Oil's new high may persist

War in Iraq. Instability in Venezuela. Civil unrest in Nigeria. Governmental wranglings in Russia. With so much uncertainty in so many of the world's leading oil-producing countries, energy prices continue a seemingly inexorable rise - provoking new speculation that the world may be heading into a period of permanently higher prices.

Even the once-mighty Organization of Petroleum Exporting Countries (OPEC) seems unable to bring prices down, reinforcing the view that fundamental change in world oil markets, and not just temporary psychology, is behind the latest price surges.

Indeed, while energy analysts debate whether this is really just a short-term spike or the beginning of the end of cheap oil, one thing is clear: Energy prices will face continued pressure. Demand is only going to increase, supplies are getting harder to reach, and tight refining capacity could make getting oil to market more problematic.

"This may not be a short-term aberration," said ChevronTexaco CEO David O'Reilly, in a recent speech before the US Chamber of Commerce. "I believe energy prices are going to face continued pressure - reflecting fundamental changes in demand, supply, and geopolitics. We are, in fact, witnessing a change in the basic energy equation."

Clearly, global events are contributing to the current run-up in prices. Iraq continues to produce less oil than it did before the war. Restiveness in West Africa and nervousness about more unrest in Venezuela, even after the recent referendum, have intensified worries about supply disruptions there. The crisis over Russian President Vladimir Putin's crackdown on Yukos, Russia's largest oil producer, has eased somewhat in recent days, but the situation remains volatile.

All this helped push crude oil prices to a new high early Wednesday at $47 a barrel. While this remains well below the peak prices of the early 1980s (when inflation is factored in), it still represents a 27 percent jump in just the past six weeks. "Near-term prices will be higher than we have been accustomed to," says Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. "But these current high prices are supported by geopolitical events rather than supply and demand problems."

He says if you were able to eliminate all the "fear factors," oil would probably be around $30 a barrel.

But others note that the spikes are so severe at the moment in part because of more fundamental trends. Global demand continues to rise. It is expected to increase by 40 percent in the next two decades. Much of that will come from developing countries - most notably China, whose energy needs are expected to more than double by 2020.

Page: 1 | 2