High oil prices are made in the United States

[Robbien]

LONDON: In its latest short-term energy outlook report, the Energy Information Administration (EIA) of the US Department of Energy (DOE) raised its projected average West Texas Intermediate crude oil price for the third quarter to $37 per barrel. The report also warned that "price spikes are still quite possible given the uncertainties surrounding Middle East instability, terrorism, Iraq, and the fact that, while some optimism for improvement is warranted, oil inventories worldwide are still low."

The upward revision in the price forecast for US crude came as OPEC reinforced its commitment to increase production.

The oil group's president, Purnomo Yusgiantoro, told reporters that "OPEC still has a commitment to raise its quota by 500,000 barrels a day beginning in August." Saudi Oil Minister Ali al-Naimi confirmed more than once that the decision is "firm and irrevocable."

If OPEC has not turned off the spigot - OPEC production is estimated to have risen by 3.3 million barrels per day between 2002 and 2004 - and is committed to increasing future production, what explains the run up in prices and the upward revision in oil price forecasts? The usual explanation that simply blames OPEC and makes it the scapegoat for sharp rises in oil prices is no longer convincing.

http://www.menafn.com/qn_news_story_s.asp?StoryId=58076

[stickdog]

1. This analysis is worth a read. (nt)

[Momof1]

2. more from the article

In 2001, George W. Bush ordered the filling of the Strategic Petroleum Reserve (SPR) to its maximum capacity of 700 million barrels. Despite rising prices in 2002 and 2003, the US government continued to build up its reserves, refusing to release any oil from the SPR to cool down prices. Bush made it clear that "the idea of emptying the SPR would put America in a dangerous position in the war of terror." This strategy did not only increase the price of crude oil by pushing up demand, but sent signals to the market that the government might have credible intelligence about possible terror attacks on oil installations.

Fears of supply shortages are multiplying at a time when demand for oil is expected to expand fast. The EIA expects a growth in global oil demand in of excess of 2 million barrels per day (about 2.6 percent) for 2004 and 2005. This increase is seen as being driven by strong growth performance in China and North America. Markets fear that with such high growth projections, OPEC producers will not be able to meet the growing demand.

The New York Times claims Saudi Arabia's oil fields "are in decline, prompting industry and government officials to raise serious questions about whether the kingdom will be able to satisfy the world's thirst for oil in coming years. Energy forecasts call for Saudi Arabia to almost double its output in the next decade and after. Oil executives and government officials in the United States and Saudi Arabia however say capacity will probably stay near current level, potentially creating a significant gap in the global energy supply."

So far the discussion has been about expectations, but what about the current demand-supply situation? Very few observers would argue that the current oil market is characterized by unmet excess demand. Professor Robert Mabro from the Oxford Energy Seminar notes that US refineries are working at 95 to 96 percent of capacity. He questions how these refineries can realize such high rates if they are short of crude oil. The lack of an oil shortage, however, has had only a limited impact on the markets

http://www.menafn.com/qn_news_story_s.asp?StoryId=58076