OIL: Soaring from One Record High to the Next

By Humberto Márquez Reprint | | Print |

Humberto Márquez

CARACAS, Oct 22 2004 (IPS) - As oil prices soar from one record high to another, alarm is growing around the world, with countries scrambling to ensure fuel supplies and seek alternative energy sources.

The price of light sweet crude in New York started off the week at an all-time high of 55.33 dollars a barrel, then rose even further, to 55.45 dollars by Friday.

The managing director of the International Monetary Fund (IMF), Rodrigo Rato from Spain, said the “downside risks” from oil have increased, meaning that rising oil costs could have a visible impact on global economic growth, currently forecast at 4.3 percent for 2005. Rato spoke to the press in Geneva just before heading off to the Middle East, the world’s largest oil-producing region.

France has announced that it is moving forward with its plans to build the prototype of a new generation of nuclear reactors, the European Pressurised Water Reactor (EPR), capable of generating 1600 megawatts of electricity, as a means of further reducing dependency on fossil fuels.

In Latin America, Venezuela, the world’s fifth-largest oil exporter, has extended a helping hand to its fellow developing nations by selling them oil at world market prices but with special credit facilities.

Agreements are currently being negotiated with the Dominican Republic, Chile, Paraguay and Peru, who are joining a number of other countries in the region already receiving this preferential treatment.

There is good reason to be taking action. At this point in time, even if oil prices were to drop a few dollars, they would still almost certainly remain high over the next year, far above the 31-dollar average price for West Texas Intermediate crude (WTI) registered in 2003, or the 2002 average of 26 dollars a barrel. So far this year, the WTI average is 40.15 dollars a barrel.

In the meantime, the price of North Sea Brent crude, always a few dollars cheaper because of its higher density, also reached a new record high of 51.55 dollars on Friday in London.

This week’s average prices were 54.12 dollars a barrel for WTI, 50.49 dollars for Brent crude, and 46.31 dollars for the OPEC (Organisation of Petroleum Exporting Countries) basket of seven crudes, according to the Venezuelan Ministry of Energy.

OPEC, which comprises Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela, produces 30 of the 82 million barrels of oil consumed around the world every day. With the price of its basket of crudes averaging 35 dollars a barrel, the organisation’s sales will total more than 350 billion dollars this year.

“We believe prices will remain at these levels in 2005, at least for the first half of the year,” said Venezuelan Energy Minister Rafael Ramírez before heading to the Dominican Republic to negotiate a new agreement.

“The days of persistently cheap oil are over,” and the next few years may be stressful for energy consumers, said U.S. Federal Reserve governor Ben Bernanke.

But the futures markets of New York and London are already feeling the strain.

Venezuela attributes part of the rise in prices to speculative activity in futures markets, and the Bloomberg agency reported that futures market traders and analysts predict that prices will continue to rise before the end of October.

One recent reason for the steady increase in prices is that the U.S. Department of Energy reported that just as the northern hemisphere winter is starting, inventories of distillates (mostly diesel and heating oil) amount to 119 million barrels, 13.4 million barrels lower than one year ago.

U.S. stocks of heating oil stand at 49.5 million barrels, 15 percent lower than the average for the last five years – news that is driving up prices because refineries seek to stock up ahead of time in view of the high level of competition from other energy consumers.

The main novel development occurred in China, which between January and September imported some 455 million barrels, compared to 350 million barrels in the same period last year.

Producers are pumping at near full capacity, with a very small margin of spare capacity and relying partly on heavy crudes, which are less attractive to the market. That fans fears of disruptions in supplies in case of contingencies in producer areas that are suffering from political instability.

However, the producer nations are determined to meet demand. Saudi Arabia offered to pump 11 million barrels a day next year, up from the current 9.5 million, and the United Arab Emirates proposed increasing its potential output from 2.5 to 3.5 million barrels a day over the next year.

But experts agree that the market will no longer have the large spare capacity it enjoyed in the 1990s, and will have to face volatile oil prices, at least in the near future.