The oil price moved significantly upwards in late March and early April amid an upsurge in violence between Israel and the Palestinians and an Iraqi call upon Arab states to impose an oil embargo on the US in response to its support for Israel. On 1 April, the OPEC basket price topped the organisation's target price of $25 a barrel for the first time since 11 September, but analysts maintain that market fundamentals will bring about a modest price decline as market jitters fade.
Iraq's Baath Party on 1 April issued a statement calling for oil to be used 'as a weapon' against Israel and the US. The call was taken up by Iraqi Foreign Affairs Minister Naji Sabri, who asked the Organisation of the Islamic Conference (OIC) states on 2 April to back an embargo. 'It's up to all the Arab oil-producing countries,' he said. 'But in general terms, the Arab world and Arab countries have the right to co-ordinate their policies and stand by their brothers the Palestinians.'
Iran cautiously backed the Iraqi proposal. 'The first thing is to put pressure on the US,' said Foreign Affairs Minister Kamal Kharrazi on 2 April. 'As long as the Americans are supporting Israel, there is little chance that Israel will withdraw.' However, Iran has ruled out acting without backing. 'It will be effective if all Arab countries would take such a decision,' said Kharrazi. Iran supplies no oil to the US.
Standing against an embargo, Saudi Arabian Foreign Affairs Minister Prince Saud al-Faisal said it would be counterproductive. 'Oil? It's what the Arab countries need the most for their development,' he said in an interview with France's Le Monde on 2 April. 'If they want to strengthen themselves in the face of the Israeli aggression, they have no other alternative than to go on selling oil and gas. Without these resources how can the intifada and the Palestinian struggle for the recovery of their rights be supported?'
Analysts say that the oil supply is highly unlikely to be deliberately constricted by the Arab states as a political weapon. '[Iraqi President] Saddam Hussein doesn't have that support but the market is reacting with concern to everything that raises tension in the Middle East,' says Ken Miller, analyst at the US' Purvin & Gertz. 'That is why the market is now up further than the market fundamentals suggest it should be. I'm in agreement that there's a war premium right now of about $4-5 a barrel.'
But market fundamentals will be the real drivers for the oil price when the market nerves settle. 'Troubles in the Middle East don't necessarily disrupt the oil flows,' says Miller. 'We're running on excess capacity within OPEC of 5 million-6 million barrels a day. There's a huge increase in OPEC's output capacity planned and non-OPEC capacity alone is growing faster than world demand. Our tendency is for a lower oil price.'
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