Production Boom Acts as Shock Absorber on Prices at the Pump

Tensions with Iraq fail to boost gas prices in new oil economy.

What does it take to make the world's oil market tremble these days? The last time Iraqi leader Saddam Hussein roared, oil prices soared, lines formed at the pumps, and the price of used Ford Explorers went through the floor.

This time, Wall Street can barely suppress a yawn. Sure, the price of crude oil has jumped up and down like a pogo stick, but gasoline prices haven't budged.

The reasons illustrate how much the global oil market has changed in the past decade. Some energy experts say the world has entered a period of relative oil-price stability that can shrug off short-term tensions, such as the current one with Iraq.

"The critical point here is: Is there anything that could reduce the supply of oil to the world?" says Kevin Lindemer, an analyst at Cambridge Energy Research in Cambridge, Mass. "In the Gulf War, that was a fear but it didn't happen. It's unlikely to happen this time."

In some ways, the fundamentals of the oil market have changed dramatically in recent years. There's much less unity within OPEC, the group of oil-producing nations that once adhered to production quotas with an Islamic-law rigidity, thus controlling prices more closely.

Now Saudi Arabia and other nations are producing more than their agreed to quotas in order to secure higher profits. In addition to the fierce competition within OPEC, oil-producing nations are facing newer competitors from places as remote as Kazakstan and the deeper waters of the Gulf of Mexico as a part of a global mini-drilling boom.

Making all this diamond-bit activity affordable is a raft of new technology, which has cut the cost of production in half in the past 10 years. In this context, Iraq has had only a minimal effect on the global price of oil.

Before the Gulf War, Iraq was a major player, producing 3.5 million barrels a day. Now it can sell only 750,000 barrels a day, to pay for food and humanitarian needs.

Steady gas prices

From an oil refiner's point of view, raising gas prices during short-term political conflicts is not worth the risk. In part, this is because today's market is more competitive among the companies that take crude oil and turn it into the products that consumers use, such as gasoline, home heating oil, and plastic.

With plenty of gasoline in reserve, refiners and retailers are absorbing any short-term increase in the price of crude, rather than passing it on to consumers. "This is a very competitive market," says Sarah Emerson, an oil analyst at Energy Security Analysis in Boston. "Let's say you're Chevron and you increase your gas prices, but Exxon doesn't. Think of how many gas stations you can stop at on the way home from work."

To be sure, the crude-oil market has been volatile in the past few weeks. The price of a barrel of crude jumped from $19 in September to $23 last week, when the US started sending aircraft carriers to the Gulf. But gasoline and home-heating-oil prices have remained stable throughout.

"From an oil market point of view, the market reaction shows there's some fear in the price," says Ann Louise Hittle, an analyst at Cambridge Energy Research. "But from a consumer point of view, they could care less."

While most of the press and politicians have focused their attention on Iraq's weapons supplies and Baghdad's unwillingness to be monitored, some analysts say the current conflict has had more to do with Saddam's drive for good old-fashioned market share.

Drive for market share

Consider this: In 1990, when Iraq invaded Kuwait, Saudi Arabia was producing 5.4 million barrels a day and Iraq was producing 3.5 million barrels. Today Saudi Arabia is producing 8 million barrels a day and Iraq about 750,000 barrels, at least officially. In a sense, Saudi Arabia has absorbed Iraq's market share.

"This is a battle for market share within OPEC, and Saddam Hussein wants to get it back," says Norman Higby, head of WMP Forecasts, an oil industry consulting firm in Menlo Park, Calif.

According to intelligence reports, Iraq may be smuggling anywhere from 200,000 to 1.5 million barrels a day through Iran and into the open market. "What Iraq is trying to do is fire the UN as its marketing agent and sell the oil on the market."

But if Saddam was hoping to have more effect on the economies of the developed world, some analysts say he should have acted sooner, perhaps at the beginning of the summer driving season. "If this had happened back in May or early June, you'd see a much bigger impact," says Mr. Lindemer.