Is there any relief in sight for the recent record oil prices?

by Sherine Abdel-Razek

Once again oil price futures have reached record highs, climbing to $ 43.82 a barrel for September delivery at the New York Mercantile Exchange. Brent crude rose 78 cents to $ 40.03 a barrel in London -- the highest since the first Gulf War.
It was less than two month ago that the prices broke the $ 40 per barrel boundary amid regional tension and attacks on the oil pipelines in Iraq. However, OPEC's promise to increase production helped cool down the feverish market and prices dipped below the $ 40 plateau.

Adjusted for inflation, world oil prices remain far below the levels reached during the 1970s oil shock, but have shot up dramatically from the beginning of 2002, when the price per barrel hovered around $ 18.
Many believe the recent price hike should be branded with a "made in Russia" label. Russia's largest oil producer, Yukos, is in chaos and could stop production. Yukos produces one fifth of Russia's oil output -- or about 2 % of global production -- andis locked in an ongoing tug of war with Russian authorities over a $ 3.4 bn tax bill, fraud charges, and the fate of its former CEO, the billionaire oligarch Mikhail Khodorkovsky, who is now in jail.

However, a closer look reveals that there is a long list of factors contributing to the price increase. According to analysts, the fear premium -- the increase in prices resulting from political tension in main oil producing countries like Saudi Arabia and Iraq -- adds $ 6 to $ 8 to the price. This coincides with the uncertainty accompanying the pending presidential referendum in Venezuela, the world's fifth largest oil producer.
Still, according to an annual survey by Oil & Gas Journal, worldwide exploration and production spending is expected to rise 4.8 % this year to $ 53 bn. But that does not mean oil and natural gas markets will necessarily be awash in new supplies anytime soon. Analysts say that it will take between a year and 18 months for the investments of both OPEC and non-OPEC members to bear fruit and relieve the over-heated market.

Also, the International Energy Agency expects oil demand to grow by 3.2 % in 2004 to 81.4 mm bpd, leaving very little spare production capacity. The global demand is growing at the fastest rate since the late 1970s. One estimate puts the growth rate at 4.1 % for the first half of this year. This stemmed from several factors: a very cold winter last year, nuclear power outages in Japan, surging natural gas prices in the US and China's expanding economy.
To meet the skyrocketing demand, the supply side is being pushed to the limit. OPEC is already pumping at close to capacity. In late July, OPEC officials said they were producing 27.5 mm bpd, 2 mm bpd above their quota.

Still, analysts agree that the main players in the industry are taking a relatively conservative approach to boosting output. They cite a number of reasons for the industry's cautiousness, including the possibility that a sudden economic recession or a cool down in political problems could shave demand, tighten prices and make any expansion in drilling activities now economically detrimental later.
After examining these factors, it becomes clear that more price hikes are probably on the way, as factors affecting both the demand and supply sides of the equation are believed to be long lived. Claude Mandil, executive director of the International Energy Agency, said oil prices could remain high and volatile for the foreseeable future.
"The end of 2004 may be critical," he said. "There is less flexibility than we should have, and than we had last year. It will be more difficult to react to unpredicted events," he said.