Surge in oil prices not just spec­u­la­tion, of­fi­cials say

The Washington Times Weekly - - National - By Pa­trice Hill

Oil prices verg­ing on $100 a bar­rel are the re­sult of skimpy sup­plies col­lid­ing with strong growth in China, the United States and the rest of the world, and not just the work of spec­u­la­tors, the na­tion’s chief en­ergy fore­caster con­cluded Nov. 6.

That means gaso­line prices could top a record $3.20 a gal­lon by the end of the year and $4 a gal­lon by spring, an­a­lysts say, cre­at­ing a monumental en­ergy crunch for con­sumers who also are fac­ing dou­bledigit in­creases in their home heat­ing bills this win­ter. Reg­u­lar gas prices passed back through the $3 bar­rier on Nov. 6.

The In­ter­na­tional En­ergy Agency says that an even big­ger world­wide en­ergy cri­sis is pos­si­ble within a few years be­cause of rapid eco­nomic growth in China, In­dia and other emerg­ing coun­tries and slow pro­duc­tion in­creases by ma­jor oil ex­porters, which could lead to oil short­ages by 2015.

“A sup­ply-side crunch in the pe­riod to 2015, in­volv­ing an abrupt es­ca­la­tion in oil prices, can­not be ruled out,” the in­ter­na­tional agency said in a re­port re­leased Nov. 7. The agency par­tic­u­larly faults the Or­ga­ni­za­tion of Pe­tro­leum Ex­port­ing Coun­tries (OPEC) for fail­ing to make the mas­sive in­vest­ments in oil ex­plo­ration and drilling needed to keep up with soar­ing de­mand for en­ergy around the world.

The out­look for this win­ter does not en­vi­sion fuel short­ages, but it is hardly com­fort­ing. For the first time in years, con­sumers are fac­ing the like­li­hood of hav­ing to con­tend with record high gaso­line prices at the same time they are suf­fer­ing from the sticker shock of home heat­ing bills that are fore­cast to be 10 per­cent to 40 per­cent higher than last year.

“We ex­pect reg­u­lar na­tion­wide gaso­line quotes to in­crease 40 cents to $3.20 a gal­lon by the end of the year, rep­re­sent­ing an an­nu­al­ized hit to spend­ing power of about $50 bil­lion,” said David Green­law, econ­o­mist at Morgan Stan­ley.

Con­sumers usu­ally get a lit­tle re­lief from high gas prices in the win­ter as a re­sult of a sea­sonal pat­tern where both oil and gaso­line prices have dropped af­ter La­bor Day and the end of the sum­mer peak driv­ing sea­son. While gaso­line prices started to fol­low that pat­tern this year, world oil prices did not go along and in­stead started a steep as­cent that has con­founded an­a­lysts and fore­cast­ers.

Mr. Green­law and other fore­cast­ers for weeks have blamed spec­u­la­tors and the de­clin­ing dol­lar as prin­ci­pal cul­prits be­hind the enor­mous spike in pre­mium crude prices from $70 a bar­rel in mid-Au­gust to $96.70 in New York trad­ing yes­ter­day. Since oil is priced in dol­lars, the re­cent sharp fall of the cur­rency has con­trib­uted to es­ca­lat­ing prices. Spec­u­la­tors have latched onto the trend and placed bets on fur­ther rises in oil prices.

The spec­u­la­tive fer­vor for weeks had lit­tle im­pact on U.S. con­sumers since pump prices re­mained rel­a­tively low, but that anom­aly dis­si­pated in re­cent days when gas prices started to rise steeply. The na­tion­wide price now stands 81 cents above year-ago lev­els, ac­cord­ing to the U.S. En­ergy In­for­ma­tion Ad­min­is­tra­tion.

The widely re­spected in­de­pen­dent agency de­clared that the sharp rise in oil prices was not pri­mar­ily the re­sult of spec­u­la­tion but rather re­flected the ro­bust growth of de­mand for fuel, mainly in the U.S. and China, amid slug­gish growth in sup­plies.

The agency also said de­mand growth has been ro­bust in oil-pro­duc­ing na­tions in the Mid­dle East and Rus­sia, and their thirst for gaso­line has been aided by their grow­ing war chests of petrodol­lars.

Mean­while, OPEC curbed its pro­duc­tion for most of the year un­til this month, when it lifted out­put by a mea­ger 500,000 bar­rels a day, forc­ing the U.S. and other coun­tries to draw down their stores of crude to meet ris­ing fuel needs. That has left in­ven­to­ries of oil world­wide at tight lev­els, the agency said.

Adding to the pres­sure on prices is OPEC’s small cush­ion of sur­plus ca­pac­ity — 2 mil­lion to 3 mil­lion bar­rels a day, pri­mar­ily in Saudi Ara­bia — should a sup­ply cut­off re­sult from ten­sions with Iran or other dis­rup­tions. The world con­sumes about 85 mil­lion bar­rels of oil a day.

An up­ris­ing in Nige­ria — a key sup­plier of pre­mium crude to the U.S. — has shut down more than half a mil­lion bar­rels of pro­duc­tion a day since Fe­bru­ary 2006, the agency es­ti­mated, while Venezue­lan pro­duc­tion also has waned since 2002 and could de­cline fur­ther as a re­sult of the coun­try’s re­cent na­tion­al­iza­tion of its oil in­dus­try. In­sta­bil­ity in Iraq’s north­ern oil-pro­duc­ing re­gion bor­der­ing Turkey also has pres­sured prices re­cently.

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