From Iraqi insurgents targeting pipelines to Russian prosecutors targeting Yukos to storms in the Gulf of Mexico, threats to oil production have sent the price of crude soaring. With growth in global demand at a 24-year high and supply overstretched, any hint of disruption becomes a market mover. Oil prices hit $46.65 per bbl. last week the highest in the 21-year history of New York Mercantile Exchange futures amid fears of political unrest in the wake of oil-rich Venezuela's recall referendum on President Hugo Chávez. The soaring price might not signal a return to the 1970s oil shocks, but it was enough to cause stock markets to tumble and prompt economic leaders to warn of the threat to global economic growth.
Right on cue, here comes Saudi Arabia to save the day. Last week the kingdom said it was prepared to pump an extra 1.3 million bbl. a day to bridge the supply gap. Normally, even the hint of a production increase from the world's largest oil producer would quell prices. But this time the markets simply shrugged and kept driving up the price. What went wrong?
Saudi Arabia's problem isn't a lack of oil; rather, it needs to modernize its drilling and refining infrastructure. Even then, says Wardell, Saudi Arabia's extra capacity comes in the form of heavy crude good for making diesel but not the in-demand light, sweet crude that refineries need for gasoline. And so most analysts now predict prices will hit $50 per bbl., a far cry from the less than $10 per bbl. that crude fetched back in 1986. Supply and demand are powerful in theory, but for the moment they're taking a backseat to fear. If Yukos dries up (the Russian titan produces 2% of world supply) or insurgents hit oil installations in Iraq, Nigeria or whisper it Saudi Arabia, then $40 per bbl. might start to look almost cheap.
Back Down To Earth
A mixed week for British Airways: the carrier cheered first-quarter profits of $128 million after a loss last year, but risks legal action after ignoring Italy's demand to stop undercutting struggling Alitalia's fares on competing long-haul routes. BA asked the European Commission to step in. Meanwhile, union members among the airline's ground staff voted in favor of strike action over pay.
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