2007 energy outlook: costs up

In addition, non-OPEC sources are expected to increase next year, as new discoveries in Russia, Brazil, and the US Gulf of Mexico come onstream. The Department of Energy estimates this could add a few hundred thousand barrels of oil a day to the world supply.

Any new supplies, however, could quickly be absorbed by China. With its economy expected to expand by another 9 to 10 percent, its oil demand is expected to increase by about 7 percent, estimates Paul Ting of Paul Ting Energy Vision in Short Hills, N.J.

China currently imports between 3 million to 3.5 million barrels of oil per day, Mr. Ting estimates. This indicates it would need an additional 200,000 barrels each day to satisfy its larger appetite.

But as Ting points out, "it's never simple when it comes to the Chinese energy landscape." For example, with a significant amount of its oil coming from the Middle East, China is placing more importance on energy security. "The lack of a strategic petroleum reserve [in China] is a big issue," says Ting. "So in the next year or so, they will start to accumulate 100 million barrels of oil, which translates into an additional 100,000 barrels of oil per day."

While China grapples with surging demand, some analysts believe geopolitical concerns about energy may once again roil the energy markets.

In April, Nigeria, a key oil provider, will hold a presidential election. In the oil-rich delta area of Nigeria, dissidents are attacking oil platforms and kidnapping workers.

"Separatists are already attacking the infrastructure, and the unrest could climax in April," says John Kilduff, an energy trader at FIMAT USA, a commodities broker.

Tuesday, in an indication of the difficulties facing business operations in Nigeria, a gasoline pipeline there exploded, killing at least 200 people.

Energy markets will also be tuned in to the situation in Iraq, says Amy Myers Jaffe, professor of energy policy at Rice University in Houston. In one possible scenario, there might be some manipulation of the price of oil because of the ongoing sectarian strife in Iraq between the Shiites and the Sunnis, she says. She cites as an example the Iran-Iraq war in the 1980s, when Saudi Arabia, a mainly Sunni Muslim state, tried to keep oil prices down to hurt Iran, which is mainly Shiite.

"The fact the Saudis have not done it yet does not mean they would not do it," she says. "They have enough spare capacity to do this again if they see political facts they don't like."

If the strife in Iraq were to spread, that could pose a major risk. Most of the oil production in the region is in areas controlled by Shiites, even in Saudi Arabia, says Professor Jaffe. "There is the possibility this could become not just a crisis in Iraq but could spread to other populations. The reality is that if you commute to work, you have to care that there is no extended civil war in the Gulf."

• Material from Associated Press was used in this report.

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