The Organization of Petroleum Exporting Countries said it will reduce its daily oil production by 500,000 barrels with effect from Feb.1, 2007. (File Photo) Photo Gallery >>>

    NEW YORK, Dec. 15 (Xinhua) -- The year 2006 has witnessed fluctuating oil prices as prices peaked at 78.40 U.S. dollars per barrel in July, then plummeted to 55 dollars last month, before rising to current levels of 60-65 dollars.

    Considering the factors -- the trend of world economic growth, OPEC's further oil cuts as well as geopolitical events and natural disasters, energy analysts forecast that the volatile oil prices are expected to be high in 2007.

    GLOBAL ECONOMIC GROWTH

    As the world's biggest economy, the United States, which consumes over 40 percent of the world's gasoline and more than 25 percent of the world's crude oil, is seen by investors and analysts as a bellwether for oil demand and price direction.

    Although statistics showed in the third quarter of this year, the U.S. economy grew at its slowest pace of 1.6 percent in three years, many analysts still have confidence in U.S. economic growth.

    David Resler, chief economist of Nomura Securities Co. said "The 1.6 percent growth is temporary ... U.S. economy remains flexible and strong. The growth will rally to 3 percent in the fourth quarter and the growth of 2007 will keep across 3 percent."

    The slowing of the U.S. economy would not necessarily result in a marked fall in demand for oil next year because overall demand was driven mainly by consumption in other major economies.

    The International Energy Agency (IEA) warned in its monthly report on the oil market that: "Even if the U.S. economy were to slow down, the world economy and global demand are likely to hold their ground."

    The Paris-based energy watchdog forecast on Nov. 10 that daily demand for oil alone will rise 38 percent by 2030 as energy demand climbs, particularly in emerging economies.

    It added that the global average daily demand in 2006 may reach84.5 million barrels per day (bpd), a 1.1-percent increase on the previous year. In 2007, demand is forecast to increase by 1.7 percent to 85.9 million barrels per day.

    LIMITED SPARE CAPACITY

    Economists and market analysts expected that oil prices would stay high as global oil output and production capacity are unlikely to rise remarkably in the near future.

    They said a lack of spare capacity has been one of the key drivers of rising prices. Adjusted for inflation, the world oil industry has increased its investment in oil and natural gas production by 5 percent only between 2000 and 2005.

    "That's almost nothing; it's inadequate," said Fatih Birol, the IEA's chief economist and principal author of the agency's latest annual World Economic Outlook.

    Several major producers in the world are already pumping near full tilt or even beginning to scale down production due to dwindling reserves as well as other economic factors.

    The Organization of Petroleum Exporting Countries (OPEC), which pumps over a third of the world's oil, has already curbed output this year by 1.2 million bpd, or four percent in November, to halt a 25 percent price slump over 10-weeks.

    Dermot Gately, a professor of economics at New York University, has modeled OPEC countries' income at different levels of production, noting that any effort on OPEC's part to expand capacity to maintain its market share would only begin to yield higher revenues after 2015, and even then, the increase would be marginal.

    Given all the uncertainties involved, a rational OPEC planner would probably resolve simply to maintain exports at today's levels rather than add capacity, he added.

    GEOPOLITICAL EVENTS & NATURAL DISASTERS

    Analysts forecast that the recent geopolitical uncertainty in the Middle East would cause ripples on the world oil market and set global crude prices soaring.

    The Middle East accounts for more than a third of the world's oil production, over two-thirds of the global crude exports and almost two-thirds of the world's untapped reserves.

    Therefore, any geopolitical tension in the region, such as the political crisis along the Lebanese-Israeli border this summer, could spark traders' concerns over the state of the world oil supply.

    Traders are also concerned about the possibility that Iran's oil exports would come to a halt if the United Nations imposed international sanctions on Teheran for its nuclear activities.

    Iran is OPEC's No. 2 producer following Saudi Arabia, pumping four million bpd of crude oil and exporting 2.4 million barrels per day. A report issued by the Fimat Group said that if the world market loses Iran's oil, crude oil futures could spike to 80-85 dollars a barrel.

    Meanwhile, as Africa's leading oil producer, with daily exports of 2.5 million barrels, Nigeria has shut off one-fourth of its daily output after a series of military attacks.

    There are also worries over the risks posed by frequent natural disasters to world oil production. Hurricanes Rita and Katrina in 2005 destroyed oil and gas production platforms and rigs concentrated in the Gulf of Mexico and led to all-time highs in crude oil futures market.

    PRICES LIKELY TO RISE

    The new forecast has been proven by rising demands with winter heating in the U.S.. U.S. Energy Department predicted in its monthly report on the outlook for oil and gas markets published in November that crude oil prices would "rise by about two dollars per barrel each month over the next several months."

    Energy analysts also agreed that oil future prices are likely to remain high over the next year amid fears of OPEC's further oil cut.

    OPEC ministers meeting in Nigeria on Dec. 14 announced that the bloc was discussing an oil output cut of up to 500,000 barrels per day from Feb. 1.

    If oil demand is still growing at that time, the price will start pushing up to a level sufficient to bring supply and demand back into balance, said Bobby Coats, Arkansas Extension agricultural policy economist.

    Edward Morse, the chief energy economist of Lehman Brothers argued that oil prices in 2007 may average as much as eight dollars a barrel more than in 2006, which is 67 dollars on average till Nov. 17, 2006.