Oct. 1, 2004, 11:30PM

Oil tops $50 and hangs on

Weaker dollar adds to misery of crude run-up

By LYNN J. COOK
Copyright 2004 Houston Chronicle

It finally happened. Crude oil closed above $50 per barrel on Friday.

Trading of light, sweet crude for November delivery on the New York Mercantile Exchange settled up 48 cents at $50.12, a whopping 70 percent higher than at this time last year.

While Americans are paying more for crude than they have since the early 1980s, oil isn't all that expensive for Japan and European nations.

Why? Dollar devaluation.

The dollar has taken a drubbing from the euro and yen in the last two years, down 40 percent and 13 percent against each currency, respectively.

That means that while oil prices in the United States hit record highs, Europeans have recently been paying 10 euros less per barrel than they did in the summer of 2000. In Japan and England, oil is still much cheaper than it was for the entire first half of the 1980s.

The appreciated currencies lend increased purchasing power. Therein lies the demand driver for more oil, according to Anas Alhajji, a professor of economics at Ohio Northern University.

At the same time that dollar devaluation is increasing demand abroad, it could reduce the world's supply of oil.

Oil-producing countries with economies closely tied to the dollar, such as Saudi Arabia, may not drill for more oil as quickly as the public expects in the face of high prices.

Alhajji says that in Europe, as the dollar depreciates, the rig count drops. In Latin America and the Middle East, a weak dollar can increase the cost of operations, discouraging new drilling.

Group of Seven

Another part of the problem is buying power. Middle Eastern countries bring in funds through dollar-denominated oil sales, but then have to purchase goods and services from nearby Europe. When the dollar doesn't stretch as far as it once did, Middle Eastern producers feel they have to earn more per barrel to make up for the difference between the weak dollar and the expensive euro.

The Group of Seven countries — the United States, Japan, Germany, France, Britain, Italy and Canada — are watching. All agree that today's prices could quickly become problematic.

During a meeting in Washington, D.C., on Friday, the group declared high oil prices a threat to the global economy and urged producers to provide relief by boosting supplies.

Inventory counts and news from Nigeria also created more jitters in the market Friday, helping bump oil prices over the $50 line. In other New York trading, November heating oil rose 0.97 cent to $139.58 per gallon and November unleaded gasoline rose 2.46 cents to $1.3522 per gallon. In London, Brent crude rose 24 cents to settle at $46.62 per barrel.

Crucial factors

U.S. oil production dipped below 5 million barrels per day and has been slow to recover since Hurricane Ivan thundered through the Gulf of Mexico. The federal government also announced plans to loan 4.2 million barrels of crude from the Strategic Petroleum Reserve, the nation's stockpile, to help refiners keep up with demand. One million barrels of that will go to Astra Oil for delivery to the Crown Central refinery in Pasadena.

Market watchers are also concerned about the shaky peace agreement between the Nigerian government and rebel factions in the Niger River Delta. So far, violence has interrupted only a tiny fraction of production, but last year, clashes took almost half the country's oil installations out of commission.

Houston-based investment banker and analyst Matt Simmons isn't concerned with the news of the day. He describes oil demand as a runaway train. Fundamentally, he sees the growing gap between supply and demand pulling this already taut oil market tighter still.

With a quick survey of some simple oil supply and demand numbers, Simmons paints an ominous price picture.

From all corners of the industry, demand will rise dramatically in the fourth quarter, and high prices aren't expected to hamper demand growth in 2005, Simmons says. Meanwhile, the Organization of the Petroleum Exporting Countries is pumping almost all it can.

According to the International Energy Agency, the world will need 4.3 million more barrels of oil every day by the end of next year. The demand increase comes on top of the 83 million barrels per day being consumed worldwide. Simmons wonders where the oil will come from.

Globally, energy companies have plans to bring 6 million to 8 million extra barrels of oil a day on stream, but the timeline for those projects stretches out until 2009. And some of those projects could be delayed.

"Get ready for a 15-month fire drill," Simmons says. "This market is going to be put to the test. These numbers are collisionary."

ljcook@chron.com