Surge in oil prices hurting Asian recovery
Surge in oil prices hurting Asian recovery
SINGAPORE (Dow Jones): Iraq's move to shut down its oil exports this week pushed crude prices to levels not seen since the Gulf War, which has industry analysts pondering just how high crude might go and the repercussions of crude's upward spiral this year.
Iraq stopped its oil exports in a political move to show its anger over continued United Nations sanctions against it. That decision was made after Baghdad rejected a two-week extension of the UN's oil-for-food program, which allows Iraq to export billions of dollars of oil in return for food and other humanitarian aid.
Iraq exports about 2.3 million barrels of oil a day.
Although some analysts have said they see crude hitting US$30 a barrel in the near term, most don't think these levels are sustainable after the first quarter of next year.
But they say the consistent rise in crude this year is damping Asian oil-importing nations' economic recoveries, which could provide at least part of the catalyst for the Organization of Petroleum Exporting Countries to relent and boost their production levels.
"At the end of the day, OPEC does have the capacity to lift production to offset Iraq's action," said James Brown, vice president of corporate research and strategy for Merrill Lynch & Co., Singapore.
"OPEC is in the driver's seat. They're almost in a better situation (since Iraq stopped oil exports) than they were before," Brown added, explaining that Iraq's shutdown has exacerbated already persistent global oil supply concerns.
Those fears sent prices soaring on the New York Mercantile Exchange Monday, when the nearby West Texas Intermediate contract hit a post-Gulf War high of $27.15 a barrel. That compares with this year's low of $11.26/bbl set Feb. 17 and a 12-year low of $10.35/bbl in December 1998. The January WTI contract last traded on Nymex Access Wednesday at $26.59/bbl.
The current situation is reminiscent of the two previous oil shocks in 1973-74 and 1979-80, and those shocks were painful for several Asian nations, said Al Troner, managing director of Asia Pacific Energy Consulting in Kuala Lumpur.
Unlike developed nations, emerging markets such as Thailand, the Philippines and Indonesia are more immediately impacted by rising fuel costs because of their more industrial-oriented economies, he said.
Oil and gas-exporting Indonesia has actually benefited from rising fuel prices. Its finance ministry last week said rising oil prices have helped narrow the nation's budget deficit this year from an estimated 6.8 percent of gross domestic product for the fiscal year ending March 31, 2000, to 4.8 percent of GDP.
But the cost of domestic fuel subsidies has gone up with rising oil prices, and Indonesia has not gained as much as it would have in the past, Troner said.
"Now oil and gas make up only about 30 percent to 35 percent of its export earnings compared with about 60 percent to 70 percent in the early 1980s," he said.
Thailand and the Philippines, on the other hand, are heavily dependent on oil imports and have begun to voice concern about their fledgling recoveries being hurt by rising oil prices.
John Diaz, managing director of Moody's Investors Service Inc.'s Energy Group in New York, said Moody's believes "there is a good likelihood" that crude will reach $30/bbl and that the current high prices are sustainable through the first quarter of 2000.
In a series of moves since March 1998, OPEC and some non-OPEC oil-producing nations have cut crude supplies with production cuts of some 5 million b/d, with OPEC pledging 4.3 million b/d of those cuts.
Asia Pacific Energy's Troner said there is a growing divergence among OPEC member nations regarding production and price levels.
"We've seen signs of a rift among them," he said. While some nations have said the current prices are acceptable, Saudi Arabia - the world's largest oil producer and OPEC's driving force - has begun to argue that these "short-term gains may eventually bring about the disasters of the last 30 years," Troner said.