Oil prices tumbled in London today, defying nearly unanimous predictions prices would skyrocket once war broke out in the Persian Gulf.
After jumping $7 a barrel to nearly $40 in the first hour of the war, prices on world markets began to tumble. By midday, the price of benchmark North Sea Brent crude had dropped to near $21 a barrel in European trading.
The sharp drop in oil prices in both Asia and Europe followed the announcement that the United States and other Western nations planned to release oil from their strategic petroleum reserves. The action could add 2.5 million barrels a day to the world's oil supply.
Analysts attributed the decline to a surplus of worldwide oil supplies and the early perception that the fighting in the gulf poses no immediate threat to the rich oil fields of the region.
Oil prices surged last night after the outbreak of war in the Persian Gulf, but fell back quickly in the wake of reports that there had been little damage to oil facilities and no immediate threat to oil supplies. But analysts warned that oil prices could quickly begin to rise if the war news turned sour for the allies.
To reassure oil traders and consumers that supplies will remain ample and discourage panic buying, President Bush authorized the Energy Department to sell crude oil from the nation's 590-million-barrel strategic stockpile almost immediately after the start of the war was announced.
At the same time, seven of the country's biggest oil companies -- Mobil, Chevron, Unocal, Arco, Amoco, Shell and Conoco -- announced that they would freeze their wholesale or retail gasoline prices in an effort to keep prices stable at the pump.
Traders and analysts said huge inventories of crude oil and petroleum products in the United States and around the world apparently had a dampening effect on the price increase, as did news that the outbreak of war in the Persian Gulf apparently was having no effect on Saudi Arabia's rich supplies. Reports from oil company officials here and in Saudi Arabia said there were no indications of any serious damage to oil wells, pumping stations or refineries.
"It makes sense, because there is no shortage unless they can hit the Saudi fields," said John Lichtblau, executive director of the Petroleum Industry Research Foundation, a New York think tank.
"Demand is off, the world is oversupplied," said the head trader at a major international oil company. "If Saudi Arabia can keep producing the way they've been -- crisis? What crisis?"
No oil has flowed from Iraq or Kuwait since August, so damage to those installations, if any, would not tighten world supplies. If crude oil shortages do develop, the oil to be sold from the strategic stockpiles of the United States, Japan and Germany -- as much as 2.5 million barrels a day -- is expected to more than make up the difference.
Oil prices had been rising steadily in recent days as traders grew nervous about the outlook for a supply-threatening war in the Persian Gulf. In futures trading yesterday, the price of a benchmark barrel of high-quality crude for February delivery rose $1.93 to $32.
But traders said last night that many participants in the spot market took advantage of the early advance in prices began to sell their positions, bringing the market quickly back to earth. "Hey, man, it's a one-day war," one crude oil trader joked last night.
"Everybody's blood was stirred," said one seller who took advantage of the upward spike of as much as $9 immediately following the outbreak of war.
Another New York trader said he sold 50,000 barrels last night using his home computer during the surge.
"As far as I can figure, just about everyone in the States rushed back to their office and started trading," said a head trader at a major oil company.
Anticipating such a rush to trade on war news, the Bush administration and the oil industry took what appeared to be planned steps to hold down prices and reassure consumers who might otherwise rush to top off their gas tanks and create an artificial shortage.
"Americans should not panic about their ability to obtain gasoline or other oil products in the event of a war in the Persian Gulf," said Charles J. DiBona, president of the American Petroleum Institute, a trade group.
"They instead should feel reassured about the adequacy of supplies."
In addition to the price freeze announced last night by the seven oil companies, many firms have put restrictions on purchases by major wholesale customers to prevent hoarding that could cause what one industry executive called "self-inflicted" shortages that would push prices higher.
And in another development aimed at forestalling panic, Energy Secretary James D. Watkins has sent a letter to governors of all 50 states asking them not to interfere with the free market.
"There are significant economic risks associated with intervening in any way to attempt price or allocation controls in the event of potential market disruptions," Watkins warned. At least 30 states still have on their books laws authorizing governors to impose some form of gasoline rationing or supply allocations, such as the odd-even sale days invoked during the oil crises of the 1970s.
Staff writer Kara Swisher contributed to this report from New York.