February 25, 2003	Tuesday	Zul Hijjah 23, 1423

RIYADH, Feb 24: The United States is moving ahead with its plans to wage a war on Iraq at a time when the oil supply and demand equation is already under strain. The war will destabilize the entire oil rich Gulf, and consequently an energy crisis like situation may emerge, which may cripple the global economy struggling to get out of the recessionary trends, analysts here strongly feel.

Many say although in the short run the oil prices are keeping firm, the higher oil prices are in fact endangering the long-term prospects of oil in the global market.

The Opec crude basket is currently hovering well above the targeted price band of the oil cartel. Earlier this week, it stood at $31.48 per barrel. This is despite the announcement by the oil producers to open the tap and do away with individual production quotas in case of a war on Iraq and any consequent crisis in the global oil markets. The Opec, for obvious reasons seems determined, to the extent it can, to keep the oil prices within reasonable limits. Yet not everything is in the control of the oil producers, many in Dhahran, the virtual global energy capital, believe.

In the US, crude oil stocks at the end of the first week of February were at their lowest levels since 1975 and below the industry’s minimum operating level of 270 million barrels. The oil producers of the Gulf could not be blamed for this unwanted development. It is apparent the Bush administration failed to replace the loss of Venezuelan supplies with oil from its Strategic Petroleum Reserve (SPR) and instead preferred to rely on increased output from the Opec producers whose oil is 42 days away from the US refiners. That replacement was only beginning to arrive in the US by the middle of February.

However, it is not just in the US that oil inventories are low. Total oil stocks in the OECD Pacific countries were seven per cent down than the previous year at the start of January. These woes were further compounded by higher than average consumption in the power generation sector in Japan, apparently due to continued problems in the country’s nuclear industry. Korea, in the meantime, was also required to introduce emergency measures, reducing import duties and implementing oil demand reduction initiatives, in order to overcome the shortages due to the lower stocks and tight availability.

Unusual cold weather was also believed to be fuelling the oil consumption, especially in the northern hemisphere.

All these combined, and in case of a war, the woes of the oil markets would compound further. Oil markets then would be faced with the prospect of losing Iraq’s two million barrels per day of oil exports, and perhaps some of Kuwait’s oil too.

Hence oil analysts, including the prestigious Centre for Global Energy Studies (CGES), founded by the former Saudi oil minister Shaikh Zaki Ahmad Yamani, feel oil prices will remain high until more oil comes to the market and will rise higher still, if more oil disappears in case of war and disruption to oil shipments from the region. The last thing the global oil industry needs at this stage is another disruption to oil supplies coming on top of the near total loss of Venezuela’s output throughout December and January.

The impact of the war on oil prices would thus depend on how events unfold in the region, how long the possible war on Iraq continues and how the OECD governments use their strategic stocks in response to a loss of supplies from Iraq, and perhaps other countries in the region, argues the Monthly Oil Report of the CGES. “If these stocks are not brought into use at the onset of any war in Iraq, no matter how short (or long) it might turn out to be, one would have to ask what value they serve,” counter asks the February oil report of the CGES.

The oil consuming countries have almost 1.3 billion barrels of oil in their strategic stockpiles, enough to replace three months of crude exports from the region.

However, in the longer run the situation presents a different scenario. Oil demand growth looks robust only because of cold weather and problems with Japan’s nuclear industry. A prolonged period of high oil prices could undermine the fragile economic recovery, leaving 2003 as the third successive year of almost stagnant demand, the CGES reports stresses.

After two years of lacklustre performance the International Energy Agency is projecting a robust 1.1 million barrels per day of increase in global oil demand for 2003. However, a prolonged period of higher than average oil prices and an uncertainty over war with Iraq might well slow the recovery in the US economy and with it any hopes of growth in Asia.

In these sort of developments incremental oil demand could be lower than anticipated and the longer the oil prices remain high, the more likely this will become, the prestigious Centre for Global Energy Studies warns.