Iraqi leader Saddam Hussein cut off his country's oil exports this week to push up prices around the world. After a background report, Margaret Warner leads a discussion on the move.

JIM LEHRER: As Americans take to the road this Thanksgiving, they're going to find gas prices a lot higher than last year, and they could go higher still. Margaret Warner has that story.

MARGARET WARNER: World oil prices surged to their highest level since the end of the Gulf War yesterday after Iraq unexpectedly began cutting off its oil exports. Iraq's move was just the latest shock to the world oil market, which has seen prices more than double over the past year. Crude oil prices closed yesterday at just over $27 a barrel, a nine-year high. Less than a year ago, a barrel of crude was selling at a 12-year low of about $11.

Iraq has been allowed to sell a certain amount of oil in exchange for food and medicine under a U.N.-controlled program offering a limited exemption from the sanctions imposed at the time of the Gulf War. In the last six months, for example, Iraq exported about $7 billion worth of oil, or roughly 5 percent of the total sold around the world. But the Iraqi leadership has been agitating to have sanctions lifted altogether. Instead, last Friday, the Security Council simply extended the current oil sales program for just two weeks. Iraq responded yesterday by cutting the flow of oil to one of its main export points, and today, Iraq's oil minister said his country will stop all exports of oil.

AMER MOHAMMED RASHID, Oil Minister, Iraq: We have finished pumping and loading all the tankers which we have contracted for, under contracts for the sixth phase by today.

MARGARET WARNER: Even before this latest move, American consumers have been feeling the pinch of higher energy costs. The Labor Department reported last week the prices of gasoline and home heating oil have jumped nearly 31 percent this year.

MARGARET WARNER: For more on why prices are up, and what Iraq's latest move could mean, we're joined by Lawrence Goldstein, president of the Petroleum Industry Research Foundation, a non-profit group funded by oil companies that researches the energy market; and Geoffrey Kemp, director of regional strategic programs at the Nixon Center, a foreign policy research group in Washington.

MARGARET WARNER: Mr. Goldstein, explain for us why even before Iraq's latest move we've seen oil and energy prices jump so dramatically this year.

LAWRENCE GOLDSTEIN, Petroleum Industry Research Foundation: There are two factors that have been driving oil price up. The less important one is the recovery in Asian economic activity, which has brought about a corresponding increase in demand. But big increase in price is really due to the fact that OPEC for the third time this April agreed to a major cutback in supply. They took about four million barrels a day of oil off the market, so that we're seeing the loss in supply has eroded the very, very aggressive build in stocks that occurred in 1998. That erosion in stocks has led to a very dramatic increase in crude oil prices from a low of about $11 to $12 earlier this year to $27 today, the equivalent of about a 30 to 35 cent a gallon increase at the pump.

MARGARET WARNER: So you're saying essentially that OPEC wanted to create much tighter supplies and they've had the discipline to succeed in doing that.

LAWRENCE GOLDSTEIN: The discipline evolved back in 1998. They cut supplies twice. But the discipline eroded each time, and in February of this year, the crown prince of Saudi Arabia made an important visit to Iran and was following that meeting, that OPEC agreed to a third round of cuts in April. And the real surprise is not that they agreed to cuts, but the percent compliance has been staggeringly high, very close to 90 percent.

GEOFFREY KEMP, The Nixon Center: One of the reasons that Iraq did that, I think, is because they're fearful that a Dutch-British proposal that's being discussed by the Security Council now will in fact be adopted. This proposal will essentially eliminate sanctions, but Iraq will have to have inspectors back...

MARGARET WARNER: Weapons inspectors.

GEOFFREY KEMP: Weapons inspectors will have to come back, and they will have to come back and they will have to certify that Iraq has a clean bill of health on weapons of mass destruction. Saddam would much prefer to see a Russian proposal also at the U.N. go through, which essentially would allow sanctions to be lifted just if the inspectors came back with no real sanction. And I think what you see here is Iraqi concern that ultimately the British, the French, and the Dutch will get their way.

MARGARET WARNER: Now, if Iraq... if this move doesn't work, can Iraq afford to give up... They've been getting at least, what, about $7 billion worth of oil and medicine. It's not everything they want, but every six months or so. Can they afford to do without it?

GEOFFREY KEMP: Of course they can for a certain period of time. Let's be clear about one thing, Margaret. Saddam and his entourage are not going to suffer come what may. They get as much money as they want. They get it from fraud, from the black market, from profiteering. So, in fact, if there is a slowdown in supply of food and medicines, actually that will probably help Saddam; similarly, with oil. So they're not going to hurt. The people that are going to hurt are the Iraqi people. And what Saddam is cynically hoping is that the plight of the Iraqi people will help him in his fights in the U.N. in New York and in the Arab world where he has a lot of support on humanitarian grounds.

MARGARET WARNER: Mr. Goldstein, if Iraq sticks to its guns here, how soon will American consumers feel this extra pinch, and in what way?

LAWRENCE GOLDSTEIN: We believe that gasoline prices would have been rising in any case, because crude oil prices have gone up more at this moment than the change in street prices at the pump. So that regardless of what Saddam did, gasoline price were going to go up approximately another five cents a gallon. But I want to make it very clear, we don't believe that Saddam is serious. We have learned over time to believe very little that he says, and not to be surprised by almost anything that he tries to do. We believe he's posturing. The extension of the phase six for two weeks has given this moment to step back and try to leverage the market. We don't believe Iraqi oil will stay off the market for any reasonable period of time. And he has a free good on his hand. And this is very important to understand. There will be around seven humanitarian oil sale program agreed by the Security Council. That will set a dollar amount probably in the order of $5.2 billion. So by his withdrawing sales for the next two weeks, in no way costs him any money over the remainder of the six-month program because given any reasonable prices times the volume he could export, he will more than be able to exceed the $5.2 million. His actions yesterday come at no cost to him.

MARGARET WARNER: Could this be a bluff, Geoff Kemp? I noticed that today on the wires there are some reports that maybe Iraq would accept a six-month rollover of the current program. Could he just be bluffing?

GEOFFREY KEMP: Well, he's posturing certainly, and I agree he's not going to be hurt in the short run. Furthermore, let's face it, Iraq is not in a position, given its low level of production, to truly influence the price of oil over time. That's Saudi Arabia's role. And I think the Saudis and the Iranians and other members of OPEC have made it clear that while they wanted oil prices to rise from the $11 low, they certainly don't want them to go through the ceiling again, because they learnt a bitter lesson in the 1970s, that when you do that, the West starts to get ingenious, and we conserve and prices ultimately come down. I think they're quite happy...

MARGARET WARNER: In other words, you kill the goose that keeps laying the golden egg if you go too high.

GEOFFREY KEMP: Exactly. And Saudi Arabia has enough locked in spare capacity if the Iraqis for whatever reason did decide the hold the oil back for a long, long period of time, it could be made up from other sources.

MARGARET WARNER: How do you think, Mr. Goldstein, OPEC would respond if Iraq sticks to its guns?

LAWRENCE GOLDSTEIN: I think you have to realize that OPEC is not a homogeneous entity. There are individuals who clearly would be pressured by the United States to respond if in fact Iraq were to withdraw the 2.3 million barrels a day of exports from the market. Understand we're moving into the peak seasonal demand globally when stocks are already tied, so that Iraq's withdrawal from the market if it were to occur and be sustained from a period would have a substantial impact on price if Saudi Arabia, Venezuela, and Mexico didn't respond. OPEC may be reluctant to increase supplies, but in that environment, I wouldn't be surprised if the U.S. government weren't already at this moment in consultation with Saudi Arabia, Venezuela and Mexico for some kind of contingency plan.

MARGARET WARNER: How much, Geoff Kemp, do political considerations come into play here in terms of strategic in that region, in terms of what Saudi Arabia might choose to do?

GEOFFREY KEMP: Saudi Arabians think very strategically, particularly after the lessons they learned in the 70s that rights now their great ally is Iran, funnily enough. There is a rapprochement between Iran and Saudi Arabia. They have worked together to keep production down so that prices go up. And they're not going to do anything to disturb that apple cart. Their other great ally is the United States. And they can't afford to see us go into a tailspin through high energy prices. Therefore they will I think ultimately cooperate with us.

MARGARET WARNER: Mr. Goldstein, it looks like whatever happens with this Iraq latest move, we're in for these higher energy price for some time. We're not going back to the $10 a barrel oil price?

LAWRENCE GOLDSTEIN: It doesn't appear in any reasonable scenario that prices are going to unwind substantially in the near term, although we do believe you'll see a peak in price over the next 60 to 90 days and slow erosion as we move through 2000.

MARGARET WARNER: All right. Well, thank you very much Lawrence Goldstein and Geoffrey Kemp.