Business Analysis: With the oil price surging, will Bush turn on the American tap?

Despite fears of a Seventies-style crisis, US reserves could flood the market at a stroke
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The Independent Online

The renewed surge in the oil price following last weekend's atrocity in Saudi Arabia has triggered new fears that the world may be on the brink of an oil crisis to rival that of the 1970s. The price then averaged more than $50 a barrel in today's money for four consecutive years, peaking at $72. Last week the price touched $44.

The renewed surge in the oil price following last weekend's atrocity in Saudi Arabia has triggered new fears that the world may be on the brink of an oil crisis to rival that of the 1970s. The price then averaged more than $50 a barrel in today's money for four consecutive years, peaking at $72. Last week the price touched $44.

"On fundamental grounds the price of Brent crude should be $32 a barrel," said Clay Smith, an oil analyst at the City office of Commerzbank Securities, "and ultimately prices do revert to their fundamental levels".

Eric Chaney, Morgan Stanley's economist in London, agrees but thinks that base price is also moving up. He said: "It seems the fundamentals are still in favour of higher prices going forward."

Mr Smith was quick to warn that there are a number of threats to security of oil supply. The world's leading producer, Iraq, is still in a state of chaos. As the weekend's events demonstrated, Saudi Arabia is less stable than many people in the West previously believed. Venezuelan oil workers went on strike last year, and the president, Hugo Chavez, faces a crucial referendum. And Africa's leading oil producer, Nigeria, is beset by conflicts between Christians and Muslims. "So the potential for upward spikes in the oil price is unlimited," Mr Smith said.

However, that price has been rising strongly for more than a year, suggesting that more powerful forces than sabotage or political upheaval are driving it. As Mr Chaney said: "We are not sure there will be enough supply because of increased demand in the global economy."

Unusually, the three main engines of the US, Europe and Asia are all stepping up their calls on oil.

The biggest changes are the sharp increases in demand from China and India as their economies suck in imports of raw materials for manufacture and re-export or, in India's case, to improve the country's infrastructure.

James McCormack, an analyst at the FitchRatings agency, said: "We have revised upwards our 2004 Brent oil price assumption from $31 to $36. We believe that middle east security concerns, which contribute to driving prices higher, are unlikely to be alleviated in the short term. Oil demand in China is growing rapidly, accounting for about 35 per cent of the projected increase in global demand this year."

Robin Griffiths, the chief technical strategist at HSBC, said: "India and China are now growing at such a rate that they will keep demand high. China has started to rein in its growth in recent months, which will probably take oil prices lower in the short term, although they are unlikely to slip below $35, and certainly not down to the mid $20s. I have been predicting for a while that prices will reach $40 this year, and expect them to hit $50 next year, and $60 the year after that."

Market forces are at least easier to deal with than the arbitrary price hike by the colourful Sheik Yamani on behalf of the Organisation of Petroleum Exporting Countries (Opec) 30 years ago. That was enough to spark global hyper-inflation and destabilised western governments.

Today Opec is far more conciliatory, and has been a calming influence on oil prices for the past 20 years. In Amsterdam last month, Saudi Arabia proposed that Opec member countries should raise their combined production ceiling by 2.5 million barrels per day to 26 million. But, as our table shows, this will make little difference as most Opec members are already producing more than their agreed quota, and are, in any case, bumping up near the limit of their capacity. As Mr Smith at Commerzbank said: "Arguably, Opec is now becoming irrelevant."

More important is that China is quietly increasing its strategic reserves from 37 million barrels to 100 million. But that will take several years, and it would be madness to stock up when prices are so high.

As so often, the US holds the key, accounting as it does for about a quarter of the world's oil consumption. But, according to Commerzbank, it does not have enough refinery capacity to step up production, and there have been recent closures as many refineries were converted to produce cleaner fuel. Nevertheless, this is the time of year when US drivers start revving up their 320 million cars and vans for the annual driving season, criss-crossing the American continent in search of mountain retreats, seaside resorts, bears, rabbits and relatives.

While that takes a heavy toll of demand, President Bush has a tap that could flood the market at a stroke. It is called the US Strategic Petroleum Reserve (SPR). It currently stands at 680 million barrels and can produce four million barrels a day.

That tap was last turned by the US President's father at the time of the Gulf War in 1991. He was acting to prevent disruption to supplies, which is the only legitimate reason for releasing the SPR. However, the present President faces election in November and, with the threats to supply in Saudi Arabia, Iraq, Venezuela, Nigeria and other unstable countries, it is hard to believe that he could not find good reason to add to supplies.

After all, if the oil price hits $50 a barrel, surely supplies have to have been disrupted, don't they?

Motorists gearing up to fight petrol price rises

Politicians and petrol companies are steeling themselves for a motorists' backlash against rising prices.

A spokesman for the prime minister, Tony Blair, was quick to distance him from any involvement. He said: "The Prime Minister does not determine the price of petrol. It's not for the Prime Minister to indulge in TV reality shows and judge the price of the oil market."

Yet only a few weeks ago Mr Blair was saying: "We look very carefully at the impact of higher oil prices on the world economy. Where we can, and where we are able to, we try and take action."

The signs are that he is right to take fright. A new survey shows drivers would back fresh demonstrations against price increase. Up to seven in 10 motorists would support fuel blockades, which so frightened the government four years ago, according to the Churchill motor insurance company. It found that six in 10 motorists were taking some sort of action to protect themselves from a fuel crisis, including stocking up on groceries, filling spare fuel tanks to keep in cars and always ensuring that their car's fuel tank was full. The survey discovered that more than four in 10 motorists claimed they always shopped around for fuel. This was backed by chain e-mails that have started doing the rounds in an attempt to rally support for a petrol boycott.

One argues that the best tactic is to concentrate the buyers' strike on two of the main retailers, BP and Esso, hurting them whilst continuing to buy from other outlets. It says: "If BP and Esso are not selling any petrol, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit. Acting together we can make a difference. If you're fed up paying too much for petrol, please pass this message on."

The Petrol Retailers Association director, Roy Holloway, said it was impossible to forecast just how high petrol prices would go from the present average of 82p for a litre of unleaded. He said: "If the price of crude goes up, prices at the pumps go up."

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