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Oil supplies 'face more pressure'

World oil demand will rise faster than expected, while supplies will remain tight, the latest International Energy Agency (IEA) report has warned.

The IEA predicted demand would rise by an average 2.2% a year between 2007 and 2012, up from previous estimates of 2%.

It added that geo-political tensions and a lack of spare capacity in Opec production would also limit supplies.

Brent crude rose 16 cents to an eleven-month high of $75.78 a barrel although US light crude fell slightly.

It closed down 62 cents at $72.19.

One analyst said a range of persistent economic and political factors meant that prices were on an upward curve.

"The oil price is at very high levels for good reasons," said David Dugdale, from MFC Global Investment Management.

"With Opec continuing to withhold oil from the market, the general picture remains one of tightness, with kidnappings in Nigeria, the upcoming hurricane season and ongoing geopolitical concerns all adding to uncertainty over the summer."

In its report, the IEA argued that biofuel production would hit 1.8 million barrels by 2012, more than double 2006 levels.

However, while supplies of the green fuel are set to surge, it is likely to remain marginal with just a 2% slice of the overall energy market.

It also echoed warnings issued in an Organisation for Economic Development report that rapidly growing biofuel market will increase the price of certain feedstocks - such as sugar and corn - over the coming year.

But with forecasts predicting world economic growth to increase by 4.5% a year, the report argued that oil demand could soar to 95.8m barrels a day (bpd) in 2012 from 81.6m now.

At the same time it predicted production from oil cartel Opec would fall, slipping by 2m bpd in 2009, while it also cut supply forecasts for non-Opec countries by 800,000 bpd.

It added that other factors including rising refinery costs, engineer shortages and strong demand in other energy markets would also put pressure on oil supplies.

"Despite four years of high oil prices, this report sees increasing market tightness beyond 2010," the IEA said.

"It is possible that the supply crunch could be deferred - but not by much."

A very good article commentary on this would be to discuss the reasons for this increase in oil demand, namely the development of countries such as China and India that have ever increasing populations. An alternative cause for this price increase that could be examined is the fact that supplies overall are reduced and in order to be able to use more expensive techniques to extract oil prices have to increase to make using such techniques affordable. An alternative topic for discussion on this article would be to discuss collusive oligopolies such as OPEC and their impact on global prices you could talk about the different strategies employed in oligopolies such as dominant firm price leadership and the existence of kinked demand curves. You could also talk about the potential impact of the adoption of alternative energy fuels which as stated by the article only occupy 2% of the market at the moment. If there were an increase in oil price even further people would be more inclined to switch to alternative energy fuels simply because it becomes cheaper and these alternative energy fuels are substitutes to oil. In conjuction with this you could also discuss how an even further increase in oil prices could lead to more people investing in these fuels thus boosting the extent to which they are used especially since oil is running out. Finally you could also discuss the nature of the oil market as a market of a primary good and examine things such as its price elasticity of supply and demand and how these things affect incidence of taxation when there is an energy tax imposed or the impact of these elasticities when there is a shortage of supply as well as how it is these exact elasticities (low price elasticity of demand and low price elasticity of supply) that lead to the markets great instability.