Oil Prices Zoom towards Possible $50 per Barrel by Winter

Oil prices touched another all time high of $44 per barrel in trading on Monday, August 2. Already jittery over stretched global energy supply, oil prices rocketed again – up from Friday’s $43.82 on New York – in response to the warning Sunday, August 1, of a possible al Qaeda attack on US and international financial centers in New York, Washington DC and New Jersey.
Last week, prices soared in response to the continuing turmoil at the Russian oil giant YUKOS and the long- running legal dispute between the Russian government and its imprisoned chief, Mikhail Khodorkovsky, on trial for alleged fraud and tax evasion.
Russian authorities are claiming $3.4 billion in owed taxes and fines and have frozen the company’s bank accounts and assets. Last week’s panic was touched off by rumors that YUKOS might be forced to stop exporting oil. This largest of Russian oil exporters ships 1.6 millions of barrels of oil daily, which is about 2% of the world`s output. The Russian court is still trying to sell YUKOS’s most valuable business, Yukanskneftegaz, which is by any estimate worth several times the value of the disputed tax.
“YUKOS owners and management are playing their last cards,” Barclays Capital said in a research note on Thursday. “For the Kremlin, a strong Russia is about the destruction of a rebel oligarch, but not about damaging the core of the sovereign story by causing YUKOS to stop production.”
The YUKOS crisis is actually another chapter in the saga of Russia versus the Oligarch -especially one like Khodorkovsky, who has financed political parties to challenge Russian President Vladimir Putin and urged the privatization of oil pipelines.
Russia is the second oil exporter in the world, after Saudi Arabia. Fears surrounding the fate of the embattled oil giant have been forcing oil prices higher for some weeks, adding to the squeeze created by increasing demand, especially from United States, and the burgeoning Chinese economy. Demand traditionally rises ahead of winter as stocks are replenished to meet heating needs. But the real squeeze in the oil market is caused by tight supply.
The Organization of Petroleum Exporting Countries, the world cartel known as OPEC, is already pumping its highest output in a quarter of a century to meet growing demand. Its leading member, Saudi Arabia, has raised production by one million barrels a day to arrest a spiral that could curb the world’s economic growth. Accounting for about half of the world’s oil product, OPEC’s official price band is $22-28 for a basket of crude. But cartel members have already hit almost 95% of their collective capacity by pumping 26 million bpd.
Immediate prospects for prices to level out are not good. The threat of sabotage hangs over Saudi infrastructure, including pipelines. The Iraqi oil industry, which exported 1.5 barrels per day in July, remains an uncertain factor given the state of security in the country. Other big oil players like Venezuela, Nigeria and Norway are also in the grip of unrest and strikes.
A new factor that could have a harmful effect on oil prices is the possible imposition of UN sanctions on another major world producer, Iran, which is steadily progressing towards a nuclear weapons capability. The United States is preparing to present next month’s International Atomic Energy Agency board meeting in Vienna with a demand to complain to the UN Security Council about Iran’s violations and demand sanctions. Tehran indicated Monday, August 2, that the Islamic Republic was not dismayed by the threat and was capable of riding out sanctions. However, a penalty such as the oil-for-food sanctions imposed on Saddam Hussein would further stifle world oil production and push prices up further.
But even if all the existing negative factors persist into the winter, most analysts predict oil could go as high as $50 a barrel.
How would the world economy be affected if oil price remained above $40?
The real price of oil (adjusted for inflation) is still around half the level of the early 1980`s. Even so, any price level above $40 would be detrimental. It would slow American growth by 0.5 pc and add 0.7pc to American inflation. Japan, which relies entirely on imported oil, could see its GDP growth reduced by 1 pc. The sharpest pinch would be felt by the American voter. Because gasoline is taxed, the American motorist would suffer more than car owners in other countries.