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Analysts Say Oil Prices Likely to Stay High

  • Michael Bowman

Last week the OPEC oil cartel boosted its official daily production ceiling by half-a-million barrels. But instead of moderating, crude oil prices promptly soared to a new record high, and have hovered near that level in the days since. Analysts say China's growing demand for oil, combined with a limited ability of producers to boost output, mean that world oil supplies will likely remain tight for the foreseeable future.

Monday, for the second time in a week, the price of crude oil spiked above the $57 per barrel mark on the New York Mercantile Exchange, where independent oil trader Daniel Dicker compared prices to a runaway locomotive.

"For right now, it is an overheated train, and overheated trains do not stop suddenly," he said. "So, I think it [crude oil] will probably go higher first - that is what I expect."

The price increase has not escaped the attention of President Bush. At a recent White House news conference, Mr. Bush said the United States must consume less petroleum. He also urged greater domestic oil production, including drilling in the ecologically-sensitive Alaska National Wildlife Refuge. Such a move, which is opposed by environmentalists, was approved by the U.S. Senate last week, bringing it a step closer to being realized.

"I am concerned about the price of energy," said Mr. Bush. "I am concerned about what it means to the average American family, when they see the price of gasoline going up. I am concerned what it means to small businesses."

What is behind the near-doubling of crude oil prices over the last two years? The period coincides with the war in Iraq, as well as unrest in oil-producers Nigeria and Venezuela. But analysts say the trend cannot be explained solely by conflict and chaos on the world stage. Rather, they point to a dramatic boost in global oil consumption in 2003 and 2004 that more than doubled the rate of increase from previous years. Manouchehr Takin, an analyst at Britain's Center for Global Energy Studies, points to one country in particular.

"Chinese growth in oil imports has been the major force behind the growth in world oil demand," he reminded.

Mr. Takin says plans by the Organization of Petroleum Exporting Countries for expanding production capacity were based on previous assumptions of slower growth in demand. Today, only three of the cartel's 11 members - Saudi Arabia, Kuwait and the United Arab Emirates - have the capacity to boost production to any appreciable degree.

And there is another supply-related problem, according to Mr. Takin:

"The capacity to refine petroleum products is almost at the limit," he added. "In other words, there is not much spare capacity in refining installations around the world. In the United States, for example, definitely, the capacities are limited."

What do higher oil prices mean? At the American Enterprise Institute, economist Desmond Lachman says every $10-per-barrel increase curbs world economic growth by about half a percentage point.

"There is no question that, globally, this is a drag on all the major industrialized countries," commented Mr. Lachman. "One must expect that, if these prices are maintained, they will cause some slowing in economic growth."

Even so, Mr. Lachman says the picture is not all bleak.

"One does not want to overreact to this," he said. "What we find is that market prices will, in the end, sort this out, that higher prices, if sustained, will be inducing additional drilling, and there will be alternate energy sources."

But energy analyst Manouchehr Takin says no one should expect higher oil prices to spark a massive surge in drilling activity that will leave the market awash in petroleum.

"By the time they [oil companies] do exploration work, or where there have been some discoveries and drill a few wells to evaluate them, we are talking a lead time of at least three, four, five, six years," he explained.

In addition, Mr. Takin says, he cannot discount the possibility that, just as OPEC underestimated current oil demand, it may underestimate future growth in demand, as well.

Ultimately, he says, demand will outstrip supply.

"Oil is a non-replaceable resource. There is a limited quantity of it, and you cannot go on like wheat, growing it every year," he said.

Analysts say demand can be tempered by energy conservation, and conservation will become more appealing the higher oil prices go. There are already signs that the prices may be having an effect on U.S. consumers. In the last year, sales of the biggest, least fuel-efficient consumer vehicles have tailed off in the United States, while "hybrid" electric/gasoline-powered cars are becoming more popular. Perhaps aware that sharp price increases curtail future demand for any commodity, OPEC says it wants to see prices subside to the $40-to-$50-per-barrel range.