Prices for oil surge to record

WASHINGTON -- When a tropical depression in the Caribbean was upgraded to Tropical Storm Dennis this week, crude oil prices immediately began climbing on the New York Mercantile Exchange.

Traders feared that at least one of the four tropical depressions off the US Atlantic and Gulf coasts could become a hurricane that would delay oil deliveries, damage offshore oil rigs, and threaten onshore refineries. That means temporary oil shortages are possible, a fear that drives up fuel prices.

Crude oil prices closed at $61.28 a barrel yesterday, the highest price since oil began trading in 1983 on the New York Mercantile Exchange. But when adjusted for inflation, today's prices remain well below those of the 1980 oil crisis, when oil reached more than $90 a barrel in today's dollars. In response to the report, the Dow Jones industrial average fell 101.12, or 0.98 percent, to 10,270.68 after rising 68 points Tuesday.

Volatile oil prices look as if they're here to stay, experts agree, at least for a year or two. Why? Partly because world oil demand is growing faster than oil production. Partly because financial speculators are gaming the markets. And partly because nobody knows just how much oil is available.

It is clear that the growing appetite for oil in China, India and other emerging economies has reduced the world's margin of extra oil-production capacity. The world now consumes about 84 million barrels of oil per day. With every well in the world producing flat-out, analysts said, total production could equal no more than 86 million barrels a day.

That small margin of extra capacity isn't much of a cushion against unforeseen events such as a terrorist attack, refinery fire, pipeline rupture or a natural disaster such as last September's Hurricane Ivan, which damaged oil rigs and platforms and removed about half a million barrels a day from the US market for months.

That's why markets are nervous and fuel prices are high. Right now, US oil inventories are near all-time highs, so there's no supply shortage here. But if anything cuts oil production anywhere in the world, there could be a shortage, very soon.

''Clearly, we are in a situation where the likelihood of us entering a supply-tightness scenario has increased, and that's what this market is playing off -- that fear of what could happen," said Kyle Cooper, an oil analyst with Citigroup Inc. in Houston. ''Fear and psychology are major market factors."

In the meantime, expect volatile prices, partly because speculators are gaming the market. With surging demand for oil and additional production still years from reaching market, conditions are rife for financial speculation.

''Current oil prices are basically where they are because about half of the people following oil are sure the prices are going to collapse. And the other half are actually trying to make sure they have enough oil to get through the summer," said Matthew Simmons, who runs a Houston investment bank specializing in the oil industry.