Foreign Correspondence

[Amaunet]

Oil prices: Up, up and away
By Humberto Marquez

Aug 16, 2005


CARACAS - Oil prices hit a new record of US$66.69 a barrel in New York Friday, driven up by sustained demand, refinery problems, a drop in gasoline stocks in the United States, geopolitical tension and speculative activity. US benchmark West Texas Intermediate (WTI) closed Friday at $66.55 a barrel, after climbing to a high of $66.69 - up 75 cents from Thursday. London Brent crude also hit a new high of $65.88 a barrel.

The weekly averages were $64 for WTI, $63.02 for Brent and $56.78 for the OPEC (Organization of Petroleum Exporting Countries) basket of 11 benchmark crudes, according to a report by the Venezuelan Energy Ministry. This week's prices were $3 higher than a week ago, $6 higher than a month ago, $15 higher than in the first quarter of 2005, $25 up from the 2004 average, and more than double the prices two years ago. But adjusting for inflation, they are still below the post-Iranian revolution prices of 1979, when they soared to more than $40 a barrel, equivalent to $80 a barrel today.

Iran, OPEC's second largest exporter - after Saudi Arabia - again indirectly contributed to last week's price rise due to concern sparked by its clash with the European Union and the United States over its nuclear program. But Seth Kleinman, an analyst with US-based PFC Energy, said prices were expected to hit $70 a barrel sooner rather than later.

Venezuelan President Hugo Chavez, who signed oil cooperation deals last week with Argentina, Brazil and Uruguay, remarked: "Oil prices will continue rising because the reserves are running out on one hand and there are factors like the war in Iraq on the other. The United States' plans didn't work out. They had hoped that by now they would have had Iraq under control and be producing three million barrels a day, but they haven't been able to get the country under control." Ironically, the high prices President Chavez blames on the Iraq conflict have worked out exceedingly well for his own government, which is using the windfall of oil revenues to fund populist programs that would arguably be unaffordable otherwise.

Iraq is pumping less than two million barrels a day, and like the rest of the OPEC members, as well as the non-OPEC producers, it is producing at near capacity, in order to meet the current global demand of 84 million barrels a day. OPEC, which produces nearly 40% of the world's oil and accounts for around 55% of total shipments, is made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Driving the steady high demand for oil is economic growth in the United States and in emerging giants like China and India. But prices are rising because of fears in the US and other markets of possible gasoline shortages due to problems in refineries. For example, ConocoPhillips, the largest US oil refiner, suffered a power failure and fire Wednesday in its Wood River refinery in Illinois. Although the 306,000 barrels a day processed by the plant is a small amount in comparison to total US gasoline consumption of 9.5 million barrels a day, the partial shutdown came on top of an Energy Department report that gasoline inventories had shrunk of late from 205.2 to 203.1 million barrels.

In the face of possible gasoline shortages and higher prices in the United States - the retail price currently averages $2.37 a gallon - traders are seeking to stock up on oil supplies and are thus pushing up demand and prices. "Speculation now adds $18-20 to the price of each barrel," said Venezuelan oil expert Mahzar al Shereidah. Speculative transactions are based on levels of inventories, refining capacity and demand in markets like the United States, as well as weather reports on the hurricane season affecting oil-producing areas in the Gulf of Mexico, and above all, the situation in the Middle East.

While Iran became a cause of market jitters last week, concern rose the week before that after the United States warned of the possibility of terrorist attacks in Saudi Arabia, which pumps 9.5 million barrels a day of crude, making it the world's top producer. "There are many geopolitical risks, yet there is no slack in the system to handle any disruptions," said Tony Nunan, manager for energy risk management at Mitsubishi Corporation in Tokyo.

For small consumer nations like those of Central America, today's huge oil bills are a heavy burden on their economies. This year, Nicaragua will pay some $520 million, 95 million more than in 2004, for the 10.5 million barrels it imports, while El Salvador will spend $900 million to import the same quantity of oil that it purchased last year for $670 million.

(Inter Press Service)

http://www.atimes.com/atimes/Global_Economy/GH16Dj01.html