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Why oil prices may stay sky high

By Staff writer of The Christian Science Monitor / August 2, 2004


When Russia's largest oil exporter, Yukos, was apparently ordered last week to halt production in a dispute over paying back taxes, oil prices surged to an all-time high of almost $44 per barrel.

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But analysts say the fact that Yukos could jolt the global oil market underscores how several factors are making the market vulnerable to shocks, and are likely to conspire to keep prices high for the next 12 to 18 months.

They point to the doubling of the pace of global demand in the past year, little spare production capacity, continuing terrorist attacks in the Middle East, and a controversial presidential referendum on Aug. 15 in Venezuela, the world's No. 5 oil producer.

"You can write a checklist of factors that are contributing to this very overheated and feverish market," says Peter Kemp, editor of the Petroleum Intelligence Weekly in London. "The [oil supply] cushion ... that can be used in an emergency is very, very thin."

In part because of higher gasoline prices, the US government said Friday that economic growth slowed sharply in the spring.

Adjusted for inflation, however, the cost of oil remains about half has high as the peaks reached in the late 1970s and early 1980s.

While some estimate a $10 per barrel "terror premium," Mr. Kemp figures that at least half the current price surge is "going to be a permanent feature until we see increases in supply, which are not imminent."

Yukos produces one-fifth of Russia's oil output - or about 2 percent of global production - and is locked in an ongoing tug-of-war with Russian authorities over a $3.4 billion tax bill, fraud charges, and the fate of its former CEO, the billionaire oligarch Mikhail Khodorkovsky, who is now in jail.

But even as Yukos warns that it is being forced into bankruptcy - though executives learned late last week that in fact they could keep producing - other factors shaping the oil market magnify its global impact, and that of any other potential threat to supply.

After several years of sluggish demand growth, the markets have been caught off guard by several factors: a very cold winter last year, nuclear power outages in Japan, surging natural gas prices in the US, and China's expanding economy "emerging as a driver of world demand," says David Fyfe, principal oil supply analyst at the International Energy Agency in Paris.

Back to the 1970s

The global demand is growing at the fastest pace since the late 1970s, with one estimate putting the figure at 4.1 percent growth for the first half of this year.

To meet that demand, the supply side today is also pushed to the limit. The Organization of Petroleum Exporting Countries (OPEC) is already pumping at close to capacity. In late July, OPEC officials said they were producing 27.5 million b.p.d, two million b.p.d. above their quota. As of today, OPEC says it will boost production another 2 percent or 500,000 b.p.d.

While some of OPEC's 11 member nations are investing in new capacity, it will take 12 to 18 months for that investment to bear fruit.