Oil prices cool off despite heated fighting in Gulf war

It's a strange calculation: The more deadly the war in the Gulf becomes, the more oil prices seem to fall. ``An escalation of tensions is bearish, not bullish, for oil prices,'' says Vahan Zanoyan of Petroleum Finance Company, a Washington, D.C., economic forecasting firm. The war has further divided the Organization of Petroleum Exporting Countries (OPEC), decreasing its ability to coordinate production strategy. Thus, rather than being interrupted by fighting, ``the physical flow of oil increases with each further escalation.''

In the past, hostilities in the Gulf have caused oil prices to shoot up. So by all rights this should have happened after a heavy Iraqi air raid on Iran's Kharg Island over the weekend, Iranian gunboat assaults on merchant ships, and the missile barrages in the ``war of the cities.''

Instead, prices have fallen lately, depressed by increased production from non-OPEC members, steady output from the Gulf, and lower demand in Japan and Europe because of mild winter weather.

Lower energy prices are happy news for motorists, for the operators of energy-gulping factories, and for government inflation-fighters around the world.

But they mean low income for oil producers from Indonesia to the Middle East to west Texas - as well as for the many banks, service companies, and real estate interests that are tied to the oil industry. Banking problems in Texas, for instance, won't be helped by low oil prices. Neither will the international debt situation in Mexico, Nigeria, Egypt, and other oil producing nations.

Saudi Arabia currently receives $13 to $14 a barrel for its ``light'' crude, compared with an ``official'' OPEC price of $17.52. Producers in the Gulf are not curbing production in reaction, oil watchers say.

A reminder of where unbridled oil output can lead: In late 1985 and early '86 oil prices collapsed from almost $30 a barrel to below $10. Saudi Arabia wanted ``market share'' at that time. The Saudis got it, but angered the poorer members of OPEC - Nigeria, Iran, and Indonesia - which saw dearly needed oil revenues dwindle. Eventually, the Saudis relented. Output dropped and prices firmed.

Philip Verleger, a petroleum expert and visiting fellow at the Institute for International Economics in Washington, D.C., says that today Saudi Arabia and other nations are following a ``constant output'' policy. In other words, they don't want to produce more some months and less others. They want to produce at a constant level, storing what is not used in tankers at sea for later sale.

OPEC president Rilwanu Lukman plans to announce unspecified measures today aimed at stabilizing oil prices. But the only way to do that, analysts say, would be for someone to tighten the taps.

Saudi Arabia usually ends up being that someone. But Saudi oil minister Hisham Nazer has steadfastly opposed a cut in OPEC output. The Saudis refuse to return to their old role as ``swing'' producer for the cartel, adjusting production levels to keep prices stable.

But the argument by other oil producers for the Saudis to cut back is strong.

``It's a hard sell,'' says G.Henry Schuler of the Georgetown Center for Strategic and International Studies in Washington, ``telling 100 million Nigerians or 200 million Indonesians to cut back so that Saudi Arabia [population: 5 million to 10 million] can get 25 percent of revenues. Everybody's going to have to cut.''

Fereidun Fesharaki, head of the energy program at the University of Hawaii's East-West Center, says hostilities in the Gulf have constrained Iran's exports only marginally. The war has forced Iran to import petroleum products because of damage to its refineries. And logistics have been made more difficult. But Mr. Fesharaki estimates Iran's crude oil revenues at $8.5 billion last year - sufficient for Iran's food needs and the war effort, with plenty left over.

Similarly, Iraqi exports - via pipeline to the Mediterranean and the Red Sea - are unimpeded by the Gulf war. Last year, Iraq was able to export only 1.6 million barrels a day. Today it sells 2.7 million. Kuwait, Qatar, and the United Arab Emirates, all of which remain apprehensive about the threat nearby Iran poses, still are exporting without constraint. The UAE, in fact, has signaled that it will boost production next month.

Only if oil prices fall to the $12 to $13 a barrel range, Zanoyan says, will there be enough concern within OPEC to try to cut back production.

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