As winter nears, worry over energy costs

Analysts review oil stability after the attack in Saudi Arabia. Prices are already higher than last year.

By , Staff writer of The Christian Science Monitor

Nearly every day, giant tankers carry 8 million barrels of oil from Saudi Arabia to refineries around the world.

But after the recent bombing in Riyadh, energy analysts are nervously reassessing the stability of supplies of crude from the oil kingdom.

Since oil prices are relatively high entering winter, Americans will notice any further problems in Saudi Arabia as they fill up their gas tank or pay for home heating oil. The price for West Texas crude closed above $32 a barrel last week, the highest point since the beginning of October and up from about $25 a barrel last year at this time.

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The higher price of crude is already reflected in steeper costs than last season: Home heating oil is up some 19 cents a gallon, and gasoline is 9 cents a gallon higher.

"The only thing keeping prices above $25 a barrel is fear of terrorist activity," says Dennis Gartman, publisher of the Gartman Letter, an influential political and economic newsletter. "All things being equal and if there are no terrorist attacks, these are very high prices."

The uncertainty over oil prices comes at a time when Congress is getting ready to vote on an energy bill, which was approved by most Republicans late last week. The proposed legislation does not include opening the Arctic National Wildlife Refuge, but it does have incentives for producers of ethanol, which could help reduce oil imports.

For now, though, the US depends heavily on Saudi Arabia for oil. In terms of that arrangement, one key concern, says Mr. Gartman, is the long distance that Saudi Arabia moves its oil to terminals.

"The pipelines are long and exposed as they move across the desert," he says. "I don't care how vigilant you are, there are places that you are not defending."

So far, however, there have been no attacks on the pipelines, producing areas, or terminals. The most recent attack was on a housing complex. But energy analysts are taking seriously such a target - more political than economic - particularly since Saudi Arabia is the second-largest supplier of oil to the United States and represents one-third of all oil produced by OPEC.

"The problems should remind us how dependent we are on Saudi oil production," says Robert Hormats, vice chairman of Goldman Sachs International in New York. "We have an interest in a stable Saudi Arabia."

Last year, the Saudis increased their production when strikes hobbled oil shipments from Venezuela. This helped to keep prices from going up further.

"OPEC's excess capacity is 2.2 million barrels a day," says Erik Kreil, an analyst with the Energy Information Agency. "All but 500,000 barrels is from Saudi Arabia, so without them you lose the cushion."

The uncertainty in the entire Middle East region is another reason oil prices have stayed high, says Mike Fitzpatrick, an analyst at Fimat USA, a commodities broker. For example, he says, it's still not clear how much oil will flow from Iraq. "It's all part of the calculus," he says.

Recently, the Saudis themselves have been cracking down on militants. Since May, they have arrested more than 600 people and seized scores of weapons. "The FBI and CIA are working closely with the Saudis," says Mr. Hormats.

At the same time, the US recently pulled out of the Prince Sultan air base. During the first Gulf War, the Saudis allowed the US to use the base to attack Iraqi forces, but this year, Riyadh barred the US from using the base for offensive purposes. Pulling out of the base, says Hormats, removes one of the irritants to militant Saudis who wanted American troops off their soil. With that less of a flash point for Riyadh, "It might make it easier for certain reforms," he says.

Still, it's uncertain how much reform will actually take place. Recently, President Bush gave a speech on the importance of democratic reforms in the region. But Saudi Arabia was not mentioned.

In recent years, there has been some interest in reform within the royal family, which has resulted in a substantial increase in spending on healthcare and education. But that has run up large budget deficits.

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