Saudi oil may be key if U.S. attacks Iraq

WASHINGTON -- Fear over war with Iraq has sent oil prices higher, but Saudi Arabia and its oil dominance may well determine whether a U.S. attack on Iraq will have worldwide impact on energy markets -- and choke off a U.S. economic recovery with higher fuel prices.

That's another reason the Bush administration has been soothing relations with the Saudis, including a visit by Saudi Arabia's ambassador, Prince Bandar bin Sultan, to President Bush's ranch in Texas this week.

If it weren't for the nervousness over war possibilities, oil prices would be in the mid-20s, said John Lichblau, Petroleum Industry Research Foundation chairman.

Instead, the price of benchmark West Texas crude soared past $30 a barrel last week as Bush renewed his verbal attacks on Iraqi President Saddam Hussein and Vice President Dick Cheney forcefully outlined the administration's case for ousting the Iraqi leader.

The price receded somewhat and stood at just under $29 a barrel Wednesday, still up about 60 percent since the beginning of the year. But traders still fretted not only about Mideast war prospects, but about what OPEC producers will do in September when they map out future production levels.

Despite the run-up in oil price, the increase has yet to be felt by consumers. Gasoline prices, despite strong demand, have increased only slightly, averaging $1.40 a gallon this week, 8.5 cents cheaper than a year ago, said the Energy Department's Energy Information Administration.

It is not Iraq's oil that worries the markets. Despite its huge reserves, Iraq's production has plummeted because of U.N. sanctions and internal oil infrastructure problems.

U.S. imports of Iraqi crude have fallen from more than 1 million barrels a day earlier this year to a mere 137,000 barrels a day last month as U.S. oil companies slashed their Iraqi purchases because of concern over future supply and frustration over burdensome purchase and pricing procedures.

As a result, Iraqi supplies are no longer viewed as pivotal, analysts said.

Saudi Arabia is the world's biggest oil producer. Its officials -- as well as Kuwait -- have tried to reassure the markets that despite their opposition to a U.S. attack on Iraq, they remain prepared to replace Iraqi supplies and stabilize oil markets.

"The Saudis have a long-standing policy, which we have seen carried out in action in addition to rhetoric, about not using oil as a weapon," said White House spokesman Ari Fleischer.

But some analysts, and some Arab leaders, fear that an attack on Iraq could cause such chaos in the Middle East that internal political pressures might force Saudi officials -- and other major Arab producers -- to rethink their oil policies.

Daniel Yergen, chairman of Cambridge Energy Research Associates, says an attack on Iraq and cutoff of its supplies could cause prices to spike to $35 to $40 a barrel. He predicts prices would retreat once buyers are assured that supplies from other countries are not disrupted.