New oil shock ahead as $100 spike looms

The growing international crisis over Iran's nuclear program could trigger a catastrophic oil price spike, sending crude prices over $100 a barrel, senior Wall Street analysts are warning. With prices already at around $75 a barrel, such an increase could mean drivers facing prices of $4 a gallon. A single political shock could be enough to send oil markets into panic, said Adam Sieminski, senior energy economist at Deutsche Bank in New York. "If we have one more big problem we are going to have triple-digit oil prices." Sieminski points to confrontation with Iran, a worsening of the situation in Iraq or a recurrence of devastating hurricanes in the Gulf of Mexico as potential catalysts for a major rise. Prices rose by as much as $1.20 in late trading on Apr. 28 after the United Nations inspector Mohamed El Baradei said Iran had not complied with demands to disclose the extent of its uranium enrichment program. In a report, Sieminski argues that with the world consuming some 85 million barrels of oil a day, a supply disruption of two million barrels a day (60 percent of Iran's exports) "can only be rebalanced through an extraordinary rise in prices." But he believes any breaching of the $100 level would be short-lived, and that prices would fall to between $30 and $60 as increased investment brings new production and refining capacity on stream in oil-producing nations. Mary Novak, managing director of energy services of the consulting firm Global Insight, said Iran would not need to turn off the taps completely–even if it shut off just a 10th of its three million barrels a day of exports, the impact would be dramatic. "With the situation we have, 300,000 barrels a day would drive prices up significantly," she said, adding that with the global economy growing more quickly than expected this year "demand is still expanding and supply is having trouble catching up." High crude prices have pushed gasoline prices up to $3 a gallon in the US, where President Bush has described the rise as a tax on motorists, and Republican senators have promised measures to abate prices, including an investigation of oil company tax payments. The approach of the summer driving season has combined with the hangover effect of last year's hurricanes on US refining capacity to underpin current price levels. Refineries in the US have increased their spring maintenance shut-downs for several weeks, to deal with damage from Hurricane Katrina. At the same time, more stringent environmental controls on gasoline content led to some gas stations running dry. New rules, which come into force this year, have mandated higher ethanol content in vehicle fuel; but since ethanol cannot be pumped through pipelines, a shortage of infrastructure meant that in some states, including Texas, fuel was not getting to the pumps. Manouchehr Takin, oil analyst at the Center for Global Energy Studies in London said: "Every year, approaching the summer driving season in the US, the market gets hyped, and the prices go higher, because of the fear of a shortage." The stand-off with Iran is one of several factors that could cause a significant supply disruption. Ethnic and tribal disputes in Nigeria have resulted in the loss of 500,000 barrels a day. Output in Iraq, potentially the world's second-largest exporter, is still well below pre-war levels. There are also concerns among traders about supplies from Venezuela and Russia because of internal politics. High prices have advanced rapidly up the political agenda in the US, where Republicans are trailing in the polls ahead of mid-term elections. Republican senators led by majority leader Bill Frist have proposed a series of measures including the repeal of tax incentives to oil companies intended to make them invest in the Gulf of Mexico and measures to increase refinery capacity. The issue has also prompted a return to the debate over opening up the unspoiled Arctic National Wildlife Refuge in Alaska to drilling by oil companies. President Bush also called for an investigation into possible price manipulation, and for new deposits into the US strategic petroleum reserve to cease.