World: Oil Markets Respond To Middle East Violence

(AFP) WASHINGTON, July 19, 2006 (RFE/RL) -- World oil prices slowed their rapid rise of last week, finishing just below $74 on July 18, after rising to $78.40 on July 14. Although the fighting between Israel and Hizballah in Lebanon has not had a direct impact on world oil supplies, fears that the conflict could spread and include Iran, a backer of Hizballah, drove prices up. RFE/RL correspondent Julie Corwin spoke with Tom Wallin, president of the New York-based Energy Intelligence Group about the volatility in the world oil market.

RFE/RL: Why did oil prices rise so sharply when neither Israel nor Lebanon is an oil producer?

Tom Wallin: There is a heightened level of geopolitical uncertainty in the Middle East, and that's accompanied by the fact that there is very little spare crude oil production capacity. So there is this underlying concern that if the situation gets worse or a key oil exporter gets threatened, that you have the potential for a serious loss of supply that can't be covered by extra production from elsewhere in the system. And, almost all of the surplus capacity that exists, which is fairly limited, is in the Middle East itself, so it's sort of a compounding issue when you have the geopolitical strain coming from the Middle East itself.

RFE/RL: So it's a fear of a supply shock rather than an actual supply shock?

Wallin: What's going on with these attacks on Lebanon and on Israel has just raised the level of anxiety and uncertainly about Iran, about the stability of some of the [Persian] Gulf Arab regimes in the longer term, not immediately, but in the longer term. That's raised concern about oil supplies -- with two-thirds of the world's oil reserves, you know, a large part of oil and global trade coming from region -- it just automatically raises those concerns. So it's more psychological than actual physical supply disruption.

RFE/RL: What if the conflict doesn't spread, will prices stabilize?

Wallin: Part of the reason the market was down on Monday [July 17] in response to what happened over the weekend was there was basically a realization that there is no immediate direct impact on oil supplies. But that sort of plays against this concern about the longer term, that we sort of entered a new chapter here in terms of the Middle East and the kinds of potential for instability. I mean, particularly I think the concern is that countries like Iran, like Syria and the instability in Iraq, all of these things make for a situation that is much less controllable, much more uncertain. These countries are in a way -- through the hand of Hizballah -- sort of demonstrating that they're a force to be contended with.

RFE/RL: What about an economic recession -- that's one way to bring prices down?

Wallin: The way the oil market has been going it seems like, you know, we're not going to get any kind of major downturn. The other thing, I guess, is that the shorter-term impact beside [energy] alternatives would be an economic impact, where you have some kind of global economic recession as a result of inflation and high prices. But we seem to keep bumping up through higher and higher oil price levels without seeing major economic impact. One of the big questions in the oil industry has been for the last year is when does this start to bite economically.

RFE/RL: How will Russia, an oil exporter, benefit from this spurt of oil prices?

Wallin: Like [for] any oil exporter, the high prices are good. I think the downside is in the longer term, because ultimately what all these high prices are doing is that they are creating headroom for all kind of alternative energy supplies to be developed, and they will be. We know that it takes a long time and so forth, but if we have oil prices at $75 for an extended period, there is going to be other alternatives that start to come in.

RFE/RL: Will Turkmenistan also benefit, even though it is a natural gas -- rather than oil -- producer?

Wallin: Turkmenistan is probably the last twig of the last branch of the tree in term of to feel the impact of these higher prices, but ultimately it should. But because of these transit issues and the clout of the Russian gas-supply system, they end up being a price-taker.