Iraqi Oil Concern No Threat to Supply, Analysts Say
By Sean Evers
Vienna, March 14 (Bloomberg) -- Oil prices have risen by a fifth since Feb. 25 in part as traders speculate U.S. President George W. Bush may attack Iraq. The threat to oil supplies from such a move is scant, analysts said.
Iraqi oil output is down by a million barrels a day since levels before the 1990-91 Gulf War to about 2.5 million barrels daily, or about three of every 100 pumped worldwide. Twice that amount of idle capacity lies elsewhere in the Middle East, with Saudi Arabia alone holding almost 3 million barrels to spare.
``There is a general belief that Iraq cannot hurt oil supplies in the region,'' said Jassem al-Saddoun, an oil analyst with the Al-Shall economic research center in Kuwait. ``Gulf states have enough capacity to make up for any loss in the market'' from Iraq.
As Iraq and other members of the Organization of Petroleum Exporting Countries gather in Vienna this week, U.S. Vice President Dick Cheney is touring the Middle East to garner support for its war on terrorism. Bruce Evers, an analyst at Investec Henderson Crosthwaite, estimates that concern over a possible attack on Iraq has added $2 to the price of crude oil.
An initial jump in oil prices after any move against Iraq may be short lived, analysts said. Crude prices more than doubled to $40 after Iraq invaded Kuwait in August 1990 on expectations that Persian Gulf supplies would be disrupted. While Iraq and Kuwait both stopped pumping oil, Saudi Arabia eventually filled the void and prices returned to normal levels.
Slowing world economies last year were responsible for OPEC cutbacks that left producers with spare capacity. OPEC's 10 members with output quotas, all except Iraq, cut their targets by 3.5 million barrels a day last year and another 1.5 million starting Jan. 1 to compensate for the slowest growth in crude oil demand since 1985.
No Change
Iran's oil minister, Bijan Namdar Zanganeh, said he expected OPEC tomorrow will leave in place its current quotas.
OPEC crude oil production last month fell to a 10-year low, according to the International Energy Agency. As a result, OPEC members, not including Iraq, have about 6.72 million barrels a day of spare capacity, according to Bloomberg estimates.
Economic sanctions imposed on Iraq after the invasion of Kuwait show no signs of being lifted, and the United Nations will keep control of Iraqi oil exports and the distribution of revenue. Part of the decline in Iraqi oil shipments in recent months stems from a dispute with the UN over prices.
The UN's ``oil-for-food program'' has been a sore spot for Iraqi President Saddam Hussein, who says UN controls on how the money from Iraqi oil sales is spent has caused the deaths of hundreds of thousands of Iraqi children.
The controls have also hindered Iraq's ability to pump oil. Iraq has bought only 26 cents worth of spare parts per barrel of oil produced over the program's five-year life, one-eighth the regional average of about $2, based on UN figures.
Poor Outlook
The outlook for future production is worsening, said officials from Saybolt International BV, a Dutch company contracted by the UN to monitor Iraq's oil industry. Insufficient maintenance has already left more than 20 percent of the countries' wells irreparably damaged, the UN has reported.
``Iraqi oil maintenance is simply not adequate, not as a matter of choice, but due to UN sanctions,'' said Mohammed Abduljabbar, an oil analyst with the Washington-based Petroleum Finance Co.
Chances of the controls being relaxed or ended have worsened since the Sept. 11 attacks, as the U.S. and U.K. have intensified efforts at the UN to get weapons inspectors back into Iraq.
Inspectors, whose hunt for chemical, biological and nuclear weapons in Iraq was part of the cease-fire agreement in 1991, left Baghdad shortly before a U.S.-led bombing campaign started in December 1998.
Iraq's conflict with the world body shows no sign of abating, and Bush has indicated that Iraq may be the next target. Last week, Iraq brushed off the latest U.S. demand that it readmit UN weapons inspectors.
Other Options
While its ability to pump oil deteriorates for lack of replacement parts, the nation sits on oil reserves that are second in size only to Saudi Arabia's.
With OPEC partners waiting to fill their own treasuries by pumping more, and world demand expected to creep up less than 1 percent this year, the world has little to fear from Saddam Hussein's oil weapon, analysts said.
Even the U.S., which ranks Iraq as its fifth-largest foreign crude-oil supplier, should have little problem finding alternative supplies should the nation's exports slow or stop.
``Iraqi oil is easily substituted in the current environment,'' said Waleed Khadouri, managing partner of the Middle East Economic Survey, a specialist publication covering energy and other Middle Eastern industries.
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