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EDITIONS
 Monday, 30 December, 2002, 15:19 GMT
Q&A: Why is the price of oil so high?

The price of oil has shot to above $30 per barrel, and that could seriously undermine a global economic recovery. BBC News Online looks at what has pushed the price up and where it could go next.

Why is the oil price high?

Oil prices have soared this year because of threats of a war against Iraq and the associated risk of disrupting supply from the entire Gulf region.

The uncertainty has been compounded by recent a strike in Venezuela, the world's fifth largest oil exporter, which has severely disrupted its oil production and exports.

While there is no shortage of oil yet, traders are paying higher prices for future deliveries in the expectation that there will be less to go around.

What could happen if there were a war against Iraq?

A short war is not expected to bring down the oil price immediately.

That is because the markets would continue to feel nervous and there would be an estimated six months lag before production in Iraq restarted.

A prolonged campaign, especially if it disrupted output from neighbouring states Saudi Arabia and Kuwait, could have wider implications.

The Yamani Centre for Global Energy Studies has predicted that a chemical attack on a Gulf oil facility would push the price of oil up to $100 per barrel.

How serious is the impact of the strike in Venezuela?

Traders are already getting worried that a war in Iraq might come before the Venezuelan strike is resolved, depriving world oil markets of an estimated five million barrels per day of crude oil.

The Organisation of Petroleum Exporting Countries (OPEC) has said it would make up for Venezuelan oil, but Middle Eastern supplies could take four to six weeks to ship to the US.

Venezuelan exports are not expected to recover fully until the end of February, even if the four-week old strike ended immediately.

The US, which receives about 15% of its oil from Venezuela, has seen its stocks shrink due to the strike and if this continues into the New Year, reserves could be pushed to critically low levels.

How can the price be brought back down?

If the US resolved its dispute with Iraq peacefully and the strike in Venezuela ended then prices could be expected to fall dramatically.

What impact does the high price have on the global economy?

Oil is the key source of energy for industrialised countries, most of which have only limited, if any, supplies of their own.

The high oil price will push up costs for companies and consumers, and cut profits or extend losses in a number of industries including aviation, chemicals and plastics, and distribution.

Economists, finance ministers, central bankers and business leaders around the world have warned about military action pushing up the price of oil.

European Central Bank board member Ernst Welteke said that higher prices meant immense consequences for Europe and the rest of the world.

"It would lead to an economic slowdown and have enormous consequences for the world economy," he said.

Analysis of the oil market, OPEC, and the alternatives

Key stories:

Analysis

Background
See also:

30 Dec 02 | Business
30 Dec 02 | Americas
24 Dec 02 | Business
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