– Oil Crisis...is the world about to be shocked

New oil shock ahead as $100 spike looms
Oliver Morgan and Heather Stewart - The Observer

The growing international crisis over Iran's nuclear programme 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 $72 a barrel, such an increase could mean drivers facing prices of 110p a litre on forecourts, according the the Petrol Retailers Association. Last week Lord Browne, chief executive of BP, warned that prices could rise to £1 as he unveiled bumper $5.27bn profits for the first quarter.

Shell is also expected to announce close to record numbers next week, with analysts expecting profits around $5.57bn, driven largely by the oil price.

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 Friday after the United Nations inspector Mohamed El Baradei said Iran had not complied with demands to disclose the extent of its uranium enrichment programme. Iranian President Mahmoud Ahmadinejad later said he 'did not give a damn' about the UN's opinion.

In a report, Sieminski argues that with the world consuming some 85 million barrels of oil a day, a supply disruption of 2 million barrels a day (60 per cent 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 at consultants Global Insight, said Iran would not need to turn off the taps completely - even if it shut off just a 10th of its 3 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 George 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 US 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 the autumn.

At the same time, more stringent environmental controls on gasolene content led to some US petrol stations running dry on Friday. 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 Centre 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.'

Ray Holloway, of the Petrol Retailers' Association, said that 'such a hike would be critical in the second quarter of this year, if we went to $100 a barrel in that period, you could see unleaded petrol at 110p a litre.' Average prices this weekend were 95p a litre.

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 unspoilt 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.