Thu Aug 19, 2004
By Laura MacInnis

SPRINGFIELD, Mo., Aug 19 (Reuters) - U.S. Treasury Secretary John Snow said on Thursday geopolitical worries had led to a "temporary" rise in oil prices, adding that Russia was committed to a steady flow of oil despite legal troubles facing its biggest producer.

"We are dealing with a temporary situation that is a reaction to geopolitical concerns," Snow told reporters after speaking to employees at a manufacturing plant here. "Markets in the face of uncertainty exact a price premium. I don't think the fundamentals justify the prices at these levels."

Strong demand and nagging concerns over the potential for supply disruptions have combined to push the price of crude oil up to record levels in recent weeks. U.S. benchmark crude hit a fresh high of $48.20 a barrel in trade earlier on Thursday.

One source of volatility in global oil markets is the legal quagmire facing giant Russian oil producer YUKOS (YUKO.RTS: Quote, Profile, Research). Snow said, however, that Russia was committed to keeping oil flowing.

"My understanding is the Russians are committed to keeping the output levels up and they are making a distinction between the legal actions and the production," he said.

The U.S. Treasury chief said the Bush administration had been in touch with Russian officials on YUKOS, and it was in Moscow's interest to maintain oil production.

Many industry analysts believe the Russian oil giant, which is battling bankruptcy, will find ways of keeping exports flowing.

YUKOS must pay $3.4 billion in back taxes before the end of August. The firm says it cannot do so because it lacks spare cash and is banned from selling assets to raise money.

"They can proceed with litigation on the bankruptcy of YUKOS and the taxes that are owed ... but it hasn't and it shouldn't affect oil production," Snow said.

Snow repeated his view that the increase in oil prices had created "headwinds" facing the U.S. economy, but that the expansion was still on solid ground.

PROGRESS OF YUAN

On a separate topic, Snow reiterated the Bush administration's view that China was making headway in laying the needed groundwork for floating its currency, the yuan, which it has kept fixed in value against the U.S. dollar.

"They are making a very serious effort to improve their banking system and financial institutions to create a modern financial system, which would allow them to go to a fluctuating exchange rate," he said.

U.S. manufacturers and labor groups have complained that Beijing's policy of pegging the yuan at 8.28 to the dollar has given China an unfair trade advantage, and the policy has become an issue in the U.S. presidential campaign.

"They know we are not satisfied but progress is being made," Snow said.

Last week, 87 members of the U.S. House of Representatives urged President George W. Bush to continue pushing China for "meaningful and expeditious currency reform, especially during the upcoming visit by the Chinese Vice Premier (Huang Ju) later this summer."