Explaining the 'oil crunch'

Oil prices have been on the rise again - in London a barrel of Brent crude rose to the highest level in almost a year. And we shouldn't expect a fall anytime soon - at least according to the International Energy Agency.

It warned today that the world is facing an "oil crunch" in the next five years. Demand is rising relentlessly but oil supply is bedevilled by problems - both economic and political.

Our Economics Correspondent Faisal Islam examines the pressures on oil prices:

The "Oil Crunch"

Record oil prices are pushing even higher, with traditional sources of oil supply falling faster than expected. This is massively increasing the dependence on Opec, the international organisation of twelve oil producing countries.

That's the stark outlook for world energy prices and our energy supply over the next half decade and it comes from the industrialised nations own oil watchdog the International Energy Agency.

Oil demand today is already some 86.1 million barrels per day. Yet rampant demand from China, India and developing countries will see that grow much faster than previously thought - reaching nearly 96 million barrels per day within five years

There should just about be enough supply across the world to be able to meet that. World production is set to grow from 89.2 million barrels a day all the way up to 98 million barrels

But the margin for error is minimal.

Spare capacity - basically held by Saudi Arabia is around 3 per cent of total demand. So there is an ability rapidly to increase production if there are storms or wars, yet within five years these new numbers reduce that by half to a wafer thin level of just 1.6 per cent. Leaving it highly susceptible to oil shocks, even a price above a hundred dollars a barrel.

And who is being relied on to do anything about this? The Leaders of the Opec oil producing consortium like President's Chavez and Iran's President Ahmadinejad.

With North Sea production nearly halving, north American production dwindling, and Africa and Russia less bountiful than hoped - most of that increase is going to have to come from Opec. But they don't seem in the mood.

So what's all this doing to prices?

At the start of the year, many traders had assumed that oil prices would have already fallen significantly by now. Well today Brent crude reached an eleven month high, and oil prices around the world are back up near their record highs.

With motoring organisations warning of £1 a litre petrol over the summer, this oil crunch will be felt here too.

What these numbers show, is as the industrialised world increasingly frets about energy independence, its actually becoming even more dependent upon the likes of Opec.

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