Despite good supply, prices may stay up

Factors abroad, including risk premium, determine how much we pay for crude oil, says BP economist Christof Ruehl

Wesley Loy

Anchorage Daily News

The world has no shortage of crude oil and natural gas, but that doesn’t mean the recent streak of high prices will abate anytime soon, a BP economist said June 22.

Today, factors other than the amount of oil and gas in the ground are driving prices. Those, in a nutshell, are “fear, uncertainty and a willingness to pay a risk premium,” said Christof Ruehl, a London-based BP economist.

The risks that concern energy buyers include disrupted supplies because of political or military troubles, Gulf of Mexico hurricanes and bottlenecks in the world’s oil and gas supply chains.

All of those factors tend to buoy prices as oil and gas buyers seek to lock in supplies, Ruehl said.

Ruehl, 47, a former World Bank economist, made the remarks during a business luncheon at the Hilton Anchorage hotel downtown. He presented BP’s latest “Statistical Review of World Energy,” a sweeping tally of global production and consumption of oil and gas as well as other energy sources including coal, nuclear and hydro.

BP’s report, which the company has produced annually since 1951, is highly relevant to Alaska, which is a major U.S. oil producer and hopes to someday be a large natural gas producer via a proposed pipeline down the Alaska Highway.

Alaska is highly dependent on oil revenue, but Ruehl’s report made it clear that prices are largely determined by events elsewhere in the world.

The report has kept BP economists hopping since the company’s prominent chief executive, John Browne, unveiled it June 14 in London. In addition to his Alaska visit, Ruehl said he has given or will give talks on the report in his native Germany and in France, Norway, Canada, Indonesia and India.

One of Ruehl’s main messages was that the world is still incredibly dependent on oil and gas and that alternatives such as ethanol and wind remain tiny sources of energy by comparison.

Another important message is that known, recoverable reserves of oil and gas are still huge.

According to BP’s statistical review, the world has about 41 years’ worth of oil left at 2005 production levels and technological capability. As for natural gas, the world has a 65-year supply remaining.

Some industry watchers have theorized that the world has reached or even passed the peak of oil production, suggesting that the petroleum era is beginning to fade.

But Ruehl said oil companies continue to make new discoveries and improve technology to squeeze more oil out of the ground, and so they are more than replacing the reserves that are used.

Other points from Ruehl’s talk:

• Total world oil production last year increased by 1 percent or 889,000 barrels per day, which is about what the North Slope produces.

• Natural gas prices, which spiked to as high as $15 per thousand cubic feet last year, have been running at less than half that more recently, and since January the U.S. gas markets “have shifted dramatically from a period when supply fears prevailed to one of excess supply and high levels of gas in storage.”

• The surge in oil prices really got rolling in 2004. Why? Exceptionally strong demand from China and other hot economies, Ruehl said.