Airfares, gas prices on way up as oil hits 9-month high

Canadians could see airfares rise and continued escalation in gasoline prices if the insurgency in Iraq continues to grow.

As Iraqi troops and militant group ISIS fight over control of the country's biggest oil refinery, oil prices have hit nine-month highs.

Brent crude, used to price international oil, slipped 12 cents to $114.94 US a barrel in London on Friday, after powering through $115 a barrel Thursday.

In New York Friday, the price of U.S. benchmark crude for August delivery rose 83 cents to $107.26 per barrel, its highest level since last September, when the world was worried about Syria. The Canadian oil futures called Western Canada Select, which trades at a discount because of bottlenecks in getting it to market, was at $86.83, up 78 cents.

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Late Thursday, the Islamic State in Iraq and Syria held part of the refinery, which extends over several square kilometres of desert, and was regrouping to move into areas controlled by government troops.
  
The facility, 250 kilometres north of Baghdad, accounts for just over a quarter of the country's refining capacity and its products are mainly for domestic consumption.

Airline analyst Robert Kokonis of AirTrav Inc. said higher fuel prices may force airlines to raise fares or add a “fuel surcharge” to the ticket price.

Airlines may be protected for a while from higher jet fuel prices by a rising loonie, as oil is priced in U.S. dollars.

For consumers in Canada, higher gasoline prices at the pump are already here. Dan McTeague, who watches prices for the Tomorrowsgaspricetoday.com website, says prices are headed above $1.50 a litre at pumps across Canada.

"This is going to have a rippling effect throughout the economy. People may have to grin and bear it, or they may decide, with the increase, they may have to find other ways in order to save or not spend in other parts of the economy," he told CBC News.  "That is obviously going to have a cascading effect over the next several months."

McTeague said consumers are currently paying higher prices based on speculation rather than real events. But if the insurgency moves south, it could cut off Iraq's oil production.

"If that is disrupted, then all bets are off. The fact is, prices will have to go up to meet the reality of disruption. OPEC's No. 2 producer is Iraq and it's no small player," he said. 

ISIS militants were only 40 kilometres from Baghdad and there has been growing criticism of Prime Minister Nouri al-Maliki’s regime, raising the spectre of a complete breakdown of the Iraqi government.

That could threaten all of Iraq’s oil supply, eliminating the world’s seventh largest oil producer, at 3.3 million barrels a day, from the global oil supply.

Between now and 2019, the International Energy Agency, a leading energy forecaster, has said it expects Iraq to provide almost two-thirds of the growth in OPEC production, as it is one of the world’s cheapest oil producers.

Analysts say world prices could rise by $40 to $50 a barrel without Iraq’s contribution.

The IEA did not signal the danger from Iraq in its latest report, pointing to the glut of oil created by North American shale production and the potential for Saudi Arabia to boost its output.

OPEC members manage their production to keep up a steady supply of oil without pushing prices too low. Saudi Arabia is the member state with the greatest facility for increased production.

If ISIS controls Baghdad, that would threaten Iraq’s main oilfields 150 kilometres south of the capital.

But the insurgency is already having an effect on the large U.S. oil service companies operating in Iraq. In the year to date, there have been around 8,000 civilian deaths in Iraq and that has foreigners worried.

Many companies are already pulling out their personnel because of the threat of violence and others are hesitating to commit to projects in Iraq, despite the need for expertise in the oilfields.

While this may not affect production in the near term, it could affect future production growth from the country.

And the prospect of a big spike in oil prices later this year could hurt the fragile economic recovery underway in Europe and the U.S.