Oil prices have moved up from lows of $16.60 a barrel in November 2001 to a high of $27 a barrel on April 5. Yet despite this recent price rise, the oil market's underlying fundamentals are largely stable. Typically spring is the season of weakest demand, but a rapidly recovering American economy is helping pick up the slack. Furthermore, the increase in U.S. military demand for oil is helping prices spike.
There are only two systemic factors that might upset this equilibrium before 2003. First, Angola and Russia are both dramatically expanding their production capabilities. By year's end the two countries will likely be pumping another 500,000 bpd collectively. Second, the lack of investment in the oil sector by Venezuelan President Hugo Chavez has gutted that country's long-term ability to function as a major oil supplier. Venezuela may also face a short-term problem, with oil workers from the state-owned Petroleos de Venezuela (PDVSA) threatening a strike that could shut down production temporarily.
But while the oil markets themselves can be analyzed on a long-term basis stripped of political factors, these complications must be included when generating short-term analysis. That is particularly true in the current case given that political factors -- specifically the current Israeli-Palestinian conflicts -- are almost wholly behind the oil price surge in recent weeks. Certainly major U.S. military actions in the region would heighten oil prices. However, despite the latest statements of the Bush administration, current U.S. deployments do not show this as imminent.
There are only two systemic factors that might upset this equilibrium before 2003. First, Angola and Russia are both dramatically expanding their production capabilities. By year's end the two countries will likely be pumping another 500,000 bpd collectively. Second, the lack of investment in the oil sector by Venezuelan President Hugo Chavez has gutted that country's long-term ability to function as a major oil supplier. Venezuela may also face a short-term problem, with oil workers from the state-owned Petroleos de Venezuela (PDVSA) threatening a strike that could shut down production temporarily.
But while the oil markets themselves can be analyzed on a long-term basis stripped of political factors, these complications must be included when generating short-term analysis. That is particularly true in the current case given that political factors -- specifically the current Israeli-Palestinian conflicts -- are almost wholly behind the oil price surge in recent weeks. Certainly major U.S. military actions in the region would heighten oil prices. However, despite the latest statements of the Bush administration, current U.S. deployments do not show this as imminent.