Breaking the $40-a-barrel barrier last week, oil prices might cause another international economic downturn. Sherine Abdel-Razek investigates the causes and repercussions of rising prices Traders at the New York Mercantile Exchange held their breath in astonishment last Friday while watching the benchmark crude futures breaking the key psychological $40 barrier for the first time since October 1990, two months after Iraq invaded Kuwait. Thirteen years later, troubles in the Middle East, mainly in Iraq and security concerns in Saudi Arabia triggered it again. "The price is historically high but came after a spiral increase in oil prices during the last year," said Ahmed El-Naggar, editor ot the Strategic Trends report issued by Al-Ahram Centre for Political and Strategic Studies. "2003 witnessed the highest rate of continuously increasing oil prices since 1984." Analysts believe that much of oil's price increase represents a "security premium" about fears that violence in the Middle East, such as last weekend's killing of five oil engineers at a petrochemical complex in Saudi Arabia, might cause a supply disruption. Saudi Arabia is the world's number one oil exporter and has 60 per cent of the world's proven oil reserves. Also, El-Naggar pointed out that the US failure to suppress the Iraqi resistance has hurt the world oil supply. "Being in Iraq, the US thought that it would be able to plan the oil price in a way favourable to its economic interests so that the price ranged between $15-18 a barrel. However, the recent attacks on the main oil terminal in the southern Iraqi port of Basra seems to be voiding these plans." The Iraqi oil exports after the war are now between 1.6-1.8 million barrels a day, even less than the 2.5 million exported before the war. However, El-Naggar clarified that it is not a shortage in supply that caused the hike, but rather nervousness about the future stability of oil supplies from the region. This opinion echoes Qatar's Oil Minister Abdullah Bin Hamad Al- Attiyah's statement on Saturday. Al--Attiyah attributed ongoing rises to geo-political reasons. "Certainly prices are too high and there's a five- dollar political premium. The hike in oil prices has no relation with supply shortages." The effects of these increases, which could continue, are worrisome. Claude Mandil, director of the International Energy Agency (IEA), a watchdog for oil importers, has warned that a new oil shock in which prices climb in the coming weeks is possible with prices rising to the point where they compromise a global economic recovery. Western economies were left reeling by two oil shocks in the 1970s, the first when Arab oil producers turned to oil as a political instrument during the 1973 Arab-Israeli war, cutting supplies to several Western countries. The second shock was triggered by the Iranian Revolution, which disrupted the country's oil exports in 1979. "The American economy, the world's largest, is expected to be the worst hit as each dollar increase in the price of oil adds $4 billion to the US import bill," said El-Naggar. The oil price spike to more than $40 in 1990 and a 40 per cent jump in oil prices over the summer of 2000 were both followed by recessions in the US. Moreover, an IEA report released last week warned that a $10 price increase per barrel of oil sustained over one year could trim about 0.8 per cent off Asia's overall economic growth, bringing higher unemployment and inflation. Market experts say that a move by the Organisation of Petroleum Exporting Countries (OPEC) to increase the production ceiling can be one of the exits. The OPEC cartel "should do something" when it meets on 3 June in Beirut, Lebanon, and reconsider its 23.5 million barrel-per-day output ceiling, United Arab Emirates Oil Minister Obaid Bin Saif Al-Nasseri said on Sunday. OPEC agreed in March to cut daily output quotas by one million barrels to 23.5 million from 1 April. Al-Nasseri also said it would be "wise" for OPEC to change its current target price range of $22 to $28 per barrel, which has been disregarded since the beginning of the year. There have been suggestions -- met with fervent denials -- that OPEC was considering changing the upper end of the range. News that oil ministers will hold consultations in Amsterdam on 21 May, on the sidelines of an energy conference, to review these situations and take a proper decision, has not yet been confirmed. However analysts are sceptical that the OPEC would take such a decision to support the US economy, especially since US pressure in the late 1990s pushed the price of oil down to $16 a barrel, badly hurting the exporting countries' revenues. As for the impact on Egypt, which is currently a net exporter of oil, El- Naggar seems to be optimistic. "This will enhance the exports side in the trade balance and increase the much-needed foreign currency," he said. He also dismissed the possibility of an increase in Egyptian gasoline prices stemming from the rising oil prices. In 1998, when the prices of oil declined sharply worldwide the government did not move to lower gasoline prices. Also the prospect of social unrest in response to higher gasoline prices is certainly a major factor in the government's calculations. Another positive effect might be an increase in tourism revenues with more tourists coming from the oil-rich Gulf countries.
