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Why oil prices may stay sky high

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When Russia's largest oil exporter, Yukos, was apparently ordered last week to halt production in a dispute over paying back taxes, oil prices surged to an all-time high of almost $44 per barrel.

But analysts say the fact that Yukos could jolt the global oil market underscores how several factors are making the market vulnerable to shocks, and are likely to conspire to keep prices high for the next 12 to 18 months.

They point to the doubling of the pace of global demand in the past year, little spare production capacity, continuing terrorist attacks in the Middle East, and a controversial presidential referendum on Aug. 15 in Venezuela, the world's No. 5 oil producer.

"You can write a checklist of factors that are contributing to this very overheated and feverish market," says Peter Kemp, editor of the Petroleum Intelligence Weekly in London. "The [oil supply] cushion ... that can be used in an emergency is very, very thin."

In part because of higher gasoline prices, the US government said Friday that economic growth slowed sharply in the spring.

Adjusted for inflation, however, the cost of oil remains about half has high as the peaks reached in the late 1970s and early 1980s.

While some estimate a $10 per barrel "terror premium," Mr. Kemp figures that at least half the current price surge is "going to be a permanent feature until we see increases in supply, which are not imminent."

Yukos produces one-fifth of Russia's oil output - or about 2 percent of global production - and is locked in an ongoing tug-of-war with Russian authorities over a $3.4 billion tax bill, fraud charges, and the fate of its former CEO, the billionaire oligarch Mikhail Khodorkovsky, who is now in jail.

But even as Yukos warns that it is being forced into bankruptcy - though executives learned late last week that in fact they could keep producing - other factors shaping the oil market magnify its global impact, and that of any other potential threat to supply.


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