By Tom Still
MADISON – With crude oil prices finally slipping back below $50 per barrel, some Americans may be tempted to think the worst is over when it comes to the price they pay for gasoline at the pump. Might “cheap gas” make a comeback? Don’t bet your SUV on it.
For a mix of supply and demand reasons that range from China’s booming economy to strained refinery capacity at home, consumers in the United States should not assume that oil prices will soon fall – if ever again – under $30 per barrel. The price of oil more than doubled since 2001, peaking above $55 per barrel, and much of that increase appears to be here to stay.
It’s not a crisis on the order of what the United States experienced around 1980, when the price of oil soared to an inflation-adjusted peak of $90 per barrel. However, analysts expect a combination of forces to keep oil prices high.
“Oil prices remain the single largest threat to global economic recovery,” said Christopher Edmonds, director of research for Pritchard Capital Partners, an investment firm that tracks energy markets. Edmonds spoke recently to customers of Xcel Energy, which has service territory in Wisconsin, Minnesota and nine other states.
Here are factors Edmonds and other analysts believe will keep oil prices relatively high:
The economic recovery is well under way. Demand is up after a slack period tied to the economic recession.
China and India are becoming big users of oil. Growing economies in both countries has sharply accelerated demand, putting pressures on prices as competition for oil grows.
Production is meeting demand – barely. Global consumption in 2004 has averaged about 82 million barrels per day, which is within 1 percentage point of the world’s production and refining capacity. Saudi Arabia is pumping oil so fast that it may be threatening the long-term integrity of its own fields.
The world is paying a “terror premium.” That trend began with the Sept. 11, 2001, attacks on the United States and has continued through the Iraq war.
Many oil-producing nations are subject to supply interruptions. Iraq, Iran, Nigeria, Russia and Venezuela are prone to political unrest, labor strikes or government clampdowns, such as the $10 billion tax claim made against the Russian oil giant Yukos.
There have been no major crude oil discoveries in more than a decade. Also, it’s increasingly difficult to drill in areas where reserves are known to exist. Oil that lies within Alaska’s Arctic National Wildlife Refuge could be safely pumped with the help of the latest technologies, but U.S. politicians won’t stand up to environmentalists who have dramatically overstated the risk. Canada’s Athabasca tar sands could be refined at some point, but only if prices remain high enough to justify the investment.
President Bush is stockpiling oil. The federal government’s Strategic Oil Reserves have swelled to 670 million barrels, which is enough to meet the nation’s complete needs for about five weeks at today’s consumption rates. The reserve should be 100 percent filled by May 2005, but, in the meantime, government purchases are competing with private reserves.
Finally, it’s not clear the world is coming to grips with the need to invest in oil production, refining and transportation infrastructure just to keep even. Edmonds said the worldwide bill for such investments is $568 billion per year between now and 2030.
Some short-term trends are favorable. The damage caused by Hurricane Ivan to pipelines and platforms in the Gulf of Mexico has been repaired. High prices have encouraged oil producers to ship more crude to market. However, in a world that is increasingly thirsty for petroleum, it’s hard to imagine a return to the days of cheap oil.
Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.