Racing between OPEC meetings in Vienna, Saudi Arabia's powerful oil minister Ali Al-Naimi told a reporter that the cartel was "determined" to keep the price of oil at around $25 a barrel, rather than risk a slump in the market by boosting its production.
Wait a minute. $25? Al-Naimi said that in April 2003 less than five years ago when a barrel of oil cost one-quarter of this week's whopping $100, and when prices were regarded as high enough to keep oil-rich countries happy. Which brings up the question: How long will the price of oil remain sky-high?
Judging by the analysts' predictions, it could be several years. "Prices are going to be significantly higher," says John V. Mitchell, an OPEC expert and associate fellow at Chatham House in London. That realization deepened this week when OPEC's president, Algeria's Oil Minister Chakib Khelil, rebuffed President Bush's appeal for OPEC to boost production and so help avert a U.S. recession by easing oil prices on the world market. Instead Khelil said that production quotas for its 13 members who supply about 40% of the world's oil will "either decrease or be stable" when OPEC oil ministers next meet in Vienna on March 5. Adding to the jitters over the world's oil supplies was an explosion on Monday at a refinery in Big Spring, Texas, which halted its 67,000-barrel-a-day output, and could shut the facilty for two months. And even before then a bitter wrangle between Venezuela's oil officials and ExxonMobil over a rich oil field, as well as rebel action in the Niger Delta, had raised fears that oil supplies could be seriously interrupted.
But analysts say that the problems date back years, and could take several more years to fix. When oil prices were low during the 1980s and 1990s, big oil companies and governments decided it was not worth investing in new oil fields or in building thousands more oil refineries projects that cost billions of dollars and can take about seven years of work before any new oil is sold. That decision turned out to be a bad miscalculation, say analysts. It ignored the biggest factor that has sent the world's oil demand soaring the economic boom in China and, to a lesser extent, India. "No one saw this coming down the line 10 years ago," says Harry Tchilinguirian, senior oil market analyst for BNP Paribas in London. "You have to look at where demand growth is. Everyone looks West of the Suez Canal. But in fact all the action is happening east of that."
The price may also be affected by something a little more volatile: the action on Wall Street, where investors have poured money into the New York Mercantile Exchange, trading oil contracts what analysts call "paper barrels" in search of quick profits. "People are looking at oil as a hedge against inflation," says David Kirsch, an analyst for PFC Energy in Washington. He believes that with so many factors in play, "it's a fool's errand to calculate how much that's affecting the price of oil."
U.S. officials and the Paris-based International Energy Agency predict that oil demand will ease off this year with weaker economies in the United States and Europe. But while Americans and Europeans wince these days while filling their tanks, people in China and many other countries buy gas at heavily subsidized prices, says John Waterlow, an analyst at Wood Mackenzie, a business analysis firm headquartered in Edinburgh. "It is not being sold at market rates," he says. Meanwhile, with the high prices in the United States still the world's biggest consumer of energy oil companies are finally scrambling to lock in exploration contracts in key growth areas like the Caspian Sea, Canada and the West coast of Africa.
That new oil could take years to start flowing. And so oil prices are likely to remain high for years, and "could go higher, at least temporarily," says Waterlow. He says that if prices continue rising OPEC ministers will need to calculate whether to increase production and help avoid a deep U.S. recession one lasting enough to ripple across the world, and hit its new oil-hungry customers in Asia. Until then, investors are likely to keep speculating on high-priced oil, and Al-Naimi, Khelil and others will hold the line, no matter the appeals from Washington.