Blame and Anxiety Rise Along With Price of Oil

A combination of political jitters about the Middle East and supply concerns for winter helped drive the price of crude oil briefly past $88 a barrel in New York yesterday.

The price rise rattled stock markets, which dropped for a second straight day, in part because of concerns that rising fuel costs would siphon money from consumer budgets and thwart efforts by the Federal Reserve to prop up the economy while containing inflation. The jump in oil prices also provoked finger-pointing between U.S. politicians and officials of the Organization of the Petroleum Exporting Countries.

The latest cause of political anxiety in oil markets was the request by Turkey's prime minister that parliament today authorize a possible military incursion into northern Iraq to chase Kurdish guerrillas.

Little oil is flowing from Iraq's Kurdish north because of frequent attacks on pipelines that flow through Turkey, and some analysts said that oil traders were overreacting to Turkey's saber-rattling. Others said that new military conflict would add to political turmoil in the region.

Intensifying efforts by the United States to isolate Iran because of its nuclear program have also bolstered oil prices in recent weeks, experts said.

Those political fears are adding tension to an oil market that is already tight. Despite high prices, demand worldwide is up 1.5 percent over last year and is running particularly strong in the United States, China and the Middle East. At the same time, world production remains constrained because of limited output capacity, continued conflict in Iraq, OPEC quotas and insurgents who have cut off much of Nigeria's production.

"It seems like the market woke up and said it was going into the winter and didn't have adequate stocks," said Leo Drollas, deputy executive director and chief economist at the Center for Global Energy Studies in London. "And that has pushed up the price."

OPEC said last month that it would raise production by half a million barrels a day, but Drollas and other oil analysts say that's not enough to meet demand and that petroleum inventories have continued to fall worldwide.

Demand for oil is usually sluggish this time of year. Yet last week the International Energy Agency noted that instead of the normal buildup in inventories, the major industrial nations' oil stocks appeared to have dropped by 360,000 barrels a day in September. Drollas noted that inventories in the Organization of Economic Cooperation and Development nations were down by the equivalent of three days' supply.

OPEC says it isn't to blame. The group's secretary general, Abdalla Salem el-Badri, said in a written statement yesterday that "while the Organization does not favor oil prices at this level, it strongly believes that fundamentals are not supporting current high prices and that the market is very well supplied." He said commercial OECD inventories equal to 53.5 days' supply were "at a comfortable level."

He pointed to hedge funds, investment banks and other investors that have poured money into oil markets in recent years. Rising oil prices are "largely being driven by market speculators," he said.

Oil consultant Philip K. Verleger Jr. said, however, that speculation on oil contracts has dropped since the U.S. credit crisis began in August. He estimated that 5 percent of the money invested in oil futures has been withdrawn -- in part, he said, because some investors wanted to reduce borrowing loads. He said some investors also wanted to avoid an oil-price decline like the one a year ago.

"OPEC can't hide," Drollas said. "It always talks about speculation, but this time it's a fundamentals-driven increase in price."

Verleger said a more important factor influencing prices was the Energy Department's decision in August to resume purchases of about 100,000 barrels of crude oil a day for the Strategic Petroleum Reserve. The Bush administration has said that the purchases are small compared with world consumption of 85.9 million barrels a day.

The record oil prices have arrived just as Congress is considering what to put in a package of energy legislation. On Monday night, Allan B. Hubbard, the National Economic Council's director, sent House Speaker Nancy Pelosi a letter spelling out what it would take to avoid a veto by President Bush. The letter ruled out a renewable portfolio standard and tax increases on the oil industry, while pushing for expanded U.S. production, new fuel economy standards and a big mandate for ethanol and other alternative fuels.

Rep. Edward J. Markey (D-Mass.) seized on the crude oil price increase to accuse the Bush administration of "coddling Big Oil instead of developing alternative energy resources that will lower oil prices and save our planet from the worst impacts of global warming."

White House press secretary Dana Perino said: "Look, there's no doubt that energy prices are too high. They disproportionately hurt low-income families that have to spend so much of their money on energy, and when those prices go up, it eats into the family budget on the other things that they want to be able to buy."

She said that was why Congress needed to pass a "more ambitious bill so that we can get out of this vicious cycle of the problem of supply and demand and get some alternative energies, clean-burning alternative energies that can help fuel our economy."