Oil prices jumped by more than $1.50 a barrel yesterday, setting new six-month highs on the Middle East crisis and Iraq's call for an oil embargo against the United States.
Iraq's proposal revived memories of the 1973 oil embargo but the world's biggest oil exporter Saudi Arabia dismissed the possibility of a repetition.
International benchmark Brent crude oil was trading $1.46 higher at $27.38 a barrel, after earlier shooting to $27.52, its highest level since September 19th. US light crude also soared, gaining 92 cents to $27.80.
Any oil embargo would need the backing of Middle East producers such as Saudi Arabia, a key US ally which also has influence in the Islamic world. Saudi Foreign Minister Saud al-Faisal said in an interview yesterday there was no question of Arab states withholding oil exports to pressure the United States to resolve the Middle East crisis.
He told the French daily Le Monde that Arab countries depended on revenues from oil exports for their development.
"If they want to strengthen themselves against the Israeli aggression, they have no alternative but to continue exploiting oil and gas," the minister was quoted as saying.
Delegates attending an Organisation of the Islamic Conference meeting in Malaysia gave no support to Iraq's proposed use of an oil embargo as a weapon against supporters of Israel. "This is impossible. How can we support our Palestinian brothers if we do not have revenues?" a Kuwaiti delegate told Reuters.
Iraq urged the Arab League yesterday to endorse an Iraqi draft resolution urging Arab oil producing countries to cut off oil supplies to the United States if it did not end its support for Israel.
Although neither Israel nor the Palestinians export oil, traders fear unrest could spread in the Middle East which holds some two-thirds of the world's petroleum reserves.
Iranian Foreign Minister Mr Kamal Kharrazi said the oil weapon could be an effective tool if it had the full backing of Arab producers, but pro-Israel Washington should first convince the Sharon administration to withdraw.
Iran and Kuwait are members of the Organisation of the Petroleum Exporting Countries (OPEC), which groups most major Arab oil-producing nations and supplies more than 20 million barrels per day (bpd) of crude to the 76 million bpd global market.
Arab nations have not used the oil weapon since the embargo in the 1970s that quadrupled oil prices and severely hit Western nations.
Oil has risen by slightly over 50 per cent since mid-January and some economists fear high energy prices could derail the fragile US economic recovery. A sustained rise in energy costs would cut into corporate profits and hit consumer spending through higher pump prices.
The euro zone may prove more vulnerable to higher oil prices than the US. ECB chief economist Mr Otmar Issing warned last Wednesday that oil prices were a concern. Mr Julian Callow, chief European economist at investment bank CSFB in London, said oil prices will determine whether the EU hits its economic targets. "The price of oil may make all the difference to euro zone inflation being above or below 2 per cent next year," he said.
