Rumblings of an Arab oil embargo

Could the world be about to face a real-life sequel: Oil Embargo II?

The prospect of oil prices being driven by the deployment of Israeli tanks and the future of Yasser Arafat may be moving closer. In a development reminiscent of 1973, when Arab nations embargoed oil to the US and gas lines suddenly snaked for blocks throughout the nation, Iraq and Iran are trying to rally Gulf support for again using the denial of oil as a geopolitical weapon against the US and other industrialized nations.

The effect of a new embargo could be severe. Oil prices are already at a six-month high of $28 per barrel – rising almost $2 in just one day this week. A price of $30 per barrel might cause an "oil shock" strong enough to stall the nascent US economic recovery, some economists believe.

So far, most other members of the Organization of the Petroleum Exporting Countries (OPEC) have reacted coolly to the idea.

Still, given the volatile nature of the conflict in the Middle East, it might be premature to just assume the OPEC spigot will remain open. Aspects of the current situation are disturbingly close to those of 1973.

"Certainly the elements are similar – the great uncertainty, anger, and inability of the Arabs to do anything," says Rachel Bronson, a senior fellow at the Council on Foreign Relations in New York. "The Arab world feels considerable impotence."

Yet many other dynamics have changed since 1973 that undermine the ability of any nation to impose its will on world oil markets. For one thing, OPEC isn't as cohesive as it once was. Saudi Arabia, for example – the kingpin producer of the region – has said it would not use the oil weapon.

"The Saudis were so decimated by the embargo [in 1973]," says Ms. Bronson. "They lost considerable market share and it caused the US to take conservation efforts. In fact, to this day, they still feel the effects."

The US also now has a strategic petroleum reserve, which can be tapped to provide oil to make up for temporary disruptions. Auto-efficiency standards have improved, and there are alternative sources of energy for business, such as natural gas.

The main proponent of an oil embargo is Iraq, which currently exports about 778,000 barrels per day to the US. "The only way for it to work is if they [the Iraqis] cut back output," says Robert Crandall, a senior fellow at the Brookings Institution in Washington.

Yet Iran, too, is considering is tightening its oil valves to try to force the US into pressuring Israel to withdraw its troops from Palestinian territories. Iranian Foreign Minister Kamal Kharazi said this week the actions would depend on whether other Muslim countries go along with the move.

So far, none of the moderate Arab oil producers has shown any interest in the idea, since it hurts them as much as it hurts the US. "We're not there yet, but it could happen very quickly if the Israeli offensive gets out of hand," says Roger Diwan, managing director of the Petroleum Finance Corporation, a consulting firm in Washington. "If Arafat is killed, all bets are off."

As a general rule, embargoes won't work, energy analysts say, because there is basically one world market for oil – the New York Mercantile Exchange. That means countries that cut back on their shipments of crude to the United States can still end up having their oil arrive in US ports.

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