OPEC warns against military conflict with Iran

http://www.iht.com/articles/2008/07/10/business/opec.php

VIENNA: The head of the Organization of Petroleum Exporting Countries warned Thursday that oil prices would see an "unlimited" increase in the case of a military conflict involving Iran, because the group's members would be unable to make up the lost production.

"We really cannot replace Iran's production - it's not feasible to replace it," Abdalla Salem El-Badri, the OPEC secretary general, said during an interview.

Iran, the second-largest producing country in OPEC, after Saudi Arabia, produces about 4 million barrels of oil a day out of the daily worldwide production of close to 87 million barrels. The country has been locked in a lengthy dispute with Western countries over its nuclear ambitions.

In recent weeks, the price of oil has risen higher on speculation that Israel could be preparing to attack Iranian nuclear facilities. The saber-rattling intensified this week with missile tests by Iran. That has further shaken oil markets because of concerns that any conflict with Iran could disrupt oil shipments from the Gulf region.

"The prices would go unlimited," Badri said during the interview, referring to the effect of a military conflict. "I can't give you a number."

Analysts said the timing of Badri's remarks was noteworthy, given that the idea of an attack on Iran has been around for years. In addition, an attack on Iran would probably not specifically target oil facilities, said Johannes Benigni, managing director of JBC, an oil research and consulting firm in Vienna.

"Perhaps OPEC wants to say to the Americans in particular that there would be an economic price to be paid for an attack on Iran," said Daniel Gros, director of the Center for European Policy Studies in Brussels. "Gulf leaders also know that if a war broke out, the situation of some Gulf states also would become more uncomfortable and could have political difficulties for them domestically," he said, noting that some have their own Shia minorities.

Badri, a former oil executive who has headed the oil industry in Libya and also served as deputy prime minister of that country, called for a peaceful solution. He also suggested that an additional military conflict in the Middle East, besides the ongoing conflict in Iraq, would be severe and long-lasting.

"If something happened there, nobody would be able to solve it," he said.

The United States, Israel and other Western countries say Iran is seeking to develop nuclear weapons, but Iran says the program is only for civilian purposes.

Badri said that current geopolitical tensions were among the principal reasons why oil prices were so high.

He said that a shortfall in refining capacity and a weak dollar were other factors, and he reiterated OPEC's position that speculation on oil markets probably was the most important.

But he said that reserves of oil were plentiful and that worries about scarcity were misplaced.

Proven reserves of conventional oil worldwide rose slightly to about

1.205 trillion barrels in 2007 from 1.195 trillion barrels in 2006, according to one of two annual reports issued by OPEC on Thursday.

Supplies from Russia and Norway and other nations outside the 13-member OPEC are expected to keep growing, helped by technologies like turning gas and coal into liquid fuel and extracting oil from tar sands and shale.

Even so, Badri sought to assuage concerns about a supply shock, saying that OPEC members already were investing $160 billion in new production capacity up to 2012.

But he said additional investment in future production capacity could be limited, potentially sharpening a dispute with consuming nations about whether sufficient steps are being taken to meet demand over the next decade.

The International Energy Agency, an energy monitor based in Paris and financed by industrialized nations, warned in its annual medium term report this month that oil supplies would remain tight over the next few years, despite the record-high prices. The IEA noted low spare capacity from OPEC, among other factors. It said that prices were high mostly because of fast-growing demand from rapidly industrializing countries like China, rather than because of market speculation.

On Tuesday, leaders of the Group of 8 economic powers warned that surging oil prices could be a key factor undermining world growth and called on petroleum suppliers to increase production and refining and to increase investment in oil exploration and output over the medium term.

Some analysts have predicted that oil prices could reach $200 a barrel this year as oil consumption continues to rise rapidly while supplies lag.

Saudi Arabia has said it would raise output in July. But OPEC has not officially increased output since a meeting last September. The next meeting of the group is in September. Badri said it was too early to say whether OPEC would raise output then.