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Geopolitics, declining production raise fears about sources for oil

WASHINGTON—Oil prices inched Thursday toward last summer's record high amid concerns of supply disruptions, and energy forecasters think that volatile geopolitics and declining oil production will keep prices up for years.

Oil reached $67.15 a barrel Thursday on the New York Mercantile Exchange, up 70 cents to a two-month high, amid concerns over disruptions in Nigerian oil production and a possible political showdown over the nuclear ambitions of Iran, the second-biggest exporter in the Organization of Petroleum Exporting Countries oil cartel.

Oil prices are approaching last year's all-time high of $70.85 a barrel, which came the day after Hurricane Katrina's landfall on the Gulf Coast, and U.S. consumers again are feeling the shock at the gas pump. AAA said Thursday that the nationwide average for a gallon of unleaded gas stood at $2.51, which is 36 cents higher than a year ago and 27 cents higher than a month ago, but well below last year's inflation-adjusted all-time high of $3.05 a gallon.

Global oil production is straining to keep pace with demand, which makes oil traders fear supply disruptions and bid up prices for assured future delivery. The balance between supply and demand will remain tight for several years, which is expected to keep fuel prices high, experts at the Energy Information Administration's annual outlook meeting predicted Monday.

Michael Cohen, an EIA economist, said oil production was expected to drop over the next two years in stable production areas such as Mexico, the North Sea and the Middle East. Meanwhile, the demand for oil, particularly in rapidly developing nations such as China, India and Brazil, is expected to grow.

That means more oil must be discovered and produced, not only to keep pace with surging demand, but also to replace the declining output.

Over the next two years, oil producers that don't belong to the OPEC cartel are expected to step up production by 2.5 million to 3 million barrels per day, while global demand for oil will grow by 3.5 million barrels a day, Cohen and private analysts said.

The world will look to OPEC to make up the shortfall, which makes oil traders nervous. Two of OPEC's biggest players, Iran and Venezuela, are openly hostile to the Bush administration, and vice versa.

Iran has hinted that it might withhold oil from global markets to provoke a supply crisis if Western powers thwart its nuclear programs. Venezuela has threatened to divert its U.S. oil exports to other countries. Venezuela's oil minister, Rafael Ramirez, told state television Wednesday that ExxonMobil, the world's biggest private oil company, was no longer welcome in his country.

So, despite President Bush's State of the Union pledge to reduce American reliance on Middle East oil, it remains essential to meeting U.S. needs for fuel.

"This really comes down to what can Saudi Arabia do," said Jamal Qureshi, the lead oil-market analyst at PFC Energy, an energy consultancy in Washington.

Saudi Arabia vowed last year to boost production capacity from 9 million barrels per day to 12 million barrels by 2009, and left open the possibility of going up to 15 million.

U.S. dependence on Saudi oil worries oil traders, especially since suicide bombers tried to attack Saudi Arabia's largest refinery, in Abqaiq, in February.

In the near term, additional oil output is forecast to come from former Soviet Union republics in Central Asia, which are increasingly undemocratic, and from politically unstable nations in West Africa.

Joseph Stanislaw, a leading expert on global oil, said oil-consuming nations including the United States would depend increasingly on supplies from a corridor along the Persian Gulf, Caspian Sea, Siberia and northwestern North America. Of nations in that zone, only Canada has an established democracy and a history of open markets.

"The bulk of the world's resources lie along this corridor," he said.

The implication: The United States will have to adapt to the new geopolitics of oil or develop alternatives such as biofuel, high-mileage diesel and hybrid battery-powered automobiles and renewable-energy sources such as wind and solar power.

"Are we at a tipping point? Are we at a major turning point in the world? I think we could be," Stanislaw said.

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(c) 2006, Knight Ridder/Tribune Information Services.

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