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Oil Tops $75 a Barrel, Driven By Worries About Political Stability

Posted on: Friday, 21 April 2006, 21:00 CDT

CHICAGO _ Oil prices jumped past $75 a barrel Friday, rising on fear of political instability in the Middle East, Africa and Latin America.

Some economists said $100 a barrel oil is possible, as demand remains strong and the world has almost no excess production capacity.

The continuing confrontation with Iran over its nuclear ambitions has added uncertainty to energy markets. New violence was reported in Nigeria during the week. And Venezuela's saber rattling has caused concern for months.

Iran, Nigeria and Venezuela are major petroleum producers, and interruption of exports from any one of those countries would send oil prices soaring.

The benchmark price of petroleum closed the week at $75.17, up $1.48, in trading on the New York Mercantile Exchange.

"We have enough worries out there to all for this price to go higher," said Neil Donahoe, chief investment officer of SYM Investment Advisors of Warsaw, Ind. He said it is "very possible" that oil could reach $100 a barrel.

Donahoe said that investors also are contributing to a rise in the price of oil as they diversify into energy and other commodities to broaden portfolios that historically were made up of stocks and bonds.

Oil accounts for 50 percent to 60 percent of the price of gasoline. Gasoline prices typically lag changes in petroleum prices for a brief time before showing up at the pump.

Jonathan Noonan, chief investment strategist with Appleton Partners Inc., a Boston investment management firm, offers an outline for events needed to push down oil prices.

"Global confidence in total political stability" would cause petroleum prices to fall, Noonan said. "I think that is a very unrealistic expectation."

Iran is the world's fourth-largest exporter of oil. Its economy is dependent on petroleum, and it is unlikely to halt exports except in the case of war.

The U.N. Security Council has set a Friday deadline for Iran to suspend its nuclear program or face international sanctions. Iran has not said whether it would reduce oil exports if tensions escalate.

Meanwhile, militants in Nigeria have cut that country's oil output by 20 percent through attacks on oil pipelines and the kidnapping of oil field workers. They are demanding a larger share of petroleum profits for the indigenous peoples living in oil-producing regions of the country.

On Thursday, Venezuelan President Hugo Chavez warned that his government would destroy its oil fields if the country came under attack from the United States.

Chavez frequently criticizes the United States for what he describes as its heavy-handed treatment of Latin American nations. Venezuela is a major exporter to the United States.

Supply bottlenecks within the United States also could push gasoline prices higher, even if crude oil prices stabilize.

U.S. refiners are trying to complete maintenance deferred last year during hurricanes Katrina and Rita, leading to a slowdown in production.

The country is also switching from the use of methyl tertiary butyl ether, a toxic gasoline additive that reduces pollution, to ethanol.

"We don't have enough ethanol to meet demand," said Malcolm Polley, chief investment officer of S&T Wealth Management Group, located near Pittsburgh.

Polley said the government could temporarily suspend some requirements for cleaner gasoline, as it did during last year's hurricane season, until ethanol output ramps up.

Gasoline stockpiles have been declining for the last seven weeks, just as the summer driving season draws near.

There are some signs that American drivers are being affected by higher prices.

The Energy Department said that average daily gasoline demand had increased 0.9 percent this year compared with a 1.4 percent gain in the same period in 2005.

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(c) 2006, Chicago Tribune.

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Source: Chicago Tribune

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