SAN FRANCISCO -- Maybe oil heat really is a dinosaur, as the gas industry would have you believe. Because bubbling crude has shown again this week that it's still the tyrannosaurus rex of events, capable of roiling the financial markets.

On Thursday, of course, the

Dow Industrial Average

fell 3.6%, the

Nasdaq Composite

lost 3% and the

S&P 500

shed 2.6%, largely in reaction to a more than 8% climb in oil prices on the

New York Mercantile Exchange

. Friday morning, major proxies were on the rebound as oil prices and tensions cooled a bit in the Middle East; around 11:30 a.m. EDT, crude was down 37 cents to $35.69 a barrel, while the Dow was up 1.5%, the Comp higher by 4.7% and the S&P 500 up 2.4%.

Crude's latest jump was a reaction to the escalation of fighting between the Israelis and Palestinians, and the deadly terrorist attack on as U.S. Navy ship in Yemen. A minor factor may have been news

Euell Energy

had to forfeit delivery of its "winning" shares of the U.S.

Strategic Petroleum Reserves

because the company couldn't line up the necessary letters of credit.

The news came amid a growing sense among oil-industry observers that the whole Strategic Petroleum Reserve release announcement was "a sham," as Fadel Gheit, oil analyst at

Fahnestock

, declared. Gheit has maintained all along that the release of the 30 million barrels would have little or no impact on oil prices because the problem isn't a lack of oil, but a lack of additional production capacity to turn crude into distillate products. (

RealMoney.com's

Christopher Edmonds

, as fine a golfer as I know, has taken a similar

view of the situation.)

Then there's

Saddam Hussein

, whose "elite" Republican Guard unit conducted military exercises in Western Iraq on Thursday,

Reuters

reported. Baghdad also warned the

TheStreet Recommends

United Nations

it could suspend exports if monies held in a special account for Iraq aren't converted to euros from dollars -- the currency of its great enemy.

As a prelude, perhaps, to such a suspension, Gheit observed Iraqi production has fallen markedly in recent weeks; to 2.83 million barrels a day in September from 2.94 million in August, the biggest drop among

OPEC

members, according to

www.Platts.com

.Gheit claimed Iraqi production has more recently fallen below 2 million barrels a day.

Saddam may be using oil production as a bargaining chip to force the U.S. to lift sanctions, the analyst said. But he also mused about the possibility that international sanctions have taken such a toll on Iraqi production facilities that they lack necessary spare parts and other technical infrastructure to meet their OPEC-mandated quotas. He also noted Saddam has proven he can survive without the benefit of huge oil revenue, something other financially strapped OPEC governments have yet to do.

Either way, the end result is less supply from Iraq, whose deposits -- like most OPEC nations -- generally need far less refining than the type of oil held in the U.S. strategic reserve. Less supply of such "clean" crude will help keep upward pressure on oil prices, and we've all gotten the drift as to what that means for Wall Street.

Gheit, who claimed oil prices had peaked two weeks ago when I first mused about the possibility of an

October Surprise from Saddam, now concedes prices are more likely to trade in a range from $30 to $40 for the foreseeable future instead of $27 to $32, as he'd previously expected.

Recent events in the Middle East -- which almost no one could have predicted -- have also compelled Tom Petrie, CEO of

Petrie Parkman

, an energy investment firm in Denver, to revise upward his outlook for prices, although he declined to specify a figure.

"When you get into these kind of disruption, you're dealing with chaos and predicting the outcome is futile," Petrie said, adding the developments in the Middle East remind him more of the early 1970s than 1990. "I still believe the next big direction is down, but it may not be until spring until we get to lower prices."

Finally, another oil-industry observer mused about the possibility Iraq was behind the bombing of the USS Cole. Gheit dismissed the theory, suggesting that Hussein may be crazy, but is smart enough to know

Bill Clinton

would love an excuse to take the military offensive against Iraq and leave the Oval Office "wrapped in the flag rather than

Monica Lewinsky's

blue dress." (Ouch.)

So maybe Saddam wasn't behind the attack, but the U.S. has been compelled to reply with force after suffering attacks (real or imagined) against its forces on foreign seas. Remember the

USS Maine? Or the

Tonkin Gulf?

I don't want to be an alarmist, and I certainly don't want to see any escalation of violence. My point is the same as it was two weeks ago: There is still a risk oil prices could go even higher, and that such a move -- as a result of Saddam's shenanigans or other factors -- could send equities reeling further.

Back then, I sensed market participants and pundits were overly complacent about oil after it declined following the Strategic Petroleum Reserve

announcement on Sept. 22. Then again, I don't see how anyone who's been paying even passing attention to recent events can be complacent about oil anymore.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.