[R-G] Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up?

[Anthony Fenton]

http://www.time.com/time/world/article/0,8599,1901446,00.html

Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up?
By Vivienne Walt / Paris Friday, May. 29, 2009
Oil installations in Lake Maracaibo, Venezuela.

Storage tankers across the globe may be brimming with oil that no one  
is buying because of the global economic downturn, but the traditional  
laws of supply and demand don't always apply to oil prices. Drivers  
have faced rising prices at the gas pump in recent months, as  
investors and oil-producing countries hoard supplies in anticipation  
of a global economic recovery later this year.

The 12 member countries of the OPEC cartel voted in Vienna on Thursday  
to maintain output at current levels rather than increase supplies in  
order to bring some relief to consumers, particularly in the gas- 
guzzling West. The OPEC oil ministers, whose countries account for  
about 40% of the world's entire crude-oil supply, also renewed their  
commitment to stick to their agreed quotas, rather than ship extra  
oil, as they began doing last April when several members ignored their  
agreed output limits. OPEC leaders, many of whose economies are  
heavily dependent on oil exports, have struggled to stabilize prices  
at a level that suits their own economic needs amid falling demand and  
rising supplies. Prices had rocketed to a record level of $147 a  
barrel last July before plummeting to $30 just five months later and  
beginning a new climb. (See pictures of South Africa's oil-from-coal  
refinery.)

Oil analysts believe OPEC's decisions on Thursday could help push oil  
prices even higher; oil futures on the New York Mercantile Exchange  
have risen 36% in just two months, to about $63.46 a barrel on  
Thursday. And that appears to be on track to achieve targets set by  
OPEC leaders. Saudi Oil Minister Ali al-Naimi — OPEC's key power  
player — said Wednesday that oil prices ought to rise to between $75  
and $80 a barrel by the end of the year. "Demand is picking up,  
especially in Asia," he told reporters puffing alongside him as he  
jogged through the streets of Vienna. "The price rise is a function of  
optimism that better things are coming in the future."

The economic recovery Naimi so optimistically predicts would certainly  
be vital to oil-producing countries, whose own economies would be  
imperiled by a drawn-out recession. Oil demand in rich countries has  
crashed since the onset of the economic crisis last year, and is now  
at its lowest level since about 1981, according to the Paris-based  
International Energy Agency. U.S. oil inventories — the stored surplus  
— this month reached their highest level since the 1980s. And about  
2.6 billion barrels are currently stored in commercial tankers around  
the world. "There is some risk we will run out of storage space in the  
next four to six weeks," says Simon Wardell, director of global oil at  
IHS Global Insight, an energy-forecasting company in London. To oil- 
rich countries that possibility evokes grim memories of 1998, when the  
Asian economic crisis sent demand plummeting, driving world oil prices  
down to $10 a barrel. "If we run out of storage it could prompt a  
collapse in the price," says Wardell. Oil producers might then choose  
to dramatically cut output in order to run down the surplus. (See  
pictures from Azerbaijan's oil boom.)

Despite such dangers, investors and oil producers are betting that  
global demand will roar back, apparently hoping that the recession has  
already hit bottom. Over the past two months, investors have plowed  
billions of dollars into oil futures. If the U.S. and other major  
industrial economies rebound, oil supplies could be depleted because  
the recession has prompted producer nations to freeze hundreds of  
projects to open new oil wells or upgrade existing ones. In the oil- 
rich Niger Delta, a major Nigerian government offensive against rebels  
has seriously disrupted production for several weeks. Venezuela's Oil  
Minister Rafael Ramirez said in Vienna that his country could not  
afford to invest in major new oil exploration unless prices rise  
further. "We need a level of at least $70 [a barrel] to recuperate  
investment," he said on Thursday. Muhammad-Ali Zainy, senior energy  
analyst at the Center for Global Energy Studies in London, says oil  
demand could increase quickly once the recession ends, especially as  
China has begun to build up its strategic oil reserves. "We think the  
price is going to go up gradually," says Zainy.

For those feeling the pain at the gas pumps, however, there is one  
piece of good news. Oil is unlikely to hit $147 a barrel again — at  
least not during the coming decades. The U.S. Energy Information  
Administration said on Wednesday that oil prices would likely rise to  
$110 a barrel by 2015 and $130 a barrel by 2030. By that time the  
world oil markets might once again follow the normal rules of  
economics.