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Oil prices soar to record; analysts predict it's new norm

WASHINGTON—Oil prices soared to new highs Thursday, promising higher gasoline prices and leaving some analysts saying the upward run defies gravity.

U.S. light crude rose past $57 a barrel Thursday as traders shrugged off the promise a day earlier by the world's major oil producers to increase production. That puts oil prices about 50 percent higher than they were this time last year.

Gasoline prices are still lower than their 1981 highs, which in today's dollars would top $3 a gallon. In gas stations across the United States, a gallon of unleaded gas now averages about $2.05, about 30 cents more than it did a year ago.

Get used to it, energy analysts say.

They warn that fuel prices are likely to go higher and say high prices may become the norm. Experts say increasing demand for oil in large developing nations such as China and India, the lack of sufficient infrastructure to deliver oil in the future and changes in investment patterns are combining to drive up prices.

On the face of it, rising prices appear illogical. Energy Department statistics show that U.S. crude oil stockpiles were higher at the beginning of this year than they were at the beginning of 2004.

"It is so irrational ... it is defying gravity," said Steve Bellino, a New York-based senior vice president of energy risk management for Fimat USA, a global investment broker.

Lee Raymond, the chairman and chief executive officer of Exxon Mobil, the world's largest oil company, recently told Wall Street analysts that speculation, not market conditions, is driving today's oil market.

The International Energy Agency in Paris, which tracks oil demand for industrialized nations, offered a more nuanced explanation: Oil consumption has caught up with the capacity to extract and refine oil into gasoline. The agency projects rising demand for oil across the globe in the second half of 2005.

The United States remains the biggest oil consumer, using 21 million barrels a day, but the International Energy Agency warned that focusing on the United States misses the global picture. It showed that China used almost 5 million barrels a day last year and by 2022 may consume as much as the United States does today. India, the world's second most populous nation, also has a fast-growing appetite for oil.

Analysts said there wasn't enough production capacity to meet the world's growing oil demand, despite the Organization of Petroleum Exporting Countries' announcement Wednesday that it would increase production by 2 percent.

"It's really simple. We grossly underestimated the world's need for oil and we were hallucinating about the available supply," said Matthew Simmons, the head of Simmons & Co. International, a Houston-based investment bank specializing in the oil sector.

Simmons thinks there's little room in the next year or two for production increases, so oil isn't really overpriced, it's too cheap.

"I think we will look back and say how on Earth did we think that $50 or $60 a barrel was expensive," Simmons said.

John Iglehart, a managing director for investment giant Goldman Sachs in London, said the high oil prices of the 1970s led to excess production in the 1980s. Since then, he said, there's been insufficient investment to meet increasing demand.

"We've been living off the excess capacity of the 1970s," Iglehart said. "Not only do we have strong demand, but now for the first time severe supply delivery constraints."

Another sign that higher oil prices are here to stay is the futures markets for oil contracts. Oil prices are set on the spot market, in which contracts call for delivery within 30 days. To hedge against changing oil prices in the future, many investors purchase futures contracts, whose prices historically tended to be lower than the spot price.

Today, futures contracts for oil are trading at prices higher than the spot price. That means long-term contracts are being snapped up on the belief that the long-term price, although higher than today's spot price, will still be lower than the spot price will be four months from now.

"They are willing to buy it at these levels because they believe market fundamentals have changed," Iglehart said.

In other words, they think $50-a-barrel oil is a bargain.


(c) 2005, Knight Ridder/Tribune Information Services.

PHOTO (from KRT Photo Service, 202-383-6099): Oilprices

GRAPHIC (from KRT Graphics, 202-383-6064): Gas prices

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