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Unstable Middle East and 'Thirsty' Asia Drive Oil Prices Up - 2004-08-25


Political instability in key oil-producing countries and surging demand in Asia have driven crude oil prices up nearly 40 percent this summer. Some market watchers believe this is a temporary phenomenon.

World oil prices have soared to nearly $50 a barrel due to unstable supplies from the Middle East and rising demand in Asia.

Michael Rothman, an energy market analyst with the global investment firm, Merrill Lynch, told reporters at a news briefing that the upward trend in oil prices began about 18 months ago, when crude oil inventories fell 200 million barrels below normal.

He said that major oil-producing countries like Venezuela fell victim to political instability and the expectation that post-war Iraq would produce five million barrels of crude a day, more than twice its actual production, never materialized.

At the same time, Mr. Rothman said, China and India, leaders in world consumption of oil, began buying up oil in the marketplace as a precaution against the political volatility in oil-producing countries in the Middle East.

"Where is oil disappearing into?" asked Mr. Rothman. "It appears to be a hoarding phenomenon, and we think it has to run its course, almost like the flu and when it does pass, prices should gravitate much lower, somewhere down toward $30 a barrel."

China and India are two of the world's fastest-growing economies, accounting for almost half of the world's 2.5 million barrel increase in daily oil consumption.

The International Energy Agency, an adviser to 26 industrialized nations, estimates the world's demand for oil will reach more than 82 million barrels a day this year, a three percent increase over last year, and will rise another 1.8 million barrels a day in 2005.

Mr. Rothman says trying to predict when certain nations will stop scrambling to buy up oil is like predicting responses in a panic-stricken crowd.

"People are afraid there will be no oil," he said. "They think there is going to be short supply so they go out and accumulate this oil and effectively it puts pressure on available goods. Does OPEC want oil prices at $50 a barrel? Is this what the world is going to live with? The answer is no, we do not see this being the case."

OPEC, the Organization of Petroleum Exporting Countries, reported another reason crude oil prices are rising may be that that oil-producing countries like Kuwait, Qatar, Iran, Nigeria and Venezuela drilled fewer wells in 2003 than in the previous year.

Some analysts say this could prolong a global supply shortage. OPEC produces a third of the world's crude oil supply, currently pumping some 30 million barrels of oil a day. Only Saudi Arabia, the group's largest producer, is believed to have any significant ability to increase its yield.

Mr. Rothman says, however, it is unlikely prices will swell beyond $50 a barrel.

"Politically this is not a palatable level," he noted. "It is very obvious. If you look at oil prices in OPEC production, you will actually see a highly correlated manner. Prices get too high, they push barrels into the market. Prices start to retreat, they take oil out."

Mr. Rothman said the spike in crude oil prices has not hurt the U.S. economy the way it did during the 1970s oil shortage because of the availability of alternate sources of energy.

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