Saudi threat to use oil as a weapon drives up prices

The price of oil and gold surged yesterday amid fears Saudi Arabia had threatened to use its crude exports as leverage to achieve a breakthrough in the conflict between Israel and Palestine.

Reports Crown Prince Abdullah had told US President George Bush that the world's largest exporter was prepared to use oil as a weapon sent shockwaves through the market.

Crude oil for June delivery rose as much as 82 cents, or 3.1 per cent, to $27.20 a barrel in New York. In London Brent rose 43 cents, or 2.7 per cent, to $26.19 per barrel. Saudi Arabia supplies nearly 18 per cent of US crude oil imports and holds about a half of the world's spare production capacity.

"A cooling in relations with the US could mean Saudi Arabia will be slower to intervene with more oil supply when prices are rising," said Roger Diwan of Petroleum Finance Corp in Washington.

The International Energy Agency, the West's energy watchdog, called on the oil producers' cartel OPEC to increase supply to prevent rising prices stifling the economic recovery. "We would like to see more oil in June," said IEA executive director Robert Priddle. "We are in danger of an excessively tight market in the second half of the year if production is not restored."

The United Nations warned yesterday that the conflict between the Israelis and the Palestinians and its potential to drive up oil prices threatens global economic recovery.

Meanwhile gold rose to a two-year high on speculation the increased tensions in the Middle East will send crude prices higher and accelerate inflation. Gold jumped $5, or 1.6 per cent, to $309.80 an ounce, the highest price since February 2000.