Opec guarantee helps to ease the pressure on soaring oil prices

Gulf War precedent

As the full, horrifying enormity of Tuesday's attack on the World Trade Centre and the Pentagon sank in and the FTSE 100 began to plunge, just three beacons of blue stood out amid the sea of red. One represented the share price of the defence contractor BAE Systems. The other two belonged to BP and Royal Dutch Shell, whose stock market value soared along with the price of oil. In the space of a few minutes, Brent crude rose by $3.60 (£2.50) or 13 per cent as the financial markets sensed that another oil price shock was about to knock the world economy sideways.

By midday yesterday, however, calm had returned to the oil market. The price of Brent blend eased back 23 cents and Shell and BP shares were two of the biggest fallers in an otherwise rising London market. Panic over. Crisis contained.

As one oil industry executive observed: "Prices and demand seem to be steady, stocks are high, the refineries are operating at full bore and nobody is panicking. As far as we can see, there is no danger whatsoever of another seismic oil shock."

Brave words perhaps and ones which could yet return to haunt us. But for the time being at least, the oil markets do seem to have regained their poise and prices have stabilised.

All that could change overnight, of course, if President George W Bush identifies a sponsoring state behind Tuesday's atrocities in New York and Washington and that state is a Middle Eastern one. No one can forget the impact of the Gulf War which sent oil prices soaring from less than $20 a barrel to more than $40, providing the catalyst which tipped the world into recession a decade ago. Today, oil may no longer play such a large part in developed western economies. But a hike in oil prices still has the power to do immense damage, being simultaneously inflationary, in that it raises industry's costs, and deflationary, in that it depresses demand.

Although it is very early days, there are no signs thus far of a similar devastating chain reaction.

Despite some emergency measures among import-dependent Asian countries, dealers yesterday reported little evidence of panic buying and only a remote chance that supplies from the Middle East might be affected. Thailand raised compulsory reserve levels to 5 per cent. Japan and China held off from any emergency measures.

The absence of any massive and immediate retaliation by the US in response to the "acts of war" perpetrated against it was one reason for the calm in the oil market. The other was the reassuring message transmitted by the oil producers cartel Opec which pledged to maintain the stability of the oil market. "There is no shortage of supplies and there won't be any," said the United Arab Emirates oil minister Obaid bin Saif al-Nasseri. Opec's secretary general, Ali Rodriguez, rejected suggestions that any of its members would use oil as a political weapon if tensions were to rise in the Middle East.

Ironically, the slowdown which much of the developed world is already experiencing may limit the scope for oil prices to rise as weakening consumer confidence and the threat of recession weaken oil demand. Analysts calculate that every 1 per cent loss in global GDP growth removes about 400,000 barrels a day from expected demand growth.

If, on the other hand, more oil is needed, then there is plenty of spare capacity among Opec members and few indications they will turn down the taps. "If the US needs more oil, we are willing to give it them," said one Gulf industry official.

According to the American Petroleum Institute, that should not become necessary. In a statement released yesterday, the API said: "All information we have tells us that fuels are flowing normally to wholesale and retail markets throughout the United States. Our most recent data indicate that gasoline and diesel inventories are adequate to meet demand."