Price rides high on Iraq, Kuwait and Venezuela

31 January 2003
Oil prices remained high in late January as the UN weapons inspectors said Iraq was not co-operating in substance and Baghdad hinted at strikes against Kuwait. The heightened political tension overrode an increase in Venezuelan production to more than 1 million barrels a day (b/d) to keep the price of benchmark Brent crude at $30.05 a barrel on 29 January.

The inspectors' report, delivered on 25 January, has made war more probable, according to UK Foreign Secretary Jack Straw. He said in a 26 January interview that 'it is now inescapable that Iraq is in material breach' of resolution 1441. On 5 February, US President George Bush will present new evidence to the UN from US intelligence sources. The council will then meet again on 14 February - a possible date at which military action will be finalised.

In the event of a war, some 2 million b/d will be lost from the oil market for the duration of the conflict. If Iraq's oil facilities are damaged, it could take months to regain that level of production.

Now there are new threats to the oil market. 'If there will be an attack from Kuwait I cannot say that we will not retaliate,' said Iraqi deputy prime minister Tariq Aziz on 28 January. 'We will of course retaliate against the American troops wherever they start their aggression on Iraq. This is legitimate.'

Kuwait, which in December produced an average of 1.9 million b/d, sustained significant damage to its oil facilities after the 1990-91 Gulf war. While it is unlikely Iraq could accurately target much of Kuwait's oil infrastructure, the loss of even some output could coincide with lost Iraqi and Venezuelan crude.

Striking staff at Petroleos de Venezuela (PDV) have said the company is now producing 1 million b/d, some 2 million b/d below estimated capacity and 1.6 million b/d below the 2002 average.

Despite the strike, the government has pulled production back up from a low of about 200,000 b/d in December by focusing on new fields that are technologically easier to operate. However, the increase is expected to be only temporary. Several thousand PDV workers have been sacked for striking, which will further hamper the company's ability to return to full operating capacity once the strike ends.

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