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Oil Prices Driven by Demand

As oil prices continue to soar, energy experts around the world worry that production may not be able to keep up with rising demand, driven in large part by the expanding economies of India and China.

At the recent conference of the Association of Peak Oil Studies in Houston, Texas, energy industry representatives, engineers, analysts and investors all expressed concern about what the world will do when production reaches its peak. In October, the Germany-based Energy Watch group reported that world oil production already peaked last year and will now go into a steep decline.

There are many skeptics in the energy business, some of whom argue that new technology is making it possible to find and develop oil that once would have been passed over and that, even when the peak is reached, there will not be a steep decline.

But legendary oil developer and billionaire T. Boone Pickens, told a panel at the conference that he sees oil prices going higher because world oil production is unlikely to keep up with rising demand. "The $ 90 a barrel does not surprise me. It would not surprise me if it went to $ 100 a barrel. I am not predicting that. But I do think it will go to $ 100 before it goes back down to $ 80."

Pickens blames some of the problem on inefficient production by state-owned oil companies around the world that have not allowed more technically advanced private companies, like Dallas, Texas-based ExxonMobil, to take a more active role in their fields. "Could you get more than 85 million barrels a day out of the world? You could if they all turned it over to Exxon, but they are not going to do that, we know. But 75 percent of all of the oil in the world is controlled by state-owned oil companies."

But many energy market analysts say the recent rise in oil prices has to do with speculation and concerns over political turmoil in the Persian Gulf region, not peaking production. The people concerned about peak oil are not alarmists, says the Director of the Association for the Study of Peak Oil in the United States, Jim Baldauf. "We don't claim that we are running out of oil. We claim that we are running out of cheap oil. And I think if you just look in the financial pages today, you will see that this is not some projection."

But Baldauf, who is also Executive Vice President of Austin, Texas-based APEX Resources -- a company that uses new technology to get oil out of old fields -- says oil production is not as easy as it used to be. "All I know is that we have to drill deeper and smarter and at twice the cost to get about a third of the production that we used to get."

Growing Demand for Alternatives

Whether the world's oil production has peaked, will soon peak or will peak 20 years from now, it is certain that the gap between world energy demand and supply is likely to grow. Demand for energy has grown from about ten million barrels-a-day in 1950 to a current level of 85 million barrels-a-day. Demand is expected to grow to well over 100 million barrels-a-day in the coming decade.

For this reason, many big oil companies like Shell, BP and ConocoPhillips support conservation and have invested in alternative fuel research. The energy future will probably be one that features a mix of sources, including oil, gas and coal, as well as hydrogen, bio-fuels, solar and wind. No single source can do the trick.

For example, ethanol, an alcohol fuel mostly produced from corn or sugar cane, is being used across the country in a mix with gasoline. But agriculture experts say ethanol could not replace U.S. consumption of gasoline at current levels, even if all of the 176 million hectares of U.S. cropland were devoted to producing corn for ethanol. Increased demand for corn to produce ethanol has already driven up food prices, so there is a limit to how much bio-fuels can do.

Among other alternatives being discussed are expansion of liquid natural gas facilities and development of new nuclear plants. However, most of the natural gas would have to be imported and proponents of nuclear energy face an uphill battle, given public safety concerns.

Looking Ahead

Veteran oil and gas industry analyst Charles Maxwell warns that it would be better to take decisive action now, both in terms of conservation and development of alternative energy, than to wait for an energy shortage crisis. "The more we can do before that trigger is pulled, before some event sets this stuff off, the better off we are going to be."

He says such an event, whether it be a natural disaster or political upheaval, could happen at any time. Maxwell is optimistic about technological solutions to a possible energy crisis and he says having to live with less energy for a period of time could be good for the country. "Who can say that this constricted life that we are talking about for a few years will bring us tears and unhappiness? Who can say that? There are wonderful things that are going to happen. Sunsets are going to be just as beautiful as they were before. And there are things to appreciate in life that are so wonderful that returning to that kind of appreciation may be the making of a very happy era for America." Charles Maxwell is senior energy analyst at Weeden and Company in Greenwich, Connecticut.

This story was first broadcast on the English news program, VOA News Now. For other Focus reports click here.