Oil Prices Surge to Record Highs on Turkey-Iraq Tensions

Editor's note: In September of 2002, Six months before the U.S. invasion of Iraq, Laurence Lindsey, senior economic adviser to president Bush, predicted that "regime change" in Iraq would lower oil prices. “The key issue is oil," he said, "and a regime change in Iraq would facilitate an increase in world oil,� which would drive down oil prices, giving the U.S. economy an added boost.

Concern that Turkey may attack Kurdish militants in Iraq and disrupt petroleum shipments pushed crude oil to a record price Tuesday, nudging $88 a barrel and extending a rally that has added $8 in a week.

Crude oil for November delivery rose as much as $1.84, or 2.1 percent, to $87.97 a barrel in electronic trading on the New York Mercantile Exchange, the highest level since the futures were introduced in 1983.

In early London trade, the contract was at $87.45.

Oil is closing in on the inflation-adjusted high of $90.46 seen in 1980, the year after the Iranian revolution and at the start of the Iran-Iraq war. Prices this year have averaged $67.

The latest surge in oil prices came after Turkey talked over the weekend of invading northern Iraq to pursue rebel fighters from the Kurdistan Workers' Party, or PKK.

Iraq has the world's third-largest oil reserves, after Saudi Arabia and Iran.

The Turkish prime minister, Recep Tayyip Erdogan, said Tuesday that measures against Kurdish groups were "unavoidable." Parliament on Wednesday will consider a plan for military action.

"Passage of this motion does not mean an immediate incursion will follow, but we will act at the right time and under the right conditions," the prime minister said.

Olivier Jakob, managing director at Petromatrix, a consultancy in Switzerland, said: "It's a strong geopolitical concern," and added that the market was pricing in some disruption, putting $90 a barrel "within easy reach."

The tensions on the Turkish border are a potential flash point in a volatile region that holds the bulk of the world's oil reserves.

Oil has gained more than $3 this week on speculation over the Turkish offensive and as declines in the value of the dollar enhance the appeal of commodities as a hedging tool against inflation.

The sustained rise in prices this year has surprised some energy analysts, who had expected a cooling toward the end of the year.

Those expectations have been overturned by recent data showing lower-than-expected inventories in the United States, signaling resilient consumer demand and continuing problems in the domestic refining industry.

"Oil is doing what it often does in periods of change or uncertainty: It runs until something stops it," said Jan Stuart, an energy economist at UBS. "This is not driven by fundamentals. This is momentum trading."

Indonesia's OPEC governor said on Tuesday that world oil supplies were adequate and that there was no justification for the recent price rise.

"The market fundamentals are in balance. There is too much money coming into the market," Maizar Rahman said, referring to speculative investors who see energy as a good bet.

Libya, an OPEC member, said it did not see a need for the exporter group to raise oil output further to lower the record prices. It called on consumer countries to cut fuel taxes.

"OPEC cannot do much now," the National Oil chairman, Shokri Ghanem, told Reuters when asked whether the group should lift supply further. "Consumers should cut down the taxes."

The Organization of the Petroleum Exporting Countries agreed at its last meeting in September to increase supplies by 500,000 barrels per day starting Nov. 1.

OPEC members have said that a falling dollar justified higher prices because oil-producing countries sell oil in dollars and often buy goods in euros. OPEC will discuss the impact of the falling dollar when members meet on Dec. 5, the Algerian oil minister, Chakib Khelil, said Monday.

Technical buying by investment funds is also driving oil's record run, analysts say. Data released Friday show that speculative buying of oil contracts increased last week.

"Particularly because the oil price has been so strong, that in itself may have attracted some speculators to oil," said David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney.

Many investment funds automatically buy or sell oil futures when prices hit certain levels. In recent days, as oil has pushed into new record territory, several of these resistance prices levels have been broached. That triggers new buying, driving prices even higher.

Despite talk of an economic slump in the United States that could suppress oil demand, traders have been focusing on the same factors that drove up prices in recent years: global demand for energy that keeps defying expectations, tight oil supplies and little spare production capacity to cushion sudden shortages.

For U.S. consumers, the latest increase is likely to translate into higher energy bills. Last week, the Energy Department warned that heating costs would be 10 percent higher on average this winter than last year because of higher oil and natural gas prices. It also expected gasoline prices to jump next year.

Regular unleaded gasoline sells for an average of $2.76 a gallon in the United States, according to AAA, the automobile club, up from $2.23 this time last year.

Despite the high prices, global oil consumption is rising, especially in China and the Middle East. Demand is expected to grow 2.4 percent next year, to 88 million barrels a day, according to the latest report from the International Energy Agency, which advises industrial nations.

Iraq's Kurdish region, which had been relatively stable since the U.S. invasion began, holds large oil reserves, especially in the area around the city of Kirkuk. But the pipeline linking those northern fields to Turkey has been crippled by hundreds of bombings.

Iraq pumped about 2.2 million barrels of oil a day last month and exported about 1.7 million barrels a day, mostly from the southern terminal in Basra.

The November oil contract in New York expires Wednesday. Oil for December delivery gained as much $1.70, or 2 percent, to $86.83 a barrel on Tuesday.

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