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Major drops in oil prices thing of the past, says Roger Herrera
Kay Cashman
Roger Herrera, who in January 1999 predicted oil prices would increase dramatically from their $10 low, told PNA Feb. 15 that he believes significant drops in the price of oil are a thing of the past.
“The price inevitably has got to go down a little ... to perhaps as low as $23 a barrel. However, I believe the price of oil will stay up at least for the short-term future ... 12 months or so,” said Herrera. “If the price of oil does stay up for the next 24 months — even with a temporary drop to $23-$25 a barrel — it’s likely to stay up forever” because the increase in worldwide demand will keep it up.
Herrera sees $30-plus oil in the long-term.
The Anchorage-based oil and gas consultant gave three reasons for his predictions: one, old adages no longer hold true because of worldwide changes, including increased demand for oil in developing nations; two, OPEC’s power has increased because it seems to have learned from its past mistakes; and, three, oil supplies will eventually decline.
Factor No. 1: Change and demand “The world is changing and it’s not changing in a linear fashion,” said Herrera. For example, “in an eighteen month period we see silicon chips halve in size, double in speed and drop in price.
“Some of the old adages that we have been able to follow since Victorian times no longer apply,” he said, including the United State’s significance in predicting world energy needs.
“Many parts of the world are still playing catch up; are still in the acceleration phase of their energy use. ... I suspect that the huge technological advancements we’re seeing are diminishing oil use in this country — but accelerating its use in the rest of the world. Their energy use is going to increase and their economies are going to be far more greedy in their demand than we were when we were in an earlier phase,” said Herrera.
“...If, for example, India starts using more energy approaching 5 percent of the levels used by U.S. citizens, the demand for oil will far exceed the supply.
“If Japan’s economy goes back to what it was seven years ago, their energy use will undoubtedly accelerate but for different reasons,” said Herrera.
If the price of oil stays high ($23-$30) for the next year or two because of OPEC, “demand in the rest of world will have grown sufficiently to always keep it up,” he said.
Factor No. 2: A clever and united OPEC? OPEC, said Herrera, is another major factor in determining the future price of oil, particularly for the next year or two. After that, he maintains, demand will probably play a bigger role than price control.
“OPEC has surprised everyone this time by its strength of purpose in reducing output and pushing the price up. They are responsible for $30 oil today,” Herrera said.
In the past, when OPEC has acted as a cartel, he said “pure greed has reared its ugly head, inciting a member producing country to open its taps and exceed production quotas” in order to take advantage of higher oil prices and gain marketshare, effectively undermining the cartel’s attempt to control prices.
“And in 1973 and 1979/80 we saw two cycles in which OPEC kept the artificial high price of oil up too long, which gave the rest of the world the opportunity to find new oil,” said Herrera.
“I don’t know if OPEC members have learned their lesson and will therefore very cleverly manage the price of oil from their production,” said Herrera, “but if they have, they will very carefully watch what’s happening in the western world and act accordingly. The western world hasn’t reacted yet — seismic crews are not working, many oils rigs are still idle, nobody has pulled out all the stops to hunt for oil. OPEC is still in the driver’s seat. ... If say, in six months time the price of oil is causing inflation problems in America, you can bet your boots the western oil companies will start looking for and producing new oil. The price of oil will drop and we go back into our old price cycle again.
“But if OPEC has learned its lesson from the past and carefully watches western oil company reaction and reacts appropriately to it, then OPEC will stay in control of the price of oil.” An increase in exploration by western oil companies at $30 per barrel oil would be a signal, Herrera said, for OPEC to increase production, effectively lowering the price of oil to $23-$25. “If OPEC waits six months or a year, it can cut production again, push the oil price back up to $30 per barrel and get another year of huge income from the inflated price,” he said.
This scenario assumes OPEC “is very clever and unified,” said Herrera. “Will greed and self interest rear their ugly heads again? I don’t know. Which member is likely to break out first and produce more than its share, bringing the price down because of overproduction? I have no clue. But everybody is doing very nicely at $30. ... Why should they do something to change that?
“If you think that OPEC’s members have learned their lesson from the past and will react logically to the world oil situation, then watch out America because OPEC will control the price of oil at a relatively high level for a long tine to come,” said Herrera.
What about the White House’s attempts to exert political influence on the cartel, in hopes it will increase production quotas?
“The White House has to do that, has to try to flex its muscles and have a heart to heart talk with Saudi Arabia,” he said. “But to expect it to exceed is totally naive. America doesn’t have that much to offer those countries anymore. To say, for example, we won’t sell them arms is ludicrous. Of course, we will.”
The factor everyone ridicules The third factor, which Herrera said nobody believes in, is the prediction that the world is running out of oil.
“If you go down the road three to five years and get to the point where the world supply of conventional oil starts to decline, that obviously will affect the price of oil,” he said. “People have been incorrectly forecasting an imminent decline in the world oil supply for 100 years, so why should this one be the time it happens? Sooner or later the decline will actually occur. It has already happened in most producing countries of the world with exception of five major producers in the Middle East. It’s happened in America.”
Herrera believes that “probably within five years or so” dwindling oil supplies will become the dominant factor in determining the price of oil.
No more $10 oil “For all these reasons, one can suggest that the price of oil is much more likely to stay up around its present levels than it is to go back down to $10 a barrel again,” he said.
“If you really believe in any of these factors, than the price of oil will someday soon far exceed $30.
“Alaska’s future once more looks rosy and the coastal plain of the Arctic National Wildlife Reserve will surely open,” said Herrera. (See a related news item on page two of this issue.)
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