Warning of Dollars 100-a-Barrel Oil

ROCKETING oil prices might hit dollars 100 (GBP 57) this year, controversial Texan oil analyst Matt Simmons has warned.

Crude surged past dollars 60 a barrel last week and investors are pinning their hopes on a build-up in US oil-stocks to bring the price down again in the coming months. However, Simmons said surging demand will keep prices well above dollars 50.

“We could be at dollars 100 by this winter,” he said. “We have the biggest risk we have ever had of demand exceeding supply. We are about to face up to the biggest crisis we have ever had.”

G8 leaders, meeting in Gleneagles this week, have said they will broach the risks of high fuel costs hurting US economic growth or smothering the already sluggish economies of much of continental Europe and Japan. Following the talks, finance ministers are expected to repeat calls for greater transparency from OPEC and other oil-producing nations about their reserves, after oil last week hit a record dollars 60.95 a barrel.

However, Simmons says that any realistic moves will be too little, too late. In a hard-hitting report, due to be published this week, he argues that Saudi Arabia, the world’s largest producer, is running out of oil and that further price rises are inevitable as supplies decline.

Many analysts expect extra production over the next year, as high prices boost investment by energy firms. But Simmons says that after many years of under-investment, there is even a shortage of drilling rigs.

“Many of these projects are aspirations, many of them won’t create peak production in the first year and many of them within five years will be in decline,” he said.

However, the Economist Intelligence Unit (EIU) predicts that oil prices will peak by the end of this year and decline by 10 per cent in 2006 as the Chinese economy slows, reducing demand. Chinese imports have been crucial to propping up oil prices in the past two years.

But the EIU warned that its forecasts – which show a 30 per cent increase in oil prices for 2005 – might prove too conservative if there are further wobbles in supply. “The narrow margin of spare production capacity has made prices vulnerable to unforeseen reductions in supply or rises in demand,” it said.

Saudi Arabia – the world’s largest oil exporter – has already raised production in an effort to curb high prices. It says that refining bottlenecks in the US and market speculators are to blame for the recent price surge, not crude shortages.