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Herrera: Oil prices to rise Key factors include Saudi situation and expected peak in world production Steve Sutherlin Petroleum News Associate Editor
Oil prices will ease skyward, particularly when world oil production peaks in an estimated three years, says Petroleum News’ favorite oil price guru, oil and gas consultant Roger Herrera.
“There are a few things we all should be thinking about with regard to future prices,” he told Petroleum News May 19. “Most forecasters aren’t thinking about critical factors in the near future.”
First, Saudi Arabia, with its aging king and equally doddering social situation, is ripe for change, Herrera said. The social revolution in Saudi Arabia could have considerable impact on world oil prices.
“I’m not suggesting oil production from Saudi Arabia would shut down, but it could lose its role as swing producer in OPEC,” he said.
Hubbard curve Second, the Hubbard curve concept, which was accurate in predicting the peak in U.S. domestic production, will be just as prescient with regard to world production, Herrera said. A peak in world oil production is predicted to happen within the next three years.
The pattern is predictable, but the timeframe of price increase is made less clear by uncertainties surrounding the economies of Japan, China and India.
Herrera expects a slow but inevitable increase in the price of crude, but if the aforementioned economies remain sluggish, it will take longer for prices to take off.
“The Japanese economy: will it beat economic problems and turn around?
“Will China’s economy turn up and regain its growth rate?
“Will India’s economy improve?” Herrera asked. “If so, expect positive effect in terms of increasing prices,” he said.
Over the next three years, one can predict with certainty that the Saudi situation, the Hubbard curve, or both will impact oil prices, he said.
Between now and then Between now and then, however, prices are more problematic to predict.
“We know what the Russians are doing, and we know what the Canadians are doing with respect to tar sands,” Herrera said, adding that there will be lots of available oil for the next three years; then prices will start edging up.
If OPEC is disciplined enough, it has the wherewithal to keep oil prices within its specified healthy trading range of $22 to $28 a barrel, Herrera said.
The value of OPEC's basket of crude was around $26.24 on May 19, up from $23 a barrel just following the Iraq war.
The key is the Saudis, Herrera said: Saudi spare capacity is the variable.
Other counties have reserves, but the Saudis have the excess capacity. But, Herrera added, OPEC must remain unified to exert control on the market. If all the OPEC members cheat a little, it adds up.
Oil will remain King On Jan. 11. 1999, when the price of oil was at $9 a barrel, Herrera predicted world oil prices would rise significantly within six months.
Skeptics scoffed, but his predictions were correct.
Even in the face of the higher energy prices he expects, Herrera doesn’t foresee a major shift in energy use patterns.
It is important for the government to be realistic about the need to increase production, because alternative fuels won’t solve domestic energy needs in the near term, Herrera said.
“Will Congress be able to pass an intelligent energy bill, including ANWR?” he asked.
Prices will rise until alternative fuels kick in, he said.
“I don’t recognize a political will to go bananas on alternative fuels,” Herrera said, adding that politicians give lip service to the concept for political gain, but practical limits cast alternative fuels in a minor role.
Even if ethanol production reaches maximum production levels proposed in the energy bill, it would provide only a minute increment of additional energy to the nation, he said. Production of ethanol is very energy demanding. Renewable fuels might reach 8 percent to10 percent of the nation’s energy diet, if pushed by government policy. Massive oil price increases are needed to make alternative fuels economically attractive, Herrera said.
It will be 10 years before alternative fuels make a dent in the energy mix, and practical hydrogen-fueled vehicles are probably 20 years out, he said.
The oil age is 100 years old, and we have used about half of the world supplies, Herrera said, but an increased rate of use means the remaining half of world oil will not last another 100 years, but more likely only another 50 years.
“In your and my lifetime, and probably that of your children, oil will still be king,” he said.
People’s habits won’t change until oil is harder to get, Herrera said.
“There’s no mandate for change, the way people buy and drive automobiles,” he said.
“We are quite happy with the status quo, but as soon as (our energy use patterns) become untenable, out attitude will change.” Energy generates wealth Herrera doesn’t understand why some people regard energy use as an undesirable thing.
“Energy is surely good, using it in any fashion generates wealth,” he said. “The fact that we can afford to use it is a good thing.”
Americans obviously think energy is affordable, Herrera said. Gasoline would have to be priced considerably higher before it would change our lifestyle.
“Look at Europe, taxes are higher, but European lifestyles are not different from ours even though gasoline prices are essentially twice those of the United States,” he said. “Europeans drive cars, drive far and drive fast.”
Americans have the economic wherewithal to pay gasoline price increases for decades before it starts cramping lifestyles, he said.
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