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Parade Magazine
How High Can It Go?
By Lyric Wallwork Winik
October 2, 2005
Here’s the good news: We won’t suddenly run out of oil. You will not roll your SUV into the gas station, only to discover that another car has gotten the globe’s last drop.
Now for the bad news: No one knows how high oil prices can go. And no one is sure just how much oil we have left. But most of all, no one can predict what will happen to the world’s oil supply, because—as Daniel Yergin, head of Cambridge Energy Research Associates, puts it—“The greatest risks aren’t under the ground, but above it.”
We saw that vividly in August, when Hurricane Katrina tore through oil rigs and shut down key crude-oil refineries, spiking prices. (In 2004, Hurricane Ivan battered vital underwater energy pipelines, also temporarily curtailing our oil supply.) But the threats go beyond nature. Some of the world’s most unstable or despotic nations sit atop of vast oil reserves: Saudi Arabia, Iran, Venezuela, Nigeria and even Russia. Strife in any of them can send prices skyrocketing. Even a refinery fire can raise prices. Any disruption is potentially serious, because it means there is less oil to go around.
The world consumes more than 84 million barrels of oil a day, while oil fields produce about 85 million barrels. Just one million barrels or less are “excess capacity,” meaning there’s almost no extra oil in the system. It’s like being stuck on the road with $1 to pay for a cab ride home. Five years ago, that wasn’t the case. What’s changed?
Why Are Prices So High?
Let’s start with our insatiable thirst for oil. The U.S., with just 5% of the globe’s population, consumes 25% of its energy, and those figures are rising. We are setting new records for how much oil we import, now more than 10 million barrels a day. But other nations are catching up. “There’s been a shift in worldwide demand,” says Michael Humphries, head of the energy analysis group at Ferris Baker Watts, an investment firm. China and India are squaring off against the U.S. and Europe for oil. In China, demand is rising at double digits. “They are beginning to compete for every additional barrel in the Middle East,” he adds. “All you need is a major hit, like Saudi Arabia imploding, and we are going to be in trouble economically.”
“We’re living through a demand shock and had a supply shock on top of that with the effects of Katrina,” explains Daniel Yergin, who won a Pulitzer Prize for his book on the history of oil, The Prize. But while Katrina’s damage is temporary, rising demand is permanent. “People who rode bicycles in China are now driving cars,” Yergin says.
Can’t We Just Pump More Oil?
For years, that’s pretty much what we tried to do. But some experts worry that we are entering a new era. “In the past, high prices spurred oil companies to look for more oil and improve technologies, so five to seven years after a price rise, we saw a glut of new oil,” notes Paul Roberts, author of The End of Oil. If oil becomes plentiful again in 2008, we’ll know history is repeating itself. But, he cautions, there are signs that there is less oil to be found: “Big oil companies, like Shell, are struggling to replace reserves. For every barrel they sell, they aren’t discovering a new barrel.” Roberts adds: “Oil is a trade secret for many countries, so we can’t tell exactly how much of it is left.”
What can replace oil? Energy expert Peter Huber of the Manhattan Institute would like us to use more electricity to meet our energy needs. “Otherwise,” he explains, “we’ll end up shipping $30 trillion to the Middle East. The more we move away from oil, the more we will become less dependent on some unsavory places.”
What About Alaska and Iraq?
We are years away from tapping Alaska’s remaining oil and natural gas reserves, and we need an extensive pipeline system to get them south. Some of that oil will simply offset the decline of other oil fields, like Alaska’s Prudhoe Bay, adds Michael Humphries. As for Iraq, right now it can’t even refine enough oil to meet its own needs (the American military has to import fuel to run its vehicles). Significant Iraqi oil production is probably five years off, and we’ll have to buy it on the world market, like everyone else.
Will a federal energy policy help?
Frank Verrastro of the Center for Strategic and International Studies (CSIS) in Washington, D.C., says: “The U.S. hasn’t had a comprehensive energy policy since the 1970s, when, for example, we adopted car-fuel economy standards.”
“We’re nearly two generations behind the Japanese,” says Paul Roberts, who notes that improving car-fuel economy would help. But when it comes to federal energy policy, the reality is that it’s often designed to reward individual industries, says Peter Huber: “They want the government to favor their form of energy over the other guy’s, so the nuclear industry wants breaks for its plants, the coal industry wants mining breaks, and oil companies want cheap licenses for offshore drilling.”
Most experts agree that the surest way to reduce demand is to raise gas taxes, as Europe has done, but they also agree that Americans wouldn’t stand for it. And if gas prices drop back to $2.50 a gallon, as most expect, “are people really going to focus on an energy policy?” asks Humphries. “It’s still cheaper to explore in the Gulf of Mexico than to invest in a fuel cell that might not be viable for years.”
Is there any good news?
Yes. While we are using more oil, we also are using it more efficiently (even our SUVs are much more efficient than a ’70s sedan) and doing more with the oil we use. Energy costs are a much smaller part of our overall economy than they were just a decade ago, let alone during the oil crisis of the ’70s. But being more efficient doesn’t reduce total energy consumption, says Huber: “Your stove and car may be more efficient, but then you go on vacation and fly.”
We need to take dire predictions about our oil future with a grain of salt, counsels Dan Yergin. He points out that many of the concerns, including the expectation that we will run out of oil, have been voiced for decades, going back to before World War I. “Every time people talk about oil failure, they assume new technologies will freeze. But technology is always changing. Look at how the rest of our lives has changed. Who would have imagined cell phones on every block 20 years ago? Even the first edition of Bill Gates’ first book did not mention the Internet.”
Yergin believes that technology will change oil and energy too. Not only will we be able to extract more oil from the ground (right now, most fields give up only about 30% to 40% of total oil) and in more places, like the deep ocean, but there also will be lots of innovations in how we use energy. “This is the year that Americans fell in love with hybrid cars,” he notes.
Necessity also may be the mother of invention. According to the CSIS’s Frank Verrastro, the military —which was using up to 500,000 barrels a day during the war in Iraq —is trying to modify its armored vehicles to make them lighter and able to go farther on less fuel.
Finally, what about unstable nations? “It’s easy to postulate doomsday scenarios, like nuclear war during the Cold War,” says Peter Huber, but that doesn’t mean they’ll come to pass. Our biggest worries are with Saudi Arabia and Venezuela. The Saudis sell us about 9% of our oil. But most of our major suppliers are in the Western Hemisphere (see box on page 5). Europe, Japan and China get much more of their oil from the Middle East.
How high will it go?
We still may face prices of $100 or $200 a barrel of oil someday (it’s around $65 to $70 today). “We are in a tight, risky period,” says Dan Yergin. “Another crisis could send prices up again.” But, he adds, “new supplies now under development could lower prices in a couple of years.”
Many other analysts think rising prices are here to stay. “We are going to see an upward creep in retail gas prices,” says Jake Bournazian of the U.S. Department of Energy. “Demand keeps growing, and any price decline won’t offset the overall run-up each year.” And that’s the rosy scenario, without any major political or environmental crises.
How can we fight high prices at the Gas pump?
Consumers do have a say in how much they pay at the pump. It’s not sexy, but driving the speed limit, keeping your car well-maintained and keeping tires inflated can, in Yergin’s words, “reduce gas consumption by 10% to 20%. You can manage your gas consumption. You can combine trips. You can focus on fuel efficiency when you buy a car.” A small drop in demand can have big payoffs. A few years ago, when an outbreak of the Asian flu curbed driving, oil prices fell.
“We’re so caught up with the drama of the Arabs that we don’t even notice that the way we use energy is idiotic,” says Paul Roberts. “Every time you buy a bigger house or a bigger TV, chances are you are using up more energy. You can’t just complain that ‘terrorists are making it hard for me to drive my Hummer to work.’” Roberts adds that the government may have to mandate more efficient cars to change behavior: “We aren’t careful in the rest of our economic life, like with credit-card debt. We are not going to behave ourselves.”
“Energy isn’t free,” notes Peter Huber. “We pay for it in other ways as well—in environmental and geopolitical costs.” But change will “require big thinking, heavy lifting and political courage,” says Paul Roberts. “All are in short supply. The question is: Do we run out of oil or courage first?”
New York Times
White House Letter; If You Can't Take the Heat Get Out of the West Wing
October 3, 2005
The thermostats were turned up two degrees throughout the West Wing last week, and staff members willing to relinquish their coveted White House parking passes were promised free fare on the Metro subway system.
Over in the White House residence, the lights went off earlier at night and were turned on later in the morning, at least in the rooms that no one was using.
Next door at the Department of the Treasury, the secretary, John W. Snow, decided to take the Amtrak Acela to New York on Wednesday, not the Delta or U.S. Airways shuttle. ''We said, 'If there's a good time to take the train, this is it,''' said Tony Fratto, Mr. Snow's spokesman, who acknowledged that Mr. Snow, a former railroad executive, had also taken the train in the past because he liked it.
President Bush has not yet been spotted in a Jimmy Carter-like gray cardigan, but otherwise his call to Americans last week to conserve gasoline by driving less had a strangely familiar ring…
But some energy experts said that Mr. Bush's call for conservation could be more than symbolic. ''The funny thing about conservation is that a little flexibility can do a lot of good,'' said Daniel Yergin, the author of ''The Prize: The Epic Quest for Oil, Money and Power,'' a history of oil that won the Pulitzer Prize, and the founder of a consulting firm, Cambridge Energy Research Associates.
Mr. Yergin said that his firm had calculated that if all homeowners and commercial enterprises in the United States set their thermostats two degrees lower this winter it would save more natural gas than was lost from Hurricane Katrina. He also said that small things -- like driving within the speed limit and rotating tires -- could reduce motorists' gasoline consumption by 10 percent. ''Jawboning is well worth the price if you can get those kind of results,'' Mr. Yergin said.
Financial Times
Lex Column
October 4, 2005
Natural gas prices
The problem with benchmarks is that they stay fixed even though the world moves on. The Henry Hub is the long-established focus for natural gas futures in the US. As a gas plant close to the Louisiana coast, hooked up to 13 major pipelines, it is a natural price point. But, like a lot of things in the US energy sector, it is showing its age.
Reliance on a single price point for any commodity in the continent-sized US market has its share of problems. Back in 2000, with the Gulf of Mexico providing 30 per cent of US gas, Henry was a reasonable proxy. Since then, that proportion has fallen to 27 per cent. A small change, perhaps, but the effects can be seen in the divergence between Henry and the actual wholesale gas price paid around the US. Cambridge Energy Research Associates, a consultancy, says the average price spread has widened from less than 20 cents per million British thermal units in 2000 to $1 today.
As Henry gets older, he will become more detached from reality. The Gulf of Mexico's share of US gas capacity will drop to one-fifth by 2020, even as imports rise from 15 per cent of consumption to more than a quarter. The latter will include an increasing proportion of liquefied natural gas, where contracts are often priced off oil - another market with its fair share of obsolete benchmarks. Meanwhile, indigenous US gas production will shift further west, widening differentials with the east. If Henry's waywardness encourages more investment in west-east pipelines, he will still have his uses.
CNBC
Morning Call
October 7, 2005
Daniel Yergin on oil markets
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