[PEN-L:29985] OPEC weighs impact of Iraq strike

["ken hanly" <khanly@xxxxxxxxxxxxxxx>]

OPEC weighs impact of Iraq attack

U.S. move to topple Saddam could squeeze
producers
An Iraqi worker tends to the Iraqi-Turkish pipeline in Krkuk, northern Iraq.
Iraq cut off oil shipments for a month this spring to protest the Israeli
military offensive against the Palestinians.


By John W. Schoen
MSNBC

Aug. 29 -  As Mideast nations warn the U.S. against going to war with Iraq,
most cite the political turmoil that such a unilateral attack would create.
But oil-producing countries, many of whom will meet next month in Japan to
adjust production levels, have another big reason to fear a regime change. A
new government in Baghdad could increase Iraqi oil production - and take a
bigger share of the world market for crude.

        At OPEC's Sept. 19th quarterly meeting - held in Osaka to coincide
with an International Energy Forum gathering of 70 nations - the cartel will
once again try to manage the price of oil by tweaking production levels to
better match supply and demand.
       With oil prices nearly 60 percent higher than lows hit in January,
some oil analysts and traders expect to see OPEC raise production to help
tame prices. OPEC has said it wants to keep oil prices around $25 a barrel -
high enough to churn out the cash needed to meet member countries' spending
needs, but low enough to prevent higher-cost non-OPEC production from coming
on line and stealing market share.
       But the rise in the price of oil this summer has had less to do with
supply and demand than White House threats of war with Iraq. Most analysts
suggest that, with oil now trading at levels not seen since Sept. 11,
current prices reflect a "war premium" of as much as $6 a barrel. The
reason: Traders fear that war would bring a short-term interruption in
supplies - especially if Iraq strikes back at key oil production and
transportation sites outside its borders.

 In 1991, Iraqi troops retreating after a seven-month occupation of Kuwait
smashed and torched 727 wells, badly polluting the atmosphere and spilling
up to eight billion barrels of oil into the sea.

       But OPEC is apparently still undecided about whether to combat the
"war premium" by increasing supplies. On Thursday, Iran and Indonesia
weighed in by joining Venezuela and Kuwait in calling for keeping production
levels unchanged.
       "The consumer countries say oil prices are high, so please add oil,"
said Roger Diwan, an oil analyst at PFC in Washington. "OPEC says the market
is high from the war premium that [the Bush administration has] created."

 OPEC output hikes see opposition

         Even in more tranquil times, managing oil prices by forecasting
demand is a tricky business and OPEC's track record is mixed. At this time
of year, as consumption of heating oil rises, oil demand forecasts rely
heavily on weather projections.
       So even if they leave production unchanged, "the chance they're going
to overshoot or undershoot is very big," said Diwan.
       As the world's economy has slowed, the Organization of Petroleum
Exporting Countries has moved to prop up oil prices by cutting production by
some 20 percent since the beginning of last year. With prices still
approaching $30 a barrel, oil consuming countries say more oil is needed to
avert higher prices.



        Much of that extra oil is already coming to market from non-OPEC
producers, especially Russia. A revitalized oil industry in the former
Soviet Union is now overtaking Saudi Arabia as the world biggest supplier.
And Russian oil companies are among those poised to help a new Iraqi
government boost oil production when and if export sanctions are lifted.
       "OPEC right now has a lot of members who are fighting for more market
share," Phil Flynn, a oil trader at Alaron Trading, told CNBC. "The worst
thing that could happen to OPEC is to have a lot of Iraqi oil come onto the
market. So, they're very happy with the way things are right now."
       At current levels of about one million barrels a day, Iraqi
production is a drop in the global oil bucket. But Iraq is sitting on the
world's second-largest reserves, behind Saudi Arabia. Though the Bush
administration has argued for the need to pre-empt terror attacks, economics
is playing a big part in the debate over the pros and cons of ousting Saddam
Hussein from power.



        "If you had control of Iraqi oil reserves you could break the oil
cartel," said Bill O'Grady, a commodities analyst at A.G. Edwards in St.
Louis. "You could have oil prices fall to 10 to 15 dollars (a barrel) for as
far as the eye could see. And if you want to perk up the world's economy,
$10 oil will do the trick."
       But it's far from certain that a regime change would bring a
government friendly to the U.S. In fact, any new government will face huge
obstacles, as competing Iraqi factions move to settle old scores and vie for
power, according to Jim Placke, a Middle East analyst at Cambridge Energy
Research.
       "And they are very nationalist," he said. "They're not going to let
go of their oil industry and turn it over to the U.S. Army to run."
       While the benefits of a regime change are unclear, the cost of a
failed U.S. attack could be much worse, said O'Grady.
       "You could force the whole region into upheaval," he said. "What if
al Qaeda manages to overthrow the royal family in Saudi Arabia? Then you
have a really nasty regime controlling the largest oil reserves in the
world."