War fever, Venezuela drive U.S. oil to $34.50

War fever, Venezuela drive U.S. oil to $34.50

Richard Mably, Reuters, London

World oil prices surged to fresh two-year highs on Tuesday as
the United States urged the U.N. Security Council not to shirk
difficult choices on Iraq and a military build-up in the Gulf
fueled speculation that war is looming.

U.S. light crude in electronic trade set a high of US$34.52 a
barrel, its highest since December 2000, and by 1100 GMT (6 p.m.
Jakarta time) was up 55 cents at $34.46. London Brent blend added
40 cents to $31.05 a barrel.

The strike in Venezuela that has sapped oil exports since
early December and the killing in Kuwait of a U.S. Defense
Department employee near a U.S. military base also helped pull
prices higher.

Foes of President Hugo Chavez on Tuesday extended a nationwide
strike into the 51st day, aiming to force the leftist leader to
resign and call immediate elections.

With Venezuelan exports running at just 500,000 bpd, a fifth
of normal flows, commercial crude stockpiles in the United States
are close to 26-year lows.

"A lack of adequate commercial oil stocks in the U.S. and no
nearby replacement for lost short-haul crude from Venezuela has
left the oil supply chain stretched almost to breaking point,"
said London's Center for Global Energy Studies.

"OPEC alone does not have sufficient readily available spare
capacity to replace both Venezuela's and Iraq's oil exports, much
less to cope with any supply disruptions from other Gulf
producers that might result from any prolonged conflict in Iraq,"
the CGES said in a report to clients.

OPEC's biggest producer Saudi Arabia already is tapping into
the world's only significant spare capacity. Industry sources
told Reuters at the weekend that Riyadh could reach nine million
bpd by February, up a million bpd from December flows.

If OPEC is unable to cover a dual outage from Iraq and
Venezuela, the Paris-based International Energy Agency is
expected to release some of its huge emergency strategic reserves
for the first time since the Gulf War, in January 1991.

"Were an attack to be launched on Iraq, consuming country
governments would have to utilize quickly their abundant
strategic oil stocks to ensure adequate supplies," said the CGES.

U.S. officials show no sign of softening their line against
Baghdad ahead of a major report on January 27 from U.N. weapons
inspectors on whether Iraq has met disarmament commitments.

Secretary of State Colin Powell, addressing fellow Security
Council members on Monday, said: "We must not shrink from our
duties and our responsibilities when the material comes before us
next week. We cannot be shocked into impotence because we are
afraid of the difficult choices that are ahead of us."

Chief weapons inspector Hans Blix delivers his judgment to a
full U.N. sitting next Monday and the 15-member Security Council
evaluates the report on January 29.

Blix spoke to reporters in Athens after a two-day visit to
Baghdad. "The Iraqis became aware that the world is disappointed
with their declaration," he said of Iraq's 12,000 page dossier.

"We feel the declaration has not answered a great many
questions."

Iraq said on Monday it would offer the inspectors more help
and would form its own teams to search for any banned weapons.

Blix said that Baghdad had refused to allow U2 reconnaissance
flights over its territory. "They put up a number of conditions
that were not acceptable to us," he said.

Iraq wants to accompany the planes with its own aircraft, but
would be prevented from doing so if the weapons inspectors flew
to the north or south of the country because of no-fly zones
patrolled by U.S. and British planes since 1991.

Britain said on Monday it was mobilizing some 30,000 troops to
join the tens of thousands of U.S. troops already in the Gulf.