Threat of war fuels fears over oil prices

WORLD oil prices have been climbing steadily raising concerns about its impact on the global economy in what is still an uncertain outlook for 2003.

Economists have consistently expressed fears that war on Iraq could have serious consequences for the global recovery because of the likely impact on oil prices.

One of the big fears is that if the war goes wrong oil supplies will be interrupted and the fragile global recovery derailed.

Manifestations of those fears have been tangible in the way oil prices have moved in recent weeks.

And as the United States took another step closer to war on Iraq this week by declaring the country in “material breach” of a United Nations disarmament resolution, there was tangible evidence of nervousness in the oil producing countries.

OPEC, the Organisation of the Petroleum Exporting Countries, last week agreed to rein in output from next month, fearing a glut next year, and Saudi Arabia has notified its customers of a cut in January sales.

Despite those commitments OPEC’s reference oil price has gone above the group’s official target range of $22-$28 per barrel this week, standing at $29.56.

The recent price spikes create extra revenues for oil exporters, but they also damage world economic growth by raising energy costs, and undermine demand for oil.

Overall the most up to date commentaries still expect the US economy to continue to recover after a hitting a growth of 0.3% last year as the meltdown in US manufacturing continued to impact.

This year the figure is expected to climb to 2.3% and 2.8% in 2003.

Responding to concerns in the markets the world’s top oil exporter Saudi Arabia moved to calm a price spike on Friday by pledging to fill any supply gap caused by a Venezuelan strike or a possible war on Iraq.

Saudi Arabian Oil Minister Ali al-Naimi reiterated the kingdom’s desire for market stability and “fair prices”.

“Shortages, when determined, will be made up. We want to have no imbalances in the market,” Naimi told reporters ahead of a meeting of Arab oil ministers in Cairo today.

A strike in Venezuela, now in its 19th day, has brought exports to a virtual halt and prices are also rising on fears of a disruption from the Middle East.

Benchmark Brent crude oil has soared 25% in five weeks to near $30 a barrel, near its highest level in two years.

This latest development highlights the fragile nature of world oil supplies and some of the key players say concern is overdone.