done is keep prices from falling even lower.”

During the five-month military buildup that followed Iraq’s 1990 invasion of Kuwait, oil prices shot up about 50 percent amid worries that Iraq’s army could threaten supplies from other Gulf countries, which supply much of the world’s oil.

Since then, however, the oil market has changed dramatically. Iraq has been unable to sell its oil on the open market since U.N. sanctions were imposed after the invasion of Kuwait. Saudi Arabia boosted its production from some 5 million barrels a day to more than 8 million barrels a day. Also, companies stepped up drilling in regions including the North Sea and Gulf of Mexico.

“Even if there is a war we are not going to see that increase in oil prices,” said Graham Knight, an analyst with Arab Oil and Gas, an industry bulletin based in Paris.

Iraq is now producing some $2 billion in oil every six months under a U.N. oil-for-food agreement, which allows the nation to use the proceeds to buy food and medicine for its 22 million people, suffering under the sanctions. The United Nations Security Council Friday approved a resolution to raise the limit to $5.1 billion every six months.

Meanwhile, Iraq said its weakened oil industry may not even be capable of meeting the new cap unless it spends at least $600 million to repair its pipelines and oil fields.

If the sanctions are lifted, analysts fear oil prices will collapse unless major producers like Saudi Arabia and Kuwait sharply cut production, potentially devastating their economies.

But even a big drop in the price of crude oil wouldn’t mean more than a few cents saved at U.S. gas stations.

Prices are already extremely low, noted Mike Morrissey, spokesman for the American Automobile Association. The average cost of self-service regular unleaded is now $1.11 a gallon, 4.5 cents cheaper than in January and 17.3 cents less than in February 1997.

Oil prices are merely the most volatile of several factors influencing the price of gas, Morrissey said. Taxes and costs of production and marketing also determine pump prices, and those are stable.

Morrissey said the industry is watching Iraq closely, but does not expect dramatic shifts in prices.

“It will depend on the scope of the conflict,” he said. “Will prices change by a penny, or will it be a longer conflict and will it change a little bit more?”

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