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.