[NYTr] Blame and Anxiety Rise Along With Price of Oil

[All the News That Doesn't Fit]

The Washington Post - Oct 17, 2007
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/16/AR2007101602005.html


Blame and Anxiety Rise Along With Price of Oil

By Steven Mufson
Washington Post Staff Writer

A combination of political jitters about the Middle East and supply
concerns for winter helped drive the price of crude oil briefly past
$88 a barrel in New York yesterday.

The price rise rattled stock markets, which dropped for a second
straight day, in part because of concerns that rising fuel costs would
siphon money from consumer budgets and thwart efforts by the Federal
Reserve to prop up the economy while containing inflation. The jump in
oil prices also provoked finger-pointing between U.S. politicians and
officials of the Organization of the Petroleum Exporting Countries.

The latest cause of political anxiety in oil markets was the request by
Turkey's prime minister that parliament today authorize a possible
military incursion into northern Iraq to chase Kurdish guerrillas.

Little oil is flowing from Iraq's Kurdish north because of frequent
attacks on pipelines that flow through Turkey, and some analysts said
that oil traders were overreacting to Turkey's saber-rattling. Others
said that new military conflict would add to political turmoil in the
region.

Intensifying efforts by the United States to isolate Iran because of its
nuclear program have also bolstered oil prices in recent weeks, experts
said.

Those political fears are adding tension to an oil market that is
already tight. Despite high prices, demand worldwide is up 1.5 percent
over last year and is running particularly strong in the United States,
China and the Middle East. At the same time, world production remains
constrained because of limited output capacity, continued conflict in
Iraq, OPEC quotas and insurgents who have cut off much of Nigeria's
production.

"It seems like the market woke up and said it was going into the winter
and didn't have adequate stocks," said Leo Drollas, deputy executive
director and chief economist at the Center for Global Energy Studies in
London. "And that has pushed up the price."

OPEC said last month that it would raise production by half a million
barrels a day, but Drollas and other oil analysts say that's not enough
to meet demand and that petroleum inventories have continued to fall
worldwide.

Demand for oil is usually sluggish this time of year. Yet last week the
International Energy Agency noted that instead of the normal buildup in
inventories, the major industrial nations' oil stocks appeared to have
dropped by 360,000 barrels a day in September. Drollas noted that
inventories in the Organization of Economic Cooperation and Development
nations were down by the equivalent of three days' supply.

OPEC says it isn't to blame. The group's secretary general, Abdalla
Salem el-Badri, said in a written statement yesterday that "while the
Organization does not favor oil prices at this level, it strongly
believes that fundamentals are not supporting current high prices and
that the market is very well supplied." He said commercial OECD
inventories equal to 53.5 days' supply were "at a comfortable level."

He pointed to hedge funds, investment banks and other investors that
have poured money into oil markets in recent years. Rising oil prices
are "largely being driven by market speculators," he said.

Oil consultant Philip K. Verleger Jr. said, however, that speculation
on oil contracts has dropped since the U.S. credit crisis began in
August. He estimated that 5 percent of the money invested in oil
futures has been withdrawn -- in part, he said, because some investors
wanted to reduce borrowing loads. He said some investors also wanted to
avoid an oil-price decline like the one a year ago.

"OPEC can't hide," Drollas said. "It always talks about speculation, but
this time it's a fundamentals-driven increase in price."

Verleger said a more important factor influencing prices was the Energy
Department's decision in August to resume purchases of about 100,000
barrels of crude oil a day for the Strategic Petroleum Reserve. The Bush
administration has said that the purchases are small compared with world
consumption of 85.9 million barrels a day.

The record oil prices have arrived just as Congress is considering what
to put in a package of energy legislation. On Monday night, Allan B.
Hubbard, the National Economic Council's director, sent House Speaker
Nancy Pelosi a letter spelling out what it would take to avoid a veto
by President Bush. The letter ruled out a renewable portfolio standard
and tax increases on the oil industry, while pushing for expanded U.S.
production, new fuel economy standards and a big mandate for ethanol
and other alternative fuels.

Rep. Edward J. Markey (D-Mass.) seized on the crude oil price increase
to accuse the Bush administration of "coddling Big Oil instead of
developing alternative energy resources that will lower oil prices and
save our planet from the worst impacts of global warming."

White House press secretary Dana Perino said: "Look, there's no doubt
that energy prices are too high. They disproportionately hurt
low-income families that have to spend so much of their money on
energy, and when those prices go up, it eats into the family budget on
the other things that they want to be able to buy."

She said that was why Congress needed to pass a "more ambitious bill so
that we can get out of this vicious cycle of the problem of supply and
demand and get some alternative energies, clean-burning alternative
energies that can help fuel our economy."