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Experts Say Energy Prices Will Fall Eventually - 2004-05-20

Rising fuel prices worldwide have led to concerns about a pick-up in inflation and possible damage to recovering economies. Here, in the United States, gasoline prices have risen to record levels and there is fear that they may rise further. However, petroleum industry experts believe prices will eventually peak and even fall somewhat, although it is difficult to say when.

The high cost of oil has consumers around the United States dismayed, but the market gets special scrutiny here in Houston, the city known as the energy capital of the world. Oil industry executives and those who follow the sector closely say the high crude prices could help spur production and exploration, but that as long as demand remains high, prices are not likely to fall.

Bob Tippee, Editor of the Oil and Gas Journal, a magazine that is widely read by industry insiders, says the demand for oil in China, which many observers say has helped push prices higher, could soon ease.

"The [Chinese] government, in fact, is trying to tap the brakes a little bit, to cool the economy somewhat," he said. "If that happens, there will be some decrease in demand and that will take pressure off the market."

While Mr. Tippee says the oil price cycle will eventually enter a downward phase, he cannot predict when that will be. He says the current situation is the result of several factors, including increased demand by growing economies, such as China's, and recovering economies in much of the rest of the world. He says the recent sharp rise in oil prices was partly caused by three separate political events that followed in rapid succession.

The first, he says was the strike in Venezuela in 2002 that shut down much of that nation's oil production. That, he says, was followed by a crisis in Nigeria and then the war in Iraq. Because of these events happening one after the other, Mr. Tippee says, there was insufficient time to restore inventories that normally serve as a cushion to the market.

Although little good can be said about the current situation, the editor of Oil and Gas Journal notes that with prices high for both crude oil and for fuel, the energy industry is experiencing an unusual balance.

"In the current market, both sides of the market are very strong," he noted. "So product prices are high at the same time that crude oil prices are high, which helps ease the pain on refiners, which are the manufacturing part of the oil business. That is fairly unusual. Usually, one side of the market is up and the other is down and they balance out over time, but right now the whole market is tight and prices are high on both sides."

As for the rising cost of gasoline in the United States, Mr. Tippee added that crude oil prices are only part of the problem. He says the country will have to import gasoline to meet its needs because there are too few U.S. refineries to process the oil.

"You can say we should build more refineries, but it is extremely difficult to build refineries in the United States, just to get the permits and sites," he noted. "So I do not expect there to be any new grassroots construction of refineries. To the extent we do not increase refining capacity, we have to rely on the international market for the products we need. We import a lot of crude oil now, less so products, but the product share of total imports is going to have to grow if demand keeps growing."

While experts say it is unlikely that any large new oil fields will be discovered, they say there are known oil reserves that are sitting idle because of the cost or difficulty of exploiting them. The rise in crude prices could now make those oil deposits more attractive. Kumar Bhattacharjee is president of Houston-based Sita Oil Exploration House, a corporation that is poised to go after some of that oil, using the money now available in the market.

"It is very encouraging for us to get the capital because we are capital-starved, being a small independent," he explained. "There is plenty of oil and gas to find, the question is the capital."

He says there is much oil that can be pumped out of known reserves in the United States once it is cost effective to do so.

"Even in Texas and Louisiana, there are plenty of places to drill and find good-size reserves," he added. "It would not have been possible [before] because, again the word is capital. We did not have the capital to drill those things because they are deeper, more difficult, deeper wells. So, right now, I think, they are feasible now."

In the end, however, even oil company executives say, the need for energy in an expanding world economy is likely to outrun the supply. Kumar Bhattachargee says efforts to make vehicles and buildings more energy efficient could help the United States reduce consumption without derailing the economy.