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Experts warn oil, gasoline prices will stay volatile

WASHINGTON—Mounting unrest in oil-rich Nigeria and a brewing political showdown with Iran over its nuclear program sent crude oil prices surging Tuesday to three-month highs, as analysts warned that record oil prices may be coming soon.

On Tuesday the price of crude oil climbed to $66.30 a barrel at the close of trading on the New York Mercantile Exchange, the highest close since early October. Some analysts warn that prices could soon go past the all-time inflation-adjusted record of $70.85, set Aug. 30 after Hurricane Katrina.

Rising oil prices quickly translate into higher gasoline prices. The nationwide average price of regular unleaded gasoline stood Tuesday at $2.32 a gallon, according to the AAA motor club. That's up from $2.21 a month ago and $1.81 a year ago.

If last year's price fluctuations were unsettling, this year's may be worse. Here's why. The U.S. and Chinese economies—the world's top oil consumers—are expected to remain hot. That means the world's appetite for oil will continue to grow—by 2.2 percent in 2006 to 85.1 million barrels per day, according to the Paris-based International Energy Agency.

Available supply is drum-tight. Spare oil-production capacity remains around 2.6 million barrels per day—1.5 million barrels per day of it in the oil cartel known as OPEC.

Translation: Expect oil prices to stay high because there's not much wiggle room should production or exports fall off anywhere in the world.

"Add in a couple of political events and the markets are off to the races," said Philip Flynn, a vice president and energy trader for Alaron Trading Corp. in Chicago.

That's precisely what happened Tuesday, and Flynn expects the trend to produce record oil prices again this year.

"I think $70 a barrel is a lot closer than we think. I think we would have got to $70 a barrel without the political firestorm anyway," he said. "Obviously this (current) scenario gets to that quicker."

Last year's record gasoline prices of $3.05 per gallon were brought on by disruptions to oil production and refining after hurricanes ravaged the U.S. Gulf Coast. This year, it's geopolitics.

"The intersection between politics and energy is showing its ugly face again, and that all argues for upward pressure on prices," said Ken Stern, a managing director for FTI Consulting in New York.

Examples abound. A dispute over pricing with Ukraine led Russia last month to temporarily cut back natural gas exports. The stubborn Iraqi insurgency has nearly halved oil production there, cutting off supplies needed in the tight global market.

Now Nigeria and Iran are in the mix. Over the weekend Nigerian rebels damaged a Royal Dutch Shell oil platform, and they vowed more attacks. Nigeria is the fifth-largest exporter of oil to the U.S. market.

In Iran, the world's fourth-largest oil producer, President Mahmoud Ahmadinejad threatened to trigger a new oil crisis if the United Nations imposes trade sanctions to thwart Iran's nuclear ambitions.

"We have the necessary tools to defend our rights," he said over the weekend, adding that Iran's critics "need Iran 10 times more than we need them."

Iran ignited the last global oil crisis in 1979 when it cut off oil exports during its revolution. Iran now exports 2.4 million barrels of oil daily, so a cutoff would clearly affect the global supply.

If that seems suicidal, consider that Iran is flush with cash after last year's run-up in oil prices and could afford an export pause to drive home its threat.

Since taking office last August, Ahmadinejad has reached out to Venezuelan President Hugo Chavez, an ardent foe of the Bush administration. Venezuela is the fourth-largest exporter to the U.S. market. If Iran and Venezuela together temporarily withheld oil exports, the world economy could be shaken badly.

In this unpredictable geopolitical atmosphere, oil traders are running scared.

"Anytime you have steady and predictable demand, which we have with worldwide crude oil demand, and you have relatively small surpluses of production capacity, anything out of the ordinary touches a speculator's heart and can therefore become a premium," said Red Cavaney, president of the American Petroleum Institute, the oil industry's trade association. "Until you have a reasonable surplus capacity, you're going to have problems."

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(c) 2006, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): OILPRICES

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