Debating India

Goodbye to cheap oil?

Thursday 23 June 2005, by ELLIOTT*Larry, SEAGER*Ashley

IT WAS a question of when, not if, for oil traders on Tuesday as the price of a barrel of crude threatened to burst through the $60-a-barrel barrier for the first time.

News that the North Sea Forties oilfield had been shut because of technical problems pushed an already jittery market that has jumped 11 per cent in the last week alone, to a new record high of $59.55 for U.S. light crude. Although British Petroleum, which operates the pipeline to the field, said the problems would be fixed by Wednesday, dealers are jumpy about any supply disruption in the face of strong global demand and in spite of promises of further output from the Organisation of the Petroleum Exporting Countries (OPEC).

OPEC’s president said he would begin consultations with other Ministers from the oil cartel on Friday to release an additional 500,000 barrels a day of OPEC crude if prices remain high.

The promise had little effect on the markets, with analysts remaining unconvinced that OPEC had the capacity to increase supply. Instead, dealers are concerned about a lack of refining capacity in the U.S. - where a new facility has not been built for more than 30 years - the kidnapping of workers in Nigeria, and the implications of the jailing of Russian magnate Mikhail Khodorkovsky for output from his firm, Yukos.

Analysts are now openly considering the prospect that high oil prices are here to stay. When the upward movement began in early 2003, it was said that the rise would be reversed as soon as demand cooled and fresh supply kicked in. Charts show, however, an unmistakable trend, with each peak being higher than the last. There are some reasons for optimism as far as the impact on the world economy is concerned, however.

One is that in real terms, adjusted for inflation, the oil price is lower than it was when the Iran-Iraq war began in 1980. Two, de-industrialisation and the expansion of service sectors have made Western economies less dependent on petrochemicals than during the shocks of the 1970s that led to global recessions; the amount of oil used per unit of output has fallen by more than half.

Ray Holloway, of the Petrol Retailers’Association, said the current problem was as much to do with a shortage of refining capacity in the U.S. as the recent surge in crude prices. Either way, petrol was about to set new records in Britain.

Stuart Thomson, analyst at Charles Stanley, said he was concerned about global oil supplies this year. "Production in Russia is expected to drop by up to 20 per cent in the aftermath of the Yukos affair. There are growing concerns over the political situation in Nigeria. OPEC will undoubtedly increase its quotas, but with most countries producing at full capacity and long lead times to bring on extra capacity in Saudi Arabia, the market is expected to remain tight for a considerable period. Given these supply constraints, $60 a barrel is the most likely price target in the near term."

Julian Lee, an analyst at the Centre for Global Energy Studies, said the supply problems meant the only thing that would lead to lower oil prices would be a drop in demand, which increased at its strongest pace to date last year, driven by strong economic growth around the world, particularly in the U.S. and China. Graham Turner of said there had not been many indications of a slowdown in either China or the U.S. this year. The Chinese, he said, had been particularly astute, tending to build up crude stocks each time the price dipped. "None of the concerns from last year have really gone away. There are supply constraints and the two biggest economies are growing fast. That means you are going to have a problem with oil prices. The price of crude could go to $65-$70 a barrel the way things are going."

Early in the year, analysts at Goldman Sachs predicted that oil prices could go above $100 a barrel if supply problems continued to interact with strong demand. That may happen, but there is an old adage in the oil business: high prices lead eventually to low prices.

See online : The Hindu

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