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Oil fight would hit home
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November 10, 1997: 5:38 p.m. ET
U.S. military action against Iraq could pressure gas prices, heating oil first
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NEW YORK (CNNfn) - The looming threat of military action against Iraq could create collateral damage to American consumers, but the overall market should escape with more minor injuries.
Iraqi exports constitute a small part, only about 200,000 barrels, of the more than 18 million barrels consumed daily in the United States. Iraq's total exports, about 800,000 barrels daily, are also a bit player in the world's oil shipments.
However, Tim Evans, senior energy analyst at Pegasus Econometric Group, said U.S. military action could have broader effects.
"There is some risk that if the cruise missiles start to fly, that it will disrupt both the current Iraqi exports [and] also interfere with shipping in the Persian Gulf area," said Evans.
A military action could result in a price increase of $2 to $2.50 per barrel of oil over the short term, speculated Evans, and could rise more than twice that over a six-month period.
Consumers would take the first hit at the gas pumps. Such a price hike in oil would amount to a hike of about 5 cents per gallon of gasoline.
The retail sector would also feel the pinch, said Evans, noting that the increase would pull an additional $16.3 million daily from consumers' pockets and, conceivably, other purchases.
More notably, the Iraqi standoff comes at a time when heating oil consumption rises with the onset of winter, putting more upward pressure on oil prices.
Iraq has barred United Nations inspection teams from its weapons sites for more than a week because those teams included Americans.
Iraq believes the American inspectors to be spies looking to prolong economic sanctions issued against Iraq at the end of the Gulf War in 1991.
While consumers may fume, the repercussions of Iraqi tensions on U.S. stock markets should be minimal, said John Hervey, analyst at Donaldson, Lufkin & Jenrette.
He pointed to the meeting of the Organization of Petroleum Exporting Countries in Jakarta, Indonesia at the end of the month. At this meeting, Saudi Arabia is expected to seek an increase in the amount of its oil exports, a move which has calmed investors.
The absence of Iraqi oil "should be considerably less significant than it was back in June when Iraq last stopped producing," Hervey said.
As would be expected, stocks of oil companies, such as Exxon Corp. (XON) and Mobil Corp. (MOB), should benefit from an increase in oil prices, but another less-known sector should also see stocks rise, said John Lovoi, a principal at Morgan Stanley.
"Higher oil prices lead to higher levels of spending by major oil and gas operators, which increases the revenue stream in the oil field service sector," explained Lovoi.
Companies best positioned in that field include Santa Fe International Corp. (SDC), Diamond Offshore Drilling (DO) and Baker Hughes Inc. (BHI).
Analysts say the stocks most likely to feel the pinch include the most fuel-intensive issues, such as airlines, trucking and shipping companies, as well as raw materials producers like steel makers.
Investors may flee for cover under the safety of cash and gold, said Carl Weinberg, chief economist at High Frequency Economics, but any gains from this would be short lived and minimal.
"On top of everything else that's going on, I think bombs in the stock market are more important to investors right now than bombs in Iraq," he said.
-- by staff writer Randy Schultz
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