Oil prices rose to six-month highs this week on concerns that the U.S. may launch an attack against Iraq, and analysts say prices could spike further if tensions continue to mount.

"There is a growing sense of inevitability of an armed confrontation with Iraq

that will provide upward support to oil prices over the next several months," said ABN Amro analyst Matthew Conlan.

Vice President Dick Cheney has been touring the Middle East this week in an apparent attempt to build a coalition against Iraq. Meanwhile, President Bush said Wednesday that he is "deeply concerned" about Iraq, and that the U.S. is "going to deal with" Iraqi President Saddam Hussein.

Shot Away

Analysts say a $2 to $3 premium already has been built into oil prices as a result of general worries about the geopolitical landscape. Since the start of the year, a wave of short-covering has pushed oil prices up 22% to $24.12 a barrel.

"The fundamentals don't support oil prices being where they are," said Tyler Dann, an analyst at Banc of America Securities.

Although the economy has started to show signs of improvement, analysts say worldwide demand for oil remains anemic and is expected to stay that way through the end of the year. The International Energy Agency cut its demand-growth forecast once again this week to just 420,000 barrels a day, compared with its previous estimate of 500,000.

Speculation surrounding a military attack on Iraq has had such a meaningful impact on prices because the U.S. imports about 700,000 barrels of oil per day from Iraq, representing roughly 9% of total U.S. oil imports.

The Father

The last time hostilities flared up, oil prices soared 131% in three months to almost $40 a barrel. However, by the time the Gulf War actually started, prices had fallen significantly, and when the conflict ended in February 1991, oil prices were back down to $19.

Scott Smith, an analyst at Dresdner, Kleinwort & Wasserstein, said that if another confrontation were to take place, the physical dislocation of oil would be less serious than it was during the last skirmish, because Iraq has not invaded a neighboring country. In 1991, Iraq torched Kuwaiti oil fields, and shipments from the Persian Gulf were temporarily halted.

Still, Fahnestock analyst Fadel Gheit said military action in Iraq potentially could lead to a $5 increase in the price of oil, because the country exports some 2 million barrels of oil per day to the world market.

"We could see an additional rise

in oil prices, but OPEC is sitting on 5 million barrels of spare capacity, and it would be very easy for them to turn on the spigots," he said.

Bobby Ewing

Other analysts agree that with the cartel currently operating below capacity at about 80%, it could easily increase production and supplement any shortfall.

Gheit and others say Saudi Arabia could single-handedly make up any deficit left by Iraq. The U.S. currently imports about 2 million barrels of oil per day from Saudi Arabia, representing 25% of total U.S. oil imports.

"The only caveat is whether

President Bush goes into Iraq in a way that is not favored" by the majority of OPEC members, said Smith. "The U.S. has to at least attempt to send in weapons inspectors."

Middle East support for military intervention in Iraq has not proven forthcoming so far, and Jordan has said a U.S. confrontation would be a "catastrophe" for the region.

But even if Bush were to ignore the opposition and forge ahead with his plans, analysts say OPEC would be highly unlikely to impose any kind of embargo because of the sheer costs involved. The U.S. is the largest importer of oil in the world.

"It would be very expensive to keep capacity fallow. Not only are you losing revenues, you have to pay money out to store it and shut in the existing wells that are producing," said Dann of Banc of America. "When you try to restore production there are all sorts of technical difficulties."

Bebe Rebozo

The last time OPEC cut off oil to the U.S. and some of its allies was in 1973, after the U.S. sided with Israel in a war between Israel and surrounding Arab countries. When OPEC resumed selling oil, it quadrupled the price.

In the unlikely event OPEC imposes an embargo, Dann noted that the U.S., Europe and Japan could together produce 4 to 5 million barrels of oil per day for up to four months.

ABN Amro's Conlan increased his 2002 oil price forecast to $21.50 from $19.50 to reflect a war premium stemming from the threat of military action against Iraq, as well as strong OPEC compliance that he believes will continue through the end of the year.

He also raised his earnings-per-share figures on 10 oil stocks, including

ExxonMobil,

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Conoco,

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ChevronTexaco

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and

Amerada Hess.

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"Even if nothing happens, the government is still going to keep

Iraq guessing, so oil markets are going to continue to speculate that something is going to happen," noted Gheit. "The premium built into stock prices is not going to leave anytime soon."