The Memorial Day weekend assaults in Saudi Arabia leave traders even more fearful that world oil production can be disrupted.
By Associated Press
Published June 2, 2004
WASHINGTON - Fear is driving gasoline prices well past $2 a gallon.
Motorists may be paying as much as 36 cents a gallon more at the pump because of the petroleum industry's anxiety that terrorists will disrupt oil supplies, a fear that increased with two murderous rampages by al-Qaida-linked gunmen at oil compounds in the heart of Saudi Arabia.
Estimates vary, but economists say as much as $10 to $15 is being added to the cost of every barrel of crude oil because of fear that terror in Saudi Arabia, violence in Iraq or unrest elsewhere will disrupt future oil supplies.
The fear factor went up a notch over the holiday weekend with the attack in Khobar, Saudi Arabia, that killed 22 people, mostly foreign oil workers. It was the second attack in a month against oil workers in the Islamic kingdom.
Oil prices surged more than $2 a barrel Tuesday, the first trading day since the Khobar attack. The price of gasoline jumped 6 cents a gallon on the New York Mercantile Exchange.
"There obviously is a fear premium," said Seth Kleinman, an oil market analyst at PFC Energy, a Washington consulting firm. While there always has been such a premium in oil prices, with the targeting of Saudi's oil industry "it's gotten a lot further, and it's gotten a lot bigger."
One reason is that Saudi Arabia, which pumps 10 percent of the world's oil, is the only producer that has the capacity to produce more as needed to stem demand and prices, economists said. While the attacks did not target Saudi pipelines, terminals or oil fields directly, the psychological impact has rattled the markets.
After receding somewhat last week, the price of light crude for July delivery jumped $2.45, settling Tuesday at a record $42.33 a barrel on the New York Mercantile Exchange.
"Increasing terrorist activities around the world and uncertainty and instability have driven oil prices over the last six months. It's not a lack of supply," argues Fadel Gheit, an energy strategist for Oppenheimer and Co. in New York.
Gheit estimates that when oil prices were at roughly $42 a barrel, as much as $15 was generated by traders pushing up prices out of fear of disruptions. Other estimates have put the fear premium at $5 to $12 a barrel.
The size of the premium, whatever it may be, is of less importance than that it exists and has helped propel gasoline prices to record levels to the current average of more than $2 a gallon nationwide.
The cost of crude accounts for nearly half of the cost of a gallon of gasoline at retail pumps, according to the Energy Department. Energy economists figure that an additional $1 in the cost of crude adds about 2.4 cents to the retail price of gasoline.
Analysts said tight crude supplies, growing demand and a refining industry struggling to produce enough gasoline has added to the gas price surge.
But the Khobar rampage and the killing on May 1 of six Westerners at Yanbu, a Saudi refinery and petrochemical hub, have escalated the fear factor because they dissolved the notion that Saudi Arabia could protect its oil complexes.
These incidents "have shattered the market's confidence that everything was well-protected in Saudi Arabia," said Amy Myers Jaffe, a director of energy programs at the James A. Baker Institute for Public Policy at Rice University. "Before, there were pipeline attacks in Iraq, general instability. But the (Saudi) attacks turned ongoing anxiety into deep anxiety."
Al-Qaida terrorists, claiming responsibility for the Khobar attack, said the aim was to disrupt oil markets psychologically, if not by blowing up a pipeline, oil terminal or tanker. A similar message was made clear to oil markets when Iraqi insurgents recently failed in an attack on an Iraqi oil terminal.
The Organization of Petroleum Exporting Countries "will do its best to make the fundamentals right," Saudi Arabian oil minister Ali Naimi said Tuesday, reacting to consumers' concerns.
Saudi Arabia was boosting its own production, but not because the United States had pressured it to do so, Naimi said. He reiterated that he would push for OPEC to raise its output ceiling by 2.5-million barrels a day, or 11 percent, when the group meets Thursday in Beirut to consider increases in production.
Many oil industry analysts estimate that without the cloud of uncertainty posed by terrorists and the continued violence in Iraq, oil prices would be in the $30 range. They say there's still plenty of oil available.
Some analysts believe speculators are using the fear of disruptions to game the system and push prices beyond where they should be even assuming some disruption.
The Bush administration's high-profile stance that it will not use its emergency government oil reserves has made it easier for oil speculators to drive up prices, Jaffe contends.
"He is giving them (speculators) a security blanket," agrees Gheit of Oppenheimer, explaining that traders have been able to push up prices for oil deliveries at a future date without fearing they may be caught in a price squeeze if the government should release oil from its emergency stocks.
Has the fear premium become a permanent part of today's crude oil markets?
"The fear factor might narrow a little bit," Gheit said. "But I doubt it will completely disappear. We better get used to it."
OIL PRICES COULD ALTER SUMMER TRAVEL PLANS
Evidence is mounting that Americans are getting more concerned after paying higher and higher gas prices in recent weeks. The news has far-reaching implications for the sector ofFlorida's tourist industry that which draws most of its summer business from markets within a day's drive.
A few weeks ago, fewer than a third of American leisure travelers said gas prices would affect their travel plans this summer. Research released Monday by Yesawich, Pepperdine, Brown & Russell, an Orlando advertising agency that monitors people's travel intentions nationally, found significantly changed opinions.
Now, 56 percent of leisure travelers agree that gasoline prices have hit levels that will affect their vacation plans. The higher the prices get into uncharted territory above $2 a gallon, the more travelers promise to rethink their plans.
In the survey, the company asked travelers the price at which they would "definitely re-evaluate" their summer vacation plans. Here are the results:
