World oil output drops amid gulf fears

March 28, 2012 at 11:32 AM
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DUBAI, United Arab Emirates, March 28 (UPI) -- Global oil supplies are being increasingly squeezed, pushing up prices, because of an Iranian threat to close the Strait of Hormuz, a strategic Persian Gulf oil artery.

A sharp drop in output by Iran, long the second-ranked producer in the Organization of Petroleum Exporting Countries, due to Western sanctions linked to Tehran's nuclear program and concerns that Saudi Arabia won't be able to pick up the slack as it promises are major factors of the price increases.

Global production has fallen by 1.2 million barrels a day in recent weeks, about the same as the volume lost during Libya's eight-month civil war in 2011.

Prices are around $125 per barrel, up 15 percent this year and near their highest level since the 2008 oil crisis and "rapidly becoming the dominant concern of government and business leaders," the Financial Times reported Friday.

"It is a reminder that -- for all the investment in renewable energy and excitement about shale gas -- the world still runs on oil, as it did in the 1970s when supply cuts caused turmoil in Western countries.

"Hitting real incomes in oil-importing countries, higher prices threaten to chip away at an already fragile global economy. They could also sway the outcome of the U.S. election," the newspaper observed.

Iran's production has been declining for years because sanctions have blocked foreign investment to upgrade rundown infrastructure. The tightening sanctions are accelerating that decline.

Iran was exporting around 2.6 million bpd in November, about 3 percent of global consumption. By June, when a European oil embargo take effect, that's expected to fall by 1 million bpd.

Analysts predict Tehran may be forced to curtail production if it can't sell its exports.

"If it does so," the Financial Times said, "output could fall to levels not seen since the end of the Iran-Iraq war in 1988."

Libya's still struggling to restore its pre-war production level of 1.6 million bpd, while Sudan's output of around 400,000 bpd has been cut off because of an escalating dispute between the oil-rich infant state of South Sudan and its former ruler Sudan.

Yemeni production has been badly hit by more than a year of deadly political upheaval and Syria's has also slumped because of a year-old uprising against President Bashar Assad.

Individually, these production cutbacks would normally have little effect on the global oil supply but taken together amid the smoldering Persian Gulf crisis, bad weather and technical problems these add up to a problem -- and these disruptions are expected to be prolonged.

Iraq's rising production level, which Baghdad pegged at 3 million bpd in February for the first time since 1979, has ameliorated the crisis somewhat.

But with the oil industry hard put to meet rising demand, and no sign of a diplomatic breakthrough over Iran's nuclear ambitions that could prevent a threatened conflict, concerns about supplies are growing.

Saudi Arabia, the world's leading producer and which has most of the world's spare production capacity, has said it will boost its output to cover production shortfalls but there are increasing concerns that Riyadh doesn't have the capability any longer to keep that promise.

The kingdom raised its output earlier this year from around 8.5 million bpd to 9.85 million bpd amid Middle Eastern shortfalls.

It has poured billions of dollars into its vast fields for years, which should on paper ensure its ability to ramp up output to 12.5 million bpd in a crisis. But industry sources say producing at anywhere near that capacity could involve extracting heavy crudes the market might not want and would be difficult to sustain.

The International Energy agency, the West's oil watchdog, warned March 14 that the global market faces a "bumpy ride" in the coming months even with OPEC production at 31.42 million bpd in February, the highest since mid-2008.

Recent events have led to a decline in OPEC's spare capacity, the traditional cushion in times of crisis.

"There is a buffer in the system but it's not as big as we'd like given the geopolitical uncertainties in the market," said IEA Oil and Industry Head David Fyfe.

But he stressed that tensions should ease off later this year as production increases in Angola, Nigeria, Libya and Iraq boost OPEC's spare capacity. Non-OPEC production is also expected to increase.

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