Oil soars-but please do not panic-just yet anyway

August 15, 2004

Economic Outlook

Oil soars again, but no need to panic just yet
David Smith

EVERY TIME the oil price looks ready to lie down, up it pops again. A promise last week by Saudi Arabia to increase output provided only a brief respite. High prices, it seems, are here to stay.
Our definition of high prices, meanwhile, is ratcheting higher. The price of West Texas intermediate, the American benchmark, has risen to $46 a barrel (35 gallons), while Brent crude is above $42 a barrel. These are record levels, and represent a 50% rise since March last year, the start of the Iraq war.

Then, many hoped that prices would soon come down to $20 a barrel or less. A pessimistic view was that oil would remain at about $30. But $45 has been breached, and the price could go much higher still. Emergent, a hedge-fund manager, has been basing its strategy on $55-$60 oil for some time. CSFB, in a new report, warns that prices are likely to trade in the $50-$60 range, if only briefly, in the coming months.

The reasons for high prices are well known. Insecurity and insurgency in Iraq, which last week hit oil exports, have produced the opposite post-war effect to the one the optimists were expecting. Vast tracts of Iraq are unexplored, and one day the country may have the scope to increase oil output sharply; but not for a while yet.

Tight supply, in the Organisation of Petroleum Exporting Countries (Opec) and elsewhere, means prices are acutely vulnerable to rising demand from China and other fast-growing economies. The result is that any supply shock