Oil Breaks $50 a Barrel

Light crude broke the $50 a barrel barrier earlier this week, and there doesn’t seem to be much of a fundamental nor technical nature that is going to halt the increase. As suggested in this journal on August 30, the falling prices the world saw in the last month or so was merely a profit-taking correction. And while suppliers say they will try to ameliorate the current squeeze, the fact is there isn’t very much they can do to help.

One of the biggest problem areas is in oil-producing Nigeria. Rebels have threatened an “all-out war,” to start on Friday, attacking foreign oil workers and prompting Shell to pull out 235 workers from 2 oilfields. Moreover, there are problems with the theft of oil on a grand scale. To call it piracy would not be far off the mark. A tanker, African Pride, was seized by Nigerian authorities last year on suspicion of oil smuggling. The Nigerian navy now can’t find neither the crew, the cargo, nor the ship itself. No one has seen it since August. Needless to say, this builds a risk premium into the price of oil.

And on the matter of risk premium, Iraq remains as unstable as Norman Bates and Hannibal Lechter, although less charming and polite. Iraqi officials have said they will try to boost production by 160,000 barrels per day, taking their total to 2 million. So long as there are insurgents blowing up pipelines, no one will count Iraq as a reliable source of oil.

The traditionally reliable actor in the Mid-East, Saudi Arabia, has increased production to 11 million barrels a day according to a Reuters report. That is a scary prospect, however. According to oil analyst Peter Beutel in a CNN interview, "If they go up to 11 million barrels per day, and they actually do pump that much, it means there isn't a single barrel of reserve cushion in the world. That's a frightening prospect for many people."

America does have its Strategic Oil Reserve, from which some oil is being released to address hurricane-related shortages. It has a 700-million-barrel capacity and is only 30 million short of being completely full. That is equivalent to 67 days of imports. That won’t get America through a full winter. Suggestions are welcome.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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