Crude oil prices shot up nearly 80 cents a barrel on world markets yesterday as concerns grew over escalating Persian Gulf tensions in the wake of the deaths of hundreds of Iran and other pilgrims during demonstrations in Mecca.
Oil traders around the world took note of Iranian leader Ayatollah Ruhollah Khomeini's vow to avenge the deaths of 275 Iranians in the Saudia Arabian holy city as an indication that oil supplies could be disrupted if the situation worsened.
Trading was active throughout the day. At one point, prices in some markets rose as high as $1.43 a barrel before profit taking brought them down.
On the New York Mercantile Exchange, September contracts for West Texas intermediate, the benchmark U.S. crude, rose 79 cents from Friday's close to settle at $22.16 a barrel.
On the European spot market, where oil is sold to the highest bidder, Britain's North Sea Brent crude closed at $20.70 a barrel, up 75 cents.
The United Arab Emirates' Dubai Light -- the key crude from the Persian Gulf -- was up 45 cents to $18.45 a barrel.
"The market was up on fears of tensions in the Persian Gulf. The opening prices were much higher but the market tapered off with profit taking," said one New York oil trader.
"I think it is going to stay above $22 a barrel for a while," he added.
Another trader said the weekend incident in Mecca has increased the likelihood of supply disruptions, particularly from Kuwait and Saudi Arabia.
He said for every $1 increase in the price of a barrel of oil, the inflation rate in the United States goes up more than one percentage point.
At the same time, he said, if peace were to be achieved in the seven-year-old war between Iraq and Iran, oil prices could nose dive as both countrys together are capable of pumping an additional 2 million to 5 million barrels per day into an already oversupplied market.
"We could quickly go back to the days of $10 a barrel," he said.
Sanford Margoshes of Shearson Lehman Bros. Inc. in New York said there is a strong possibility of an incident occurring in and around the Persian Gulf as a result of the Mecca deaths between now and the end of the year.
"Probably what will trigger it is an Iraqi attack on Iranian shipping and port facilities, in which case Iran will retaliate vigorously and it could extend to Kuwait. So between now and the end of the year, there will be a price spike of up to $25 a barrel or more despite the current oil glut," Margoshes said.
"I think the most difficult period will be the next several weeks, with upward pressure on prices," he said.
On the New York Mercantile Exchange, September heating oil closed at 56.95 cents a gallon, up 1.60 cents.
Unleaded gasoline closed at 55.94 cents a gallon, up 1.07 cents.