NEW YORK (CNN/Money) -
Iraq suspended oil exports Monday to protest U.S. support of Israel, causing a spike in crude prices on the same day the U.S. government predicted record summer demand for gasoline.
Iraqi President Saddam Hussein said in a televised speech Monday that its embargo will be in effect for 30 days or until Israeli forces withdraw from Palestinian territory. Iraq exports about 1.5 million barrels of oil a day, nearly a million of which go to the United States.
Light sweet crude oil futures settled in New York up 34 cents at $26.55 a barrel after moving higher than $27 a barrel in earlier trading. Brent oil futures were up 85 cents in London, trading at $26.36 a barrel. Prices were also driven higher by a strike-induced weekend freeze in shipments from Venezuela, the world's No. 4 oil exporter.
The Organization of the Petroleum Exporting Countries (OPEC), which accounts for 40 percent of the world's oil output and sits on more than three-quarters of the world's proven oil reserves, quickly distanced itself from its member nation Iraq.
"OPEC does not support Iraq's oil embargo, as it goes against the organization's objective, which is to bring about stability and harmony to the oil market," an OPEC spokesman told CNNfn. "OPEC would like to distance itself from the political decisions of member countries."
OPEC also said there was enough oil in the market to meet demand for a month and that it would be willing to act if necessary to meet demand.
Though the U.S. government said prices could spike as high as $30 a barrel if the Iraqi oil is not replaced in the market, it doubts other oil producers will allow that to happen.
"Our assumption is that any shortfall would be made up, given the fact that OPEC has appeared to want to maintain a certain band of prices," said Energy Department spokesman Jonathan Kogen. "We're assuming that any shortfall from Iraq would be made up by both increased OPEC and non-OPEC production."
Most oil stocks rose on the news, but other U.S. stock prices were mixed, suffering partially on concerns that higher oil prices could sink or at least slow down a nascent recovery in the global economy. Though the U.S. economy is not as dependent on oil as that of other nations, it could still take a hit from higher oil prices, which raise other prices and dampen consumer confidence.
"Rising oil prices are the biggest risk to what is otherwise shaping up as a robust recovery," said Merrill Lynch chief economist Bruce Steinberg. "Every $1 increase in the price of oil drains about $5 billion from the U.S. economy, if sustained for a year."
But most economists doubt such a spike will last for long and think the U.S. economy is safe for now. Even if oil prices do slow the economy down, that could negate some of the inflationary effect of high prices and possibly stall any campaign by the Federal Reserve to raise its target for short-term interest rates.
"As long as wages are not affected by higher oil prices, the impact on inflation and monetary policy should be minimal, especially in the first year of recovery," said Sung Won Sohn, chief economist at Wells Fargo & Co.
Gas prices ready for summer spike
Separately, the Lundberg Survey of U.S. gasoline prices showed a gain of 8 cents per gallon to $1.46 in the past two weeks.
Gasoline prices are still below their year-ago level of $1.54, but they have risen about 30 cents since the end of February and show no sign of slowing down as summer approaches. Summer demand for gas could rise to a record 8.88 million barrels a day, up 1.6 percent from a year ago, the U.S. Energy Information Administration said Monday.
The EIA said it expected gas to average between $1.46 a gallon this summer and could peak at $1.62 a gallon by June. If the predictions come true, it would be the third-worst summer for gas prices on record, and supplies would be at "less ample levels" by late summer and early fall.
U.S. Energy Secretary Spencer Abraham told CNNfn's Street Sweep program that the spike in demand and the Iraqi embargo were more reasons for the U.S. Senate to adopt legislation allowing oil companies to drill in the Arctic National Wildlife Refuge in northern Alaska.
"To the extent we make ourselves more dependent on imports, we put ourselves a little under the gun," Abraham said. "Hopefully the Senate will take note of Iraq's decision today and act accordingly."
But the government also said the Iraqi embargo was unlikely to have much of an impact on gasoline prices, and much of Monday's jump in oil prices could have been due to speculative buying. A similar rally was seen last week, when Iraq threatened an embargo and the price of oil jumped briefly above $28 a barrel.
"We've been down this road before with Iraq," John Kilduff, an analyst with Fimat USA, told CNN/Money Morning. "Any spike is usually brief. However, given the backdrop ... this is being taken a little bit more seriously."
The move was not unexpected after Iran's supreme leader, Ayatollah Ali Khamenei, called on Arab states Friday to launch a one-month "symbolic" oil embargo against Western countries to pressure them to stop supporting Israel.
Iran is not an Arab state, but several of OPEC's 11 members are. Only Libya, however, has supported the call for an embargo. Neither Iran nor Libya are expected to actually halt exports without the cooperation of other Arab exporters.
Iraqi Oil Minister Amir Muhammed Rasheed said the suspension of Iraq's exports of about 2 million barrels per day, about 4 percent of international oil trade, from Gulf and Turkish ports began at 6 a.m. ET Monday.
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The suspended oil is part of the United Nations' oil-for-food program, which limits Iraq's oil exports in exchange for food and medical supplies.
Despite calls from President Bush that Israel withdraw from occupied areas of the West Bank "without delay," Israeli prime minister Ariel Sharon announced Monday that his nation's military campaign would continue, and he set no timetable for its end.
The last time oil-producing Arab nations used oil as a political weapon was in 1973, when reduced exports caused a global energy crisis. Since then, the world's wealthiest nations have created the International Energy Agency to provide a cushion against any similar disruption.
Based in Paris, the IEA can tap into 4 billion barrels of strategic oil reserves maintained by its member countries, equal to more than five years' of Iraqi production, based on the IEA's estimate of Iraq's output in January.
In November 2000, Saudi Arabia led the adoption of a pledge by OPEC and other major exporters that oil would not be used as a political weapon. Many Gulf states depend on oil revenues for more than two-thirds of government income and cannot afford to stop sales.