Tuesday, April 29, 2008

Why Stop At $200/Barrel?

Opec chief warns of $200 a barrel oil price
David Robertson

The president of Opec, the cartel of oil-producing countries, has given warning that the price of crude could hit $200 a barrel, sparking fears that rising fuel costs will force more businesses into bankruptcy.
Chakib Khelil, the Algerian Energy Minister and president of Opec, said that the falling value of the US dollar would continue to drive up oil prices as investors sought to store their wealth in other assets.
Lehman Brothers, the bank, has said that high prices are being sustained by an influx of money into the oil market from investment funds.
It estimates that "hot money" accounts for between $20 to $30 of the recent increase in oil prices and about $40 billion (£20 billion) has been invested in the sector so far this year — equal to all the money pumped into oil last year.
The price of oil hit an all-time high of nearly $120 a barrel today after North Sea production was shut down yesterday because of a strike at the Grangemouth refinery in Scotland.
In early trading the price of US light crude rose $1 to $119.93 amid concern about the impact of industrial action at Grangemouth.
This came on top of a $2.50 gain on Friday and leaves the price of oil up more than 25 per cent since the start of the year.
The price of Brent oil rose 83 cents to $117.17 and oil analysts have predicted that further price rises are likely in the coming months.
Supply shortages are expected to get worse over summer, which is hurricane season in the Gulf of Mexico.
In addition, demand usually rises in hot months when air-conditioning units are operating at full blast. If financial investors continue to pour money into oil funds, as the president of Opec has suggested, this could cause prices to spike even higher.
Today's price rises came as workers at Grangemouth, which is operated by Ineos, a chemical company, began a two-day walkout yesterday over pension benefits.
This forced the closure of the 700,000 barrel-a-day Forties pipeline and sparked fears that Scotland and the North of England could face petrol shortages.
Grangemouth supplies 10 per cent of the UK's petrol but also produces power for BP's Kinneil plant, which processes the oil from the Forties pipeline.
The oil price was also supported by concern over a surge in violence in oil-rich southern Nigeria, which led to five policemen being shot dead on Sunday.
Attacks by militia forces forced Royal Dutch Shell and ExxonMobile to shut down oil production temporarily two days ago.
Traders were also spooked by continued tensions between the United States and Iran, the world's fourth-largest oil producer.
A cargo ship hired by the US Navy fired on Iranian forces on Friday.
The rise in oil prices comes despite a 400,000 barrel-a-day reduction in physical demand from the United States, which is consuming less because of its economic slowdown. This has been more than offset by rising financial demand as funds seek alternative investments to the falling US dollar.
Analysts fear that the price will rise even higher as supply shortages get worse in the coming months while both physical and financial demand increase.
On the supply side, shortages may occur if there is a bad hurricane season in the Gulf of Mexico and because the oil industry typically saves maintenance work at fields such as the North Sea for good weather.
Summer usually brings a rise in demand as air-conditioning use rises, particularly in the Middle East.
Rapid economic growth in the region has led to a large increase in energy consumption, which is diverting oil and gas away from export markets to feed domestic needs.
This has exacerbated the effect of rising energy demand in the region.
The high price of oil is already having an impact on the global economy, with airlines going bust and drivers paying more to fill their cars.
Eos, the business-class-only airline, went into Chapter 11 bankruptcy protection yesterday and joins at least six other carriers that have also been grounded in the past two weeks by high costs.

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