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Vol. 16, No. 11 Week of March 13, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

No comfort in oil price outlook; dependence could disrupt recovery

The recent spike in oil prices, fueled by recent conflicts and violence in the Middle East, is bad news for U.S. energy supplies and likely will slow the nation’s economic recovery.

But a bigger worry is whether the unrest will continue and spread to engulf the entire Mideast region, said longtime oil industry observer Roger Herrera.

“I’ve not the slightest idea what will happen to oil prices in the short term. But beyond that, I don’t think we will ever be comfortable about the price of oil again,” said Herrera, who has spent more than 40 years observing oil prices, initially as a petroleum industry geologist who started his career in Alaska, and then working around the world, in places such as Peru, East and West Africa, Greece, Canada’s Arctic Islands, Colombia, Papua-New Guinea, Libya and Barbados before returning to Alaska in 1975, where he became increasingly involved in the federal politics of operating in the northernmost state. Herrera spent a lot of time in Washington, D.C., on issues such as offshore exploration and opening the 1002 area of the Arctic National Wildlife Refuge to energy exploration. From time to time in the past decade and a half, he has been interviewed by Petroleum News. Each time, he has accurately predicted the direction of oil prices.

“Forty-one years ago, I was in Libya when Col. (Muammar) al-Gaddafi took over in a (bloodless) military coup from King Idris (in 1969), and here we seem to have come full circle,” Herrera told Petroleum News in a March 8 interview.

At stake is Libya’s 1.5 million barrel-per-day oil output.

“We’re so close to the edge now that stability is only a breathing space,” he said. “The only thing holding oil prices back now (from sharp spikes) is a widespread belief that Saudi Arabia will fill the gap if countries such as Libya curtail their output,” Herrera said. “I, for one, don’t believe Saudi Arabia can drag us back. But if they do manage to keep us from tipping over the edge, we should thank our lucky stars and do something about it.”

Herrera has said oil prices climbing to $148 a barrel in 2008 “without any shadow of doubt” pushed the economy over the edge into recession.

He said little has changed in his ongoing forecast for medium- and long-term oil prices. Numerous factors including hydrocarbons comprising 85 percent of world energy consumption and world oil reserves having peaked around 2005 suggests that crude prices will again spike to $150 a barrel and, at some point, keep climbing, he said.

A growing thirst worldwide for oil and little progress in getting alternative energy sources and transportation fuels to close the supply-demand gap also contribute to the trend toward higher prices.

Benchmark West Texas Intermediate for April delivery fell $3.06, about 3 percent, to $101.32 per barrel in midday trading on the New York Mercantile Exchange March 10. In London, Brent crude lost $1.80 at $114.14 per barrel.

“We will always be close to the edge of something radical affecting the price of oil, whether it’s a political event, a supply-demand event or an alternative energy event, and we don’t have a way to rescue ourselves,” Herrera said. “As these crises come down the pike, the effect of oil prices on the economy will get worse rather than better.”

He said periods of stable oil prices will become “the exception rather than the rule.”

Shrinking domestic supply

The industry analyst said his biggest worry now is the nation’s increasing vulnerability to events in faraway places like Libya and Egypt caused by our dependence on foreign oil. Meanwhile, U.S. policymakers ignore the situation, just as they have for the past 20 years.

“Until our politicians (in Washington, D.C.) do something logical and rational about it, we will remain close to the edge” and vulnerable to high oil prices, he said.

Equally frustrating is the American public’s lack of interest in climbing oil prices unless they affect the price of gasoline. And ironically, higher gasoline prices seem to do little to change consumer habits, he said.

“Even in Europe and Britain where gas prices are averaging about $7 a gallon, every household has two cars, and people continue to drive them everywhere,” he observed.

The oil industry’s inaction is also dismaying, Herrera said.

“Oil companies are always looking at the 10- to 20-year horizon, and high oil prices could jeopardize their future,” he said.

With the exception of Shell, which has billions of dollars invested in Alaska, “the oil companies are doing absolutely nothing to increase the domestic supply of oil — aside from a few touchy-feely ads on television,” he said. “They are scared silly about public opinion, which in general is anti-oil, about the Gulf of Mexico oil spill; and about the cost of dealing with regulations and the local environment in this country.”

Oil companies, instead, are investing heavily in Russia, “which has got to be the riskiest venture ever,” Herrera said. “They should be kicking and screaming against that.”

—Rose Ragsdale

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