Supply, Demand and (Maybe) Speculation Equal $100 Barrel

By Michael A. Fletcher
Washington Post Staff Writer
Thursday, January 3, 2008

Soaring demand, a falling dollar, recent declines in domestic reserves and global political unrest combined to briefly push the price of a barrel of oil past the long-dreaded $100 threshold yesterday.

After climbing steadily since 2002, oil has surged since late last year. The price fluctuated just short of $100 for months before hitting the mark shortly after noon yesterday. It slipped back in the afternoon to close at $99.62 on the New York Mercantile Exchange.

Many experts say the increase has been largely driven by increasing consumption in China and India, as well as demand in industrialized countries including the United States that has remained stable despite escalating prices.

"Basically, demand has been growing quite strongly over the past three or four years in China and India as well as the U.S.," said Rick Mueller, an analyst with Energy Security Analysis in Massachusetts. "That has helped eliminate the spare capacity that was in the market in the past, making the market much more jittery."

Analysts pointed to a deadly attack by insurgents Tuesday at a hotel in Port Harcourt, Nigeria, hub of the oil-rich Niger Delta region, as the most recent trigger driving up prices. Insurgents have sabotaged pipelines and other equipment in the delta and have halted between half a million and 700,000 barrels a day of Nigeria's oil production.

Traders also were concerned by reports that some oil ports in Mexico were closed because of bad weather.

Over the longer term, the war in Iraq has kept exports from one of the world's major oil producers below prewar levels. Other major oil producers, meanwhile, have not given foreign companies the incentives or access for developing additional supplies. Iran has maintained its output but remains short of its potential. Venezuela's production has declined because of government disputes with foreign oil companies and workers from its national oil company.

In the United States, crude oil inventories have declined in recent months as foreign supplies have tightened and more crude has been refined into fuel oil in anticipation of winter.

"All of these factors are tied together to the fundamentals of supply and demand," said John Felmy, chief economist for the American Petroleum Institute, a trade group.

Others analysts blame oil traders for bidding up the price of oil, a process being fed by a weakening dollar, which makes oil cheaper for those buying it with euros or other currencies that have gained strength against the dollar.

"Wall Street greed is pushing the American family and our small businesses to the breaking point," said Shane Sweet, chief executive of the New England Fuel Institute, which represents about 1,000 retailers of heating oil and other fuels.

"Ultimately it is going to come down to supply and demand," said Phil Flynn, an analyst with Alaron Trading in Chicago. "If speculators push the price too high, then nobody would buy it."

Whatever the impact of speculators, soaring fuel-oil prices have serious political significance. For six years, the Bush administration made little effort to increase fuel-efficiency standards of U.S. automobiles. But a year ago Congress began work on legislation to boost standards, and Bush endorsed the effort in his State of the Union address. Last month Congress passed and President Bush signed an energy bill requiring a 40 percent increase in fuel efficiency by 2020.

But yesterday's milestone fueled calls for further action. Sen. Charles E. Schumer (D-N.Y.) was among those urging the Bush administration to suspend efforts to divert more oil to the Strategic Petroleum Reserve -- an idea that was met with a frosty reception at the White House.

"We know that markets work. . . . This president would not use the SPR to manipulate, unless there was a true emergency," said Dana Perino, Bush's press secretary.

Staff writer Steven Mufson contributed to this report.

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