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Oil Industry Holds Back Spending in Spite of High Prices - 2004-08-26

Oil prices have backed off their most recent highs, but many industry analysts think growing demand will push prices back up again in the weeks ahead. The record-high prices have been a boon to some large companies, but the oil service industry has yet to show much gain. Past boom-and-bust experiences have left people in the oil patch cautious.

High demand for energy, especially in fast-growing economies like China's, combined with turmoil in a number of oil-producing nations have pushed oil prices up towards $50 a barrel. With supplies tight and the capacity to produce more limited, some industry observers believe the price will go past $60 a barrel in the next few years.

But the surge in prices has not led to a marked increase in spending on exploration, as happened in other oil price run-ups in the past. Part of the reason is the time needed to develop new sites, according to Amy Jaffe, petroleum industry analyst with Rice University's Baker Institute.

"Oil prices have been relatively healthy for a number of years and so a lot of oil companies have done a lot of their good prospects and so coming up with an evaluation of new things to do takes time," she said.

She says identifying prospective new oil extraction sites is only the first step, followed by investment in operations to drill, pump and ship the oil.

What's more, Ms. Jaffe says, some known oil deposits remain out of bounds for political reasons.

"The industry overall, especially in the United States, but also abroad, has a problem with what I call access issues," she said. "In other words, I know where there is some oil, but can I actually get a permit to drill there?"

Amy Jaffe says some known oil fields are in environmentally sensitive areas or close to population centers where people would object to large-scale industry projects. She says political turmoil in some areas of the world has also limited the activities of companies that explore for petroleum.

In Houston, home to the largest number of oil and gas exploration and development companies in the world, there has also been a reluctance to invest in what many think may only be a temporary boom. Many oil industry executives remember the oil-price-boom of the early 1980s that ended with a crash in the middle of that decade. They are reluctant to finance new projects and hire more workers if the price of crude is likely to fall in the months ahead.

The sharp upturn in oil prices over the past year has not been matched by massive hiring in the oil sector. One industry strategy has changed, however. Until recently, many large players in the oil sector were expanding through acquisitions. But the higher prices for crude make proven reserves more valuable and companies that have them more expensive. Many large companies are now holding off on any new purchases, increasing their dividends and paying down debt while waiting to see if this boom will last.