High Oil Prices to Leave Global Economy With New Year Hangover

January 1, 2003
LONDON -- Oil prices soared again Monday on the back of a strike in Venezuela and the prospect of a war in Iraq, putting a global economic recovery in early 2003 in jeopardy, analysts warned.

Oil prices in London and New York roared ahead as a strike in Venezuela that has paralyzed crude shipments entered a fifth week and a U.S. military build-up continued in the Persian Gulf, AFP reported.

The price of benchmark Brent North Sea crude oil for February delivery rose to $30.80 a barrel in late trading from 30.16 at the close of the previous session.

The last time prices were so high was in the immediate aftermath of the September 11, 2001 terror attacks in the United States.

In New York, the reference light sweet crude February contract scaled new two-year highs, rising 66 cents to $33.38 a barrel in early deals.

"Crude prices have risen sharply ... as the U.S. military build-up in the Persian Gulf and the Venezuelan oil workers strike continues," said Lawrence Eagles, analyst at brokers GNI.

The price rally is good news for oil producers that rely heavily on oil revenues to keep their economies and public finances in good shape.

But it has set alarm bells ringing in oil-consuming nations.

Motorists are already facing higher prices at the pumps, while companies from manufacturers to airlines are seeing costs pick up.

"It is a concern because higher oil prices essentially act as a tax on consumption," said Commerzbank economist Nick Parsons. "In a world which is teetering on recession, all that happens is that it eats into firms' profit margins."

Parsons said companies find it hard to raise prices to cover increased costs in times of recession, while consumers are likely to spend less on other goods when gasoline prices rise.

"So I think that's going to dampen world economic growth and that's why we're not looking for any interest rate rises anywhere in 2003," he added.

There was little sign of any respite for oil consumers Monday, as prices pushed higher amid concerns that the strike in Venezuela might not be resolved before any war in Iraq begins.

The loss of Venezuelan and Iraqi exports would deprive the oil market of about five million barrels of oil per day, analysts estimate.

Although members of the Organization of Petroleum Exporting Countries (OPEC) have pledged to make up any shortfall caused by the loss of Iraqi exports, experts say they would be hard pressed to replace Venezuelan supplies as well if the strike drags on.

Moreover, even if OPEC does agreed to pump more oil, the extra supplies are unlikely to arrive on world markets for several weeks yet given the time needed for members to reach a decision and to ship the oil from the Middle East to the United States.

"Hopes that OPEC will provide more oil will have to wait a while," warned Eagles.