Crude oil's roller-coaster ride set to gather pace January 4 2003
Predicting that oil prices may be volatile in any given year is to state the obvious. But so many political and economic trends are at play now, oil analysts say, that 2003 might turn out to be the rockiest year in a decade.
"Every factor that could affect the oil market is with us this year," said Amy Myers Jaffe, senior energy adviser at the James A. Baker III Institute for Public Policy at Rice University in Houston.
"There could be war in the Middle East," Ms Jaffe said. "There is Venezuela. There is the possibility of a price war between OPEC and non-OPEC producers. How about labour unrest in Nigeria? It could happen. This year could be the roller-coaster ride of roller-coaster rides."
Light sweet crude ended 2002 at $US31.20 a barrel on the New York Mercantile Exchange.
The price of oil averaged about $US26 a barrel in 2002, a result in large part of a series of production cuts made by the Organisation of the Petroleum Exporting Countries.
The full impact of those cuts came to bear on global markets near the end of the northern summer, just as the Bush Administration began to threaten Iraq with war.
The war premium ebbed once United Nations weapons inspectors arrived in Baghdad. But prices surged again in December, reaching a two-year high when widespread protest in Venezuela against President Hugo Chavez brought oil production there to a standstill. Venezuela is the fourth-largest supplier of oil to the US, accounting for 9 per cent of its daily supply of crude oil.
Then, by the end of the year, the possibility of war loomed once again, after the Bush Administration declared that Iraq was in material breach of resolutions from the United Nations.
The confluence of turmoil in Venezuela and Iraq posed a grave threat to the oil markets, analysts said, because OPEC has the spare capacity to make up for supply disruptions from one place, but not both.
"They cannot handle a combination of the Venezuelans and an Iraqi disruption," said Edward Morse, executive adviser at the Hess Energy Trading Company.
"All the OPEC countries are producing all out," he said.
Oil prices increased 16 per cent in December alone, because of the strife in Venezuela.
As both sides in Venezuela dug in at the end of 2002, it appeared that more retail price increases were likely. And the longer prices remain above $US30 a barrel, the more they threaten to weaken the already anaemic economic recovery.
Even if the Venezuelan conflict is resolved soon, analysts say, it will take weeks for Venezuelan oil exports to reach normal levels.
Increasingly, industry analysts have called on the Bush Administration to release oil from the strategic petroleum reserve to ease the supply shortage. But they also concede that the Administration may be waiting to gauge what the full impact of a war in Iraq could be on the oil market, and to release crude oil from the reserve only then.
A war in Iraq raises concerns not just about Iraqi supplies, which were intermittent through much of 2002, but also about other supplies. Oil traders worry that a war could disrupt oil supplies from Iraq's Persian Gulf neighbours. Would the Iraqis bomb Saudi oil fields and sites? Or would Saudi extremists themselves try to sabotage them?
But most analysts agree that whatever disruptions might occur, they will probably not come in the form of oil embargoes like those of the early 1970s.
"People have to stop thinking that oil markets will be affected by embargoes, because embargoes are a thing of the past," said Moises Naim, a former Venezuelan minister of trade and industry and now editor of the journal Foreign Policy.
"The problem is failed states," Mr Naim said. "It's a harbinger of things to come: when internal political turmoil limits oil to world markets."
