Providing coverage of Alaska and northern Canada's oil and gas industry
February 2004

Vol. 9, No. 5 Week of February 01, 2004

Oil prices likely to remain at current levels through ’04

World economic growth to drive continued oil demand, economy thriving on $30 oil, says oil and gas consultant Roger Herrera

Steve Sutherlin

Petroleum News Associate Editor

Oil prices are likely to maintain current higher levels over the coming year, according to Petroleum News’ favorite oil price guru, Roger Herrera, a long-time oil and gas consultant who works with Arctic Power in Washington, D.C.

“The world is used to $30 oil,” Herrera said. “Economic growth is thriving at that level.”

Growth in world oil demand is the main factor that will keep the air under prices, he said. The coming year looks stable, even placid for a voluble-priced commodity such as oil.

“I would be surprised if oil prices came down significantly,” Herrera said. “The evidence of the world economy growing is self-evident.”

The global thirst for energy is growing, but one customer, China, stands large above the rest.

“China is so large, it is the deciding consumer,” Herrera said.

The growth in oil demand will likely continue.

“Chinese demand — if they don’t shoot themselves in the foot or do something silly to hinder growth — will continue,” he said. “The rest of the world is chugging along with 1 or 2 percent growth, while China is at 8 or 9 percent.”

Nobody knows where the price of oil will go, Herrera said, but there doesn’t appear to be anything on the horizon that would greatly upset the trend of worldwide rise in oil demand.

Portent for the future:

This new stability isn’t without its limits. Higher demand, along with economic and physical limits on production levels, is likely to have a profound effect on oil markets, perhaps in the near future.

“Peak oil production occurs when supply will not meet demand,” Herrera said. “As the world gets closer to peak oil production, cracks and groans will begin to appear in the energy supply system.”

Peak oil production will be a world changing, but not a world-shattering, event.

“It will probably take a year or two to recognize that a peak has occurred,” Herrera said. “It won’t be a disaster, but it’s irreversible, and if that’s not incentive to do something about it, I don’t know what is.”

The coming of the point of peak production is hard to pinpoint.

“Careful and calculated attempts have been made to predict the timetable of peak oil production, but no general consensus has been reached,” Herrera said. “It’s a bit like explaining climate change and what causes it.

“I would suspect we will reach peak oil production in the next decade,” he said.

“Demand will at least outstrip supply.”

No magic bullet

Herrera questioned the notion that hydrogen, wind, solar or other technologies would supplant petroleum in the foreseeable future.

“Hydrogen won’t happen in a timeframe that is going to rescue the situation,” he said. “All of the alternatives, especially the more exotic ones like fuel cells and hydrogen, have been studied for 50 years.”

There will be a shift to other hydrocarbons such as natural gas, which we have plenty of, and coal — available and practical substitutes, Herrera said.

Conservation will also reduce oil demand, but it won’t be a product of the political process.

“There is no political will on either side of the political spectrum to address conservation, the general public won’t agree to it,” he said. “People’s minds will be changed if it is in their own self interest to change.

“Why are auto companies bringing out fuel efficient cars on their own? Perhaps they are leading the market, before the market has spoken.”

It takes a catalyst for change, Herrera said, but it’s not true that it takes a hurtful situation upheaval, or shortage to make people change.

“Sometimes change happens because thinking people lead the way,” he said, adding that the success of hybrid cars in the marketplace is an example of that sort of rational thinking.

OPEC not in control

The Organization of Petroleum Exporting Countries won’t be the deciding factor in determining oil prices because the organization can’t manipulate growth, Herrera said.

Although recent prices above $33 dollar per barrel exceed OPEC’s recently stated limits of comfort for oil prices, it is unlikely to step in to attempt price reductions.

“OPEC is not regulating the upside of oil prices because it doesn’t have to,” he said. “OPEC can smile all the way to the bank while it builds its cash reserves.”

Herrera said he doesn’t expect OPEC to be successful at regulating oil prices because it is not solid and can’t agree among members. Saudi Arabia, because of its changed position in Middle Eastern politics and in the world, he said, is less able to influence the organization.

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