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Future oil prices will defy law of gravity Alaska industry consultant predicts ongoing strength in world energy markets tempered by voluntary conservation by U.S. consumers Rose Ragsdale Petroleum News Contributing Writer
With spot prices spiking above $55 a barrel in recent weeks, everyone, from President Bush to the guy trying to fill up his tank at the local gas pump, is wondering when oil prices will come down.
Benchmark U.S. light, sweet crude futures surged in early April, hitting a nominal record high of $58.28 a barrel as fears emerged about winter supplies later this year and U.S. gasoline inventory levels this summer. Prices have since fallen about 10 percent to around $52.50 a barrel.
Alaska North Slope crude prices followed suit, climbing to $54.14 a barrel April 1, before subsiding. By April 19, ANS oil sold for $49.16 a barrel.
But analysts are rapidly concluding that what goes up, no longer must come down.
Oil prices have been trending upward for more than a year. The trend is so pronounced that the prospect of $100-a-barrel oil is no longer considered far-fetched.
In fact, $100 oil has begun to enter mainstream thinking — at least as a realistic risk — just as it did in the early 1980s, according to Cambridge Energy Research Associates.
The energy consulting firm believes important short-term buffers, including emergency energy reserves held by the United States and other members of the International Energy Agency, could curb prices, if necessary.
Are we headed toward using such drastic measures?
Most analysts say not likely.
As the recent run-up in prices generates substantially more revenues for state coffers, most Alaskans recognize that they threaten U.S. consumer spending, a major driver of the nation’s economy.
“Every time I go to the gas pump, I’m reminded that there’s a dark side to higher oil prices,” said Chuck Logsdon, former senior petroleum economist at the Alaska Department of Revenue.
Logsdon said oil prices appear to be responding to strong demand from China, the United States and others, and suppliers, including OPEC and oil companies, are responding with more production.
This could in time have a dampening effect on economic activity, which could lead to “demand destruction,” he said.
Thus, the smart bet would be on oil prices making a downward correction at some point in the future, Logsdon said. “The trick would be to guess when that downward correction will be.”
But Alaska oil industry consultant Roger Herrera sees no significant decline in oil prices ahead.
Herrera, whose oil price predictions have been uncannily accurate for the past 15 years, envisions a very different scenario in the future. World oil supplies may be peaking Numerous factors affect oil prices — some obvious and others more subtle, he said. For example, everyone knows that most of the world’s economies — led by China, the United States and India — are growing and thirsty for energy.
But less obvious is that these galloping economies are growing faster than they have in the past five years, Herrera said.
Theorists, meanwhile, ponder whether the world’s entire oil supply has peaked or will peak soon, he said. Peaking refers to the point when half of all oil reserves have been consumed, and world oil supply goes into decline.
One possible sign of “peak oil” occurred a few weeks ago when the market shrugged off a threat from OPEC to increase its oil production by 500,000 barrels, Herrera said.
OPEC did pump an extra 290,000 barrels a day of oil in March, with the additional output coming mainly from Saudi Arabia and the UAE. Production from the Organization of Petroleum Exporting Countries totaled 29.14 million barrels per day in March against 28.85 million barrels per day in February, according to the IEA’s monthly oil market report.
“Instead of going down, oil prices stayed the same or went up a few dollars,” Herrera said. “That has never happened before, ever.”
The event may be the first evidence that OPEC no longer has the ability to control the price of oil, because it can no longer increase production by 500,000 barrels per day. This, in turn, suggests we are close to “peak oil,” Herrera said. Looking ahead logically Even so, oil prices are unlikely to skyrocket for several reasons, he said.
First, China’s economic growth could falter through mismanagement or politics, just as Japan’s rip-roaring economy did in the 1990s, he said.
“It could happen. All bets are off for China being a stable growth situation,” Herrera said.
Second, the United States is showing no indication of curbing its enthusiasm for hydrocarbons, whether it’s the energy bill before Congress or the average consumer’s love of gas-guzzling automobiles.
“One could argue that if the economy keeps growing, energy use will continue on its merry way,” Herrera said. “But sooner or later, people will react to the high prices, by grumbling to their politicians and then by using less gasoline.”
This voluntary conservation of energy, primarily gasoline, will curb growth in the U.S. economy and the rise in oil prices during the next few years, Herrera predicted.
“I believe prices will be about the same, but with peaks and valleys trending upward,” he said. “I argue this scenario based on logic. There is nothing out there that indicates huge declines in oil prices, and hopefully, there will be no huge increases.”
As for $100-a-barrel oil, Herrera said the market can expect to see such prices at some point, maybe within the next 20 years. But by that time, he said transportation will no longer rely on oil, and hydrocarbons will be used for things that can afford to pay that price such as petrochemicals.
Added Herrera: “In a different scenario, things could be much worse. But I don’t think so.”
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