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Barrel Roll

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By RUSSELL RAY, The Tampa Tribune

Published: October 18, 2007

On Sept. 13, when the price of oil closed above $80 a barrel for the first time, energy analysts brushed it off, saying the high price wouldn't last. Demand, they said, wasn't strong enough to support prices at such a high level.

But more than a month later, oil prices continue to trade above $80 a barrel at a time of year when prices should be falling. On Wednesday, oil surged to an intraday high of $89 a barrel before finishing the day at $87.40. That's 48 percent higher than the closing price on the same day last year.

What was believed to be an anomaly is now considered by industry experts as a sign of things to come. Should global demand for oil remain strong, prices could spike to $100 a barrel as early as this spring, some analysts predict.

That means motorists in the Tampa Bay area and elsewhere could end up paying close to $4 for a gallon of gasoline six months from now, when U.S. gasoline demand is expected to rise. If that scenario plays out, a 20-gallon tank of gas would cost $80.

'Would $4 a gallon be out of the question? No, not at all,' said James Cordier, president of Liberty Trading Group in Tampa, a futures brokerage firm.

Drilling Is 'A Good Investment'

What's more, oil prices at these levels are sure to put even more pressure on Congress to allow oil and gas drilling off Florida's Gulf coast.

'I would expect it,' Cordier said. 'At $80-plus a barrel, it would be very lucrative and a good investment to do that.'

The higher cost of crude oil may lead to costly gasoline as refiners pass on higher oil costs to customers. Gasoline prices in the Tampa Bay area, though, have held steady since the end of the summer driving season, according to AAA. On Wednesday, the average price for regular-grade gas was $2.75 a gallon.

'We haven't seen retail prices follow the price of crude,' said AAA spokesman Gregg Laskoski. 'What we've seen in the last two weeks has been atypical.'

This month's historic rally marks the beginning of a new era in oil prices, Cordier predicts. Although he expects oil prices will fall in coming weeks, the floor-price will be significantly higher.

'Instead of $55, the new floor might be $65 to $70,' Cordier said. 'As long as global economic growth remains strong, the days of crude oil at $55 a barrel are over.'

Last week, as oil traded above $80, the Department of Energy issued a report estimating that global demand for oil will climb by nearly 2 million barrels a day in the fourth quarter. The world now consumes about 87 million barrels of oil daily.

Record high oil prices have failed to curb demand, a disturbing trend that could make the cost of driving unaffordable for consumers on tight budgets, said John Olson, energy analyst for Sanders Morris Harris in Houston.

'Demand is basically insensitive to price,' Olson said. 'It's very inelastic, and that is very troublesome.

'If you're growing the market at 2 million barrels a day, something has to give, and what has given so far is the price structure,' Olson said.

The price of oil has surged 7 percent since Monday. The rally was primarily driven by concerns that Turkey may attack Kurdish militants in Iraq who have launched attacks inside Turkey. The conflict could disrupt oil shipments that run from northern Iraq through Turkey.

'Turkey does not produce oil, but a great deal of oil does flow through its borders,' Cordier said.

On Wednesday, Turkey's parliament approved a government plan to attack Kurdish rebels in northern Iraq.

Another factor that has kept oil prices at record levels is the lower value of the U.S. dollar.

Oil is priced in dollars, but the dollar has dropped 15 percent in value over the last three months, which is preventing a slowdown in global demand, Cordier said. Europe and Asia, he said, are buying oil at a major discount thanks to the weaker dollar.

'They're paying probably the equivalent of $75 a barrel as opposed to $85,' he said. 'That's what's allowing the market to stay high and get stronger.'

High Prices Aren't Going Away

In a recent report by Goldman Sachs, the investment bank said there is a 'high risk' that oil prices could top $90 a barrel by the end of the year.

But oil prices plunged from a high of $89 a barrel Wednesday after the Department of Energy reported a 1.8 million barrel increase in U.S. oil inventories, exceeding expectations of analysts surveyed by Dow Jones Newswires.

Prices then reversed course after traders in New York learned of Turkey's plan to attack Kurdish rebels in Iraq.

Brad Kamp, an associate professor of economics at the University of South Florida, said speculation by energy traders in New York has contributed to today's record high oil prices. But if the speculative nature of the market was removed, oil prices would still be high because world oil supplies aren't growing as fast as demand, Kamp said.

The International Energy Agency of Paris, an adviser to 26 nations on oil policy, said last week that world oil demand will grow by 2.4 percent in 2008 to 88 million barrels a day. The prediction contributed to the historic surge in prices.

'What we're seeing now is a permanent increase in demand,' he said. 'Unless we have a recession worldwide, that's not going to go away.'

The Associated Press contributed to this report. Reporter Russell Ray can be reached at rray@tampatrib.com or (813) 259-7870.

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