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New Fears on Global Oil Supplies

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THE PROGRESSIVE REVIEW - June 2, 2008
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New Fears on Long-Term Global Oil Supplies
by: Graham Bowley and David Jolly, 
    The International Herald Tribune

Worries that world oil demand will outstrip global supplies 
intensified on Thursday, sending ripples through the global 
economy as oil prices leaped above $135, a new record high. 

The price spike occurred overnight, and by Thursday morning 
oil had fallen back slightly to $132.87, down 30 cents from 
its close on Wednesday.

But the leap capped a rally that has seen oil rise nearly 
$5 a barrel in two days, underscoring the dire implications 
of the current price run-up for businesses across the globe.

Ford Motor Company, the American auto manufacturer, said 
on Thursday it would cut vehicle production for the rest 
of this year and fall short of reaching profitability in 
2009, a long-held company goal. In a statement, a top 
Ford executive said rising gasoline prices "are having a 
tremendous impact on our sales, our manufacturing 
operations and our profitability." 

Meanwhile, Europe's biggest airline, Air France-KLM, warned 
of a profound reshaping of the world airline industry 
caused by what it called the "explosion" in the price of 
oil. And American Airlines said on Wednesday that it would 
slash flights and begin charging passengers to check bags, 
part of a company effort to cut costs in the face of sky-
rocketing fuel prices. 

Gas prices are nearing $4 a gallon in the United States, 
partially as a result of a 39 percent rise in oil futures 
prices on the New York Mercantile Exchange since the 
beginning of the year. Oil prices have more than quadrupled 
since 2003. 

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Thursday's price gains came after a series of unsettling 
reports about supplies. The International Energy Agency 
warned about difficulties in expanding production. 

On Wednesday, weaker-than-expected weekly inventory data in 
the United States stoked fresh worries over oil supplies in 
the world's biggest economy, sending oil prices up $4.19 a 
barrel on the day. 

The latest supply worries arose after reports Thursday that 
the International Energy Agency, based in Paris, was 
considering reducing its assessment of the long-term world 
supply of crude oil after a study of depletion rates at the 
world's 400 biggest fields. 

"Clearly this is the issue we have had for a while of an 
increased deficit in consumption versus production," said 
John Kilduff, energy analyst at MF Global in New York. 
"That's produced this creep up in the rise in oil prices. 
The market gets hit on a daily basis." 

The energy agency has long forecast a slow but steady 
increase in production that would keep pace with demand. 
Output was projected to reach 116 million barrels a day 
in 2030, from 87 million barrels a day now. 

"We are conducting a major study," Fatih Birol, the 
agency's chief economist, said in an interview Thursday, 
"and we are going to revise our oil supply prospects." 

"We don't know the results yet," he added, which will be 
conducted "project by project and field by field." 

"But there are difficulties in expanding production," he 
said, and the World Energy Outlook 2008 ? which will be 
published in November ? will take that into account. The 
IEA has expressed concerns for some time that the growth 
of new supplies may not keep pace with demand as oil 
companies struggle to find new sources of oil. 

There are considerable signs of speculative froth in the 
market. 

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Michael Masters, a portfolio manager at Masters Capital 
Management, testified Tuesday to a Senate committee that 
while the most common explanation given for rising oil 
prices is the increased demand for oil from China. 

But he cited data showing that the increase in demand 
from index speculators over the past five years is almost 
equal to the increase in demand from China. 

Separately Thursday, Air France-KLM warned of a profound 
reshaping of the global airline industry caused by what 
it called the "explosion" in the price of oil. 

The data on Wednesday, from the Energy Department, 
showed that commercial inventories of crude oil in the 
United States fell more than five million barrels last 
week; analysts had expected a modest increase. Gasoline 
inventories also fell last week. 

The fall in inventories added to worries about oil 
supplies in the United States ahead of the busy summer 
driving season when demand usually rises, analysts said. 

The massive earthquake last week in China has also been 
weighing on markets, Kilduff said. It has deepened the 
fears about global supply because the Chinese authorities 
are now diverting energy supplies for their own needs.

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"China has reacted by holding supplies off the 
international market," he said. "We also saw them 
make a major purchase on the world market." 

He said a number of China's coal plants had been 
temporarily shut down, which meant the country would 
start to increase its demand for diesel. 

He said that the latest reports meant he would likely 
raise his forecast for the future oil price. "We are 
going to raise that. Clearly now the medium term favors 
a price of above $140," he said. 

With crude oil prices passing $130 a barrel, a rise of 
more than 100 percent in a year, the business model 
airlines adopted a decade ago has been thrown into 
question. The International Air Transport Association 
said May 2 that growth in international traffic was 
slowing, and that "the fortunes of the industry have 
taken a major turn for the worse." 

"Things are moving very quickly," Jean-Cyril Spinetta, 
the chief executive of Air France-KLM, told reporters 
Thursday before the company announced its first 
quarterly loss in five years. 

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Caroline Brothers & Michael Grynbaum contributed reporting.

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