WASHINGTON -- With so much uncertainty roiling oil markets these days, analysts say one thing is clear: the world's supply cushion is perilously thin.
Whether the amount of extra fuel that could be pumped in a pinch is 1 million barrels a day, as many believe, or significantly more than that doesn't really matter, they say, because the amount of actual production at risk these days is even greater.
As a result, the threat of output disruptions in Iraq, Russia, Venezuela and beyond has thrust crude futures above $46 a barrel - the latest run-up coming even after Saudi Arabia offered the market all it had. If global demand continues to rise at current rates, don't expect cheap prices anytime soon, analysts said.
On Friday, the price of crude for September delivery surged to $46.58 on the New York Mercantile Exchange, a rise of $1.08. That is crude's highest Nymex settlement on record, although on an inflation-adjusted basis it is still about $11 below the price leading up to the first Gulf War.
In the past, a comfortable surplus of available output, or capacity, could be depended on to temper the blow that geopolitical fears might have on oil markets, said Lawrence J. Goldstein, president of PIRA Energy Group in New York.
"But today all uncertainties must be immediately factored into the price," Goldstein said. "We simply don't have the cushion anymore."
Sure, there is no literal shortage of oil right now and prices would likely decline if the threat of sabotage against Iraqi oil infrastructure waned and the dispute between the Russian government and oil-giant Yukos gets resolved in a way that values the company's assets fairly.
But that would still leave oil markets vulnerable to other geopolitical flare-ups, analysts said, explaining why futures are trading above $40 through the end of next summer and many believe the $50 level will be reached before then.
What changed, experts said, is that private and state-owned oil companies became cautious about oversupplying the market after prices collapsed in the early 1980s. The more circumspect approach to exploration and production, however, has allowed the capacity buffer to shrink and put the industry in a position where it must struggle just to keep up with rising demand.
"It's a problem that is at least a decade in the making," Goldstein said. "So it's not going to be solved in 10 days, 10 weeks or 10 months. It's going to take years."
Depending on who you ask, the world has anywhere from 500,000 to 1.5 million barrels a day of spare capacity - the bulk of it in Saudi Arabia - that could be tapped instantly to offset a temporary loss of supply.
"This is an exceptionally low ratio for an 81.4 million barrel per day supply system and is well below the 10-year average of 5.0 million barrels per day," notes A.G. Edwards senior oil analyst L. Bruce Lanni.
And it helps to explain why this week's attempt by Saudi Arabia to calm markets was ineffective.
The Saudis said they were willing to put on the market an additional 1.3 million barrels per day, virtually all of the country's available production. But for many experts that only served to highlight the market's supply limitations.
"They are getting very close to capacity levels," said Marshall Steeves, an energy analyst at the New York-based research firm Refco. "If demand keeps expanding, what are we going to be doing at end of the year?"
Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington, attributed the latest price surge to the fact that "there are a lot more trouble spots out there than we are normally confronted with," including terrorist attacks in May and June against oil workers in Saudi Arabia.
- Yukos, which pumps roughly 1.7 million barrels a day, needs to pay the Russian government $3.4 billion in back-taxes. Its woes have prompted worries that the efficiency of the company could suffer in the next six months to a year as assets are sold off and bankruptcy looms.
- In Iraq, output temporarily ceased this week as loyalists of a radical Shiite cleric threatened to blow up oil pipelines and port infrastructure. Iraq exports roughly 1.8 million barrels a day through the southern port of Basra.
- Add to the mix the persistent fear of political and labor unrest in Nigeria (2.4 million barrels a day) and Venezuela (2.2 million barrels a day), and the sheer complexity of the situation becomes dizzying, even for veteran energy traders.
Indeed, the list of politically unstable oil-producing nations has always been long. But what especially unnerved oil traders in recent months was the speed with which the world's oil appetite grew, even with higher prices.
The International Energy Agency, a Paris-based industry watchdog, said this week that it expects global demand to rise by 3.2 percent, or 2.5 million barrels a day, in 2004 - more than double its original estimate.
Some analysts also point to the dwindling levels of oil kept in storage in the United States as an area of growing concern. The supply of commercially available crude on any given day has fallen by about 15 percent over the past decade in spite of steadily rising demand.
But others say the situation is nothing to worry about as advances in information technology and logistics have enabled the oil industry - like much of the U.S. economy - to operate efficiently with less inventory.
"This is a genuinely tight market," said Leonidas Drollas, chief economist of the Center for Global Energy Studies in London, downplaying the role of hedge-funds and other speculative investors in driving prices higher.
However, over the next 12 months he expects high prices to cause demand to taper off and production to increase.
"That's the classic response of the market," Drollas said. "Prices will weaken."