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Oil supplies: we're on a knife-edge

OIL supplies are now so tight that just 1.5 million barrels of oil a day - less than 2% of global production - is keeping another potentially devastating surge in energy prices at bay, experts have warned.

In the wake of Thursday's smaller-than-expected production increase by the 11-nation Organisation of Petroleum Exporting Countries (Opec), supply and demand are so finely balanced that the smallest disruption could send prices even higher.

World consumption of 80 million barrels a day is met with production of about 81.5 million barrels. The spare 1.5 million barrels are needed to cover everyday snags such as late tanker deliveries.

Were this 'float' to disappear in the current fevered oil-trading climate, the price would 'go into orbit,' says Axel Busch of Petroleum Intelligence Weekly. By coincidence, 1.5 million barrels is the daily amount exported by Iraq.

The good news is that one big producer has extra daily capacity of 1.4 million barrels that could be brought on stream if Iraqi exports were halted. But the bad news is that this producer is Saudi Arabia, scene of last week's terrorist attacks which sent oil prices to new highs on fears that oil production from the desert kingdom could be disrupted.

Busch believes that Al Qaeda and its associates could not have picked a more vulnerable time to menace the West's oil supplies: 'A successful attack would set off a train of copycat incidents across the region,' he says.

Three recent assaults have suggested a new Al Qaeda strategy of economic war against the West.

On April 25, there was an attempted suicide bombing of an oil terminal near Basra in Britishoccupied Iraq. On May 1, gunmen shot 50 workers, killing six, at a petro-chemical plant in Yanbu on Saudi Arabia's Red Sea coast. Last weekend, gunmen massacred 22 people in an attack at Khobar, a key Saudi oil town.

Independent energy consultant David Fleming said: 'The whole market is becoming very much tighter. We are going from a buyers-market to a sellers' market. Given the concentration of power in the oil business, that means a switch from billions of consumers making the decisions to about six key producers.

'The market is being supplied only by everyone working flat out. Successful disruption by Al Qaeda could bring us to our knees.'

Opec's decision in Beirut last week to raise production by two million barrels a day helped bring prices off the boil - the cartel accounts for 40% of world oil output.

North Sea Brent crude, which had been selling at $38.59 a barrel on Tuesday, dropped to $35.67.

Mark Redway, an oil analyst at broker Canaccord Capital, said: 'I am not sure how much Opec can do to calm the market.'

He said that total output might be starting to decline. 'We hear less and less of billion-barrel discoveries than we did ten, 20 or 30 years ago and each year we need new capacity of eight to ten million barrels a day just to make up for exhausted reserves.'

Busch concluded: 'We are pretty close to the edge.'

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