Gas Prices Stable in War

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Gasoline prices remained stable as U.S. troops rolled into Iraq to oust Saddam Hussein, easing fears that the start of the war would lead to a big jump in oil prices.

The swift seizure of the enormous oil fields in southern Iraq by U.S. Marines, Navy Seals and British Commandos apparently thwarted Hussein’s plans to sabotage the fields, which contain about 60 percent of Iraq's proven reserves. Sabotage would have sent oil prices soaring and hammered the global economy; while some wells were ignited, most of the key Iraqi fields were seized intact, according to U.S. and British military commanders.

The price of oil futures swiftly declined when it became apparent military actions had been successful at preventing a repeat of the 700 fires that damaged the vast Kuwaiti fields and cost more than $50 billion to extinguish after the first Gulf War in 1991. Prices on the spot market, where prices had reached almost $40 per barrel in trading during the day before the war, also dropped.

The price of U.S. light crude oil futures fell almost 25 percent to $28.61 a barrel, topping off a roughly 25-percent slide since last week, a sign that was good news for refiners.

Gas prices stable

Meanwhile, AAA reported at the end of last week the national average retail gasoline price was holding around $1.71 a gallon, which was actually down slightly from the all-time high of $1.72 per gallon reached the previous weekend.

Gasoline prices, however, crept higher in some areas, particularly in California, where the price was still above the psychological $2/gallon mark, according to AAA. Nor is it clear that gasoline prices will actually fall as quickly as the drop in crude prices.

Analysts note inventories of petroleum in the U.S., which play a larger role in gasoline pricing, have dropped to a 28-year low and refiners had been reluctant to re-stock in the unsettled pricing environment that prevailed through the winter.

Saudi Arabia’s promise to boost its oil production, the end of the home heating season in the Northeastern in the United States and the rebound in oil production in Venezuela after weeks of civil strife should make it easier to rebuild inventories, experts said.

Small relief

Any relief on gasoline prices could be relatively short-lived, though.
Daniel Yergin, a widely respected expert on the global oil industry, noted in an essay in the weekend edition of the Financial Times that Iraq’s fields are in need of substantial repair and may not be a factor in pricing on global markets for several months, if not years.

Nevertheless, the early reports of fires at wells near Iraq’s southern oil center of Basra had caused a buying frenzy of crude futures as the war began. The International Energy Agency in Paris said in a statement that it saw no reason to release emergency crude oil stocks despite the situation in Iraq and civil unrest in Nigeria, a major oil producer, according to the Reuters News Agency.

Longer term, however, Yergin noted prices might not move down much simply because global demand for oil is increasing. China became a net oil importer in 1993 and has doubled its oil consumption since the last Gulf War.

The Chinese economy is now growing between eight and ten percent per year and the increase in oil consumption usually keeps pace with economic growth, although the Chinese pushed conservation. In addition, a recovery in the U.S. and global economy also will raise the demand for crude oil, gasoline and diesel fuel.

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