Saber-Rattling Saddam Sends Oil Higher

Saber-rattling from Saddam Hussein is sending the price of oil higher.

The Iraqi leader on Monday said that Iraq would suspend oil exports for 30 days in response to the West's support of Israel. Although Iraq's oil exports are limited by the United Nations' oil-for-food program, they still account for a tenth of OPEC member nations' output. Crude oil for May delivery was lately up 76 cents, or 2.8%, to $26.97 a barrel.

In some sense the tough talk from Iraq is nothing new; the country has, in the past, stopped oil exports in protest of U.N. sanctions. But the current embargo comes within the context of heightened tension in the Middle East over Israel's occupation of Palestine. On Friday Iran's supreme leader, Ali Khamenei, called for Arab states to enter a one-month oil embargo against countries supporting Israel. Libya today said that it supported the Iranian proposal.

"Given the nervousness of the current situation," says Fimat USA analyst John Kilduff, "I think these gains are going to hold for now."

While Saudi Arabia and Kuwait do not support the embargo, Kilduff says the worry in the oil market is that internal pressures may force the moderates to curtail oil production -- or at least not step up production to make up for other countries' cutbacks. Given the recent improvement in the global economy, some gain in energy costs was likely, but Kilduff estimates Middle East tension has tacked $5 onto the price of a barrel of oil.

If oil heads sustainably higher, U.S. economic prospects may falter. Each of the last five recessions was preceded by a spike in energy costs.

Bank One chief economist Diane Swonk is hopeful that the rise in energy prices won't damage the recovery process. We're out of the winter months, which is helpful, she points out, and the price of gasoline is still lower than it was a year ago. Moreover, Swonk thinks non-Arab oil producers will step up to the plate.

"We are going to see some increased oil production from other sources, but until we get that news on the line, oil markets are going to be jittery," she says.

One non-Arab oil country has problems of its own. In Venezuela, OPEC's third-largest producer, strikers have disrupted operations at state oil firm Petroleos de Venezuela, bringing exports to a standstill.

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