The liberation of Iraq and the overhaul of its creaky oil production system were supposed to boost supplies and help lower prices. That may yet happen. But with Iraq still producing less than half of its pre-war output, oil prices have shot up to levels not seen since the war started. And consumers will likely have to wait awhile before prices ease again.
GLOBAL OIL INVENTORIES are already about 12 percent below the five-year average for this time of year, according to Energy Department figures. And with the U.S. economy beginning to show signs of life, increased consumption later this year could further tighten supplies.
“World oil demand is starting to rekindle,” said oil analyst George Gaspar at Robert W. Baird & Co. “We’re starting to see increases in demand on a month-to-month basis.”
That’s helped push prices steadily higher. Crude oil prices pushed toward $33 a barrel Wednesday before easing a bit after a weekly report showed supplies holding up a bit better than traders had expected. But the report said gasoline supplies tightened even further than forecast. After easing this spring, gasoline prices have begun creeping up during the peak summer driving season. The average price of a gallon of regular gas rose 2 cents last week to $1.536, about 14 cents more than it was a year ago.
Oil supplies were hurt earlier this year by unrest in major oil producing countries Venezuela and Nigeria. But Iraq, with the world’s second-largest oil reserves, remains the biggest wild card in oil production forecasts. Uncertainty over the future of Iraqi supplies prompted the Organization of Petroleum Exporting Countries to leave production quotas unchanged at its latest meeting last week, even though price have surged above the cartel’s target price range of $22-$28 a barrel. Some analysts believe that, unless OPEC relents and begins pumping harder, Iraq’s production won’t come on line fast enough to head off further prices rises, especially if an unusually cold winter stokes demand.
Though Iraq’s oil industry sustained relatively little damage during the fiercest fighting, widespread looting throughout the country after the invasion of Baghdad sharply cut production capacity.
U.S. officials hailed the resumption of Iraqi oil exports last month. But much of that is coming from millions of barrels stockpiled at the Turkish Mediterranean port of Ceyhan before the war began. The major pipeline supplying Ceyhan from the oil-rich northern Iraqi fields surrounding Kirkuk remains shut down.
Before U.S. troops invaded Baghdad in April, Iraq was pumping about 2.8 million barrels of crude a day — of which some 2.2 million barrels were available for export. Production has since fallen to about 1.2 million barrels a day, of which some 800,000 barrels are available for export.
In the days leading up to war, hopes ran high that rapid expansion of Iraq’s oil output could blunt the impact of OPEC quotas and guarantee a steady supply of relatively cheap oil. But U.S. officials now concede that goal has receded further into the future. On Tuesday, U.S. administrator Paul Bremer told reporters it would take some $2 billion to restore Iraqi production to 2.5 billion barrels a day — still below pre-war levels — by next summer.
“We have a plan,” he said. “We are on target. We think we are going to make that.”
To reach that goal, the U.S. Army Corps of Engineers last month began taking bids for up to $1 billion worth of oil rebuilding contracts, which they hope to award by mid-October, with work beginning by November or December. The Corps has promised that U.S. troops will protect workers fixing damaged pipelines, repairing looted facilities.
But with attacks continuing on U.S. forces, security remains a vital concern for companies bidding on those contracts to rebuild Iraq’s outdated oil pipelines and refineries. An American civilian with Kellogg Brown & Root, the Halliburton unit that was awarded the initial oil rebuilding contract, was killed Tuesday when his truck was blown apart by a remotely detonated land mine north of Tikrit.
Existing facilities remain vulnerable to sabotage. Bremer cautioned Saturday that the Iraqi oil industry faces attacks from both Saddam loyalists and apolitical bandits looking to strip oil facilities of marketable gear. Last week, sabotage was suspected after an oil pipeline caught fire near a key refinery in northern Iraq.
STRATEGIC STOCKPILING CRITICIZED
With global oil supplies so tight, some critics say the Bush administration’s decision to continue stockpiling crude is also helping to keep prices high. The Energy Department, which began topping off the 700-million-barrel Strategic Petroleum Reserve in the months leading up to war, has continued to add nearly 11 million barrels since May.
On Tuesday, Sen. Carl Levin, D-Mich., urged Energy Secretary Spencer Abraham to suspend stockpiling until prices fall and global inventories rise.
“This administration’s actions to fill the SPR regardless of the price of oil or the amount of oil available to the commercial sector is a major reason for these high (crude) prices,” he wrote.
The Energy Department has downplayed the impact of the SPR on prices, saying it has bi-partisan support for plans to add another 90 million barrels, which would fill the reserve to capacity.
Reuters contributed to this story.