The same cheap oil that’s providing relief to drivers and businesses in an awful economy is setting the stage for another price spike, perhaps as soon as next year, that will bring back painful memories of last summer’s $4-a-gallon gas.
The oil industry is scaling back on exploration and production because some projects don’t make economic sense when energy prices are low. And crude is already harder to find because more nations that own oil companies are blocking outside access to their oil fields.
Some analysts say oil could eventually eclipse $150 a barrel, maybe even on its way to $200. In such a scenario, gasoline would easily cost more than the record high of $4.11 a gallon set last summer. Oil trades at about $50 today.
No one knows for sure, but some analysts say the spike could happen as soon as next year, perhaps in 2011 or 2012.
“I think those supply limits will come back to bite with a vengeance,” said Sean Brodrick, a natural resources analyst at Weiss Research Inc.
High prices at the pump last summer - more than $4 per gallon for gas on average - helped slash demand for oil. From November 2007 to October 2008, Americans drove 100 billion fewer miles than the year before, according to government figures. The nation’s biggest automakers lurched toward bankruptcy as sales of sport utility vehicles and trucks plummeted.
“We wouldn’t be bailing out the automobile industry today ... had we not had this crazy situation with oil prices,” said Daniel Yergin, chairman of Cambridge Energy Research Associates, a consulting firm, and author of “The Prize,” the Pulitzer Prize-winning history of the oil industry.
Oil giants like Exxon Mobil, Chevron and ConocoPhillips have yet to announce their 2009 capital spending plans, but analysts say even the cash-rich companies are likely to shelve some projects.
Already, Royal Dutch Shell has postponed a near-doubling of production in Canada’s oil sands - an operation that analysts say only makes economic sense when oil is about $20 a barrel more expensive than it is now. Marathon Oil says it expects to cut capital spending by
15 percent in 2009.
Brodrick said canceled or postponed oil and gas projects could contribute to a drop of
7 percent or more in global oil production this year.
Smaller oil producers could cut spending by 30 percent, said Oppenheimer & Co. analyst Fadel Gheit. The majority of U.S. crude and natural gas is supplied by smaller, independent companies, not the Exxons and Chevrons, and smaller producers have been forced to pull back because of frozen credit markets.
All this comes as the Organization of Petroleum Exporting Countries, which controls about 40 percent of world crude supplies, embarks on its biggest single production cut ever.
It adds up to another round of price shocks for consumers that’s probably inevitable, said Bruce Vincent, president of Houston-based Swift Energy Co., an independent producer.
“Demand will start growing, supply will start coming down, and you’ll have that intersect again where prices will take off dramatically,” Vincent said. “(But) it’s not healthy for the economy. It’s not healthy for the industry.”
Already, the futures markets are pricing in more expensive oil. While a barrel of light, sweet crude for February delivery costs about $50, the market for September oil is already over $60.
Big Western oil companies like Exxon and ConocoPhillips have also been cut off from crude reserves under the control of nationalized oil companies from Saudi Arabia to Venezuela.
Late last year, the International Energy Agency said it will take more than a trillion dollars in annual investments to find new fossil fuels over the next two decades in order to avoid shortages that could choke the global economy.
When the world economy recovers from the current malaise, “Are we going to get another one of these violent cycles where prices overshoot and you get back in the same spiral?” asked Yergin. “Some volatility is inevitable in global commodity markets, but this kind of extreme volatility is bad for everyone. It creates deep wounds.”
Another part of the problem, said Judy Dugan, research director for the nonprofit Consumer Watchdog, is that oil companies didn’t invest enough in new exploration over the past several years, as they raked in billions in profits.
“They’re screaming, 'Drill, baby, drill,’ but they didn’t invest anywhere near where they should have been investing when prices were high,” she said. “Now that prices have crashed, they say prices are too low, knowing full well prices are going to go back up.”
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D wrote on Jan 18, 2009 10:30 AM:
" Nice try....no cigar on trying to prop up oil prices with this piece. Good 60 Minutes broadcast last Sunday. The rise last summer was attributed strictly to speculators, and had no relation to supply and demand.
Just like there was no fundamental economic reason for the runup last Summer, there's no fundamental reason to think demand will recover.
Automakers rushing to make hybrids and alternate fuel vehicles....Fusion Hybrid, Chevy Volt, Honda Clarity (fuel cell already in use), Camry hybrid, Prius, etc, etc. Steep decline in the sales of gas guzzlers.
These vehicles will be on the road for the next several years. Who knows what will happen with some of the electric vehicles and battery technology which seems to be evolving at a rapid pace.
All this is happening while even more major oil finds come online.
Anyone investing in $80/bbl oil futures should go on meds.....immediately.
Suadi Arabia will not give up market share. Venezuela isn't rattling the oil saber any more. They can't.
This collapse is far from over. "
Just like there was no fundamental economic reason for the runup last Summer, there's no fundamental reason to think demand will recover.
Automakers rushing to make hybrids and alternate fuel vehicles....Fusion Hybrid, Chevy Volt, Honda Clarity (fuel cell already in use), Camry hybrid, Prius, etc, etc. Steep decline in the sales of gas guzzlers.
These vehicles will be on the road for the next several years. Who knows what will happen with some of the electric vehicles and battery technology which seems to be evolving at a rapid pace.
All this is happening while even more major oil finds come online.
Anyone investing in $80/bbl oil futures should go on meds.....immediately.
Suadi Arabia will not give up market share. Venezuela isn't rattling the oil saber any more. They can't.
This collapse is far from over. "
Jack Frost wrote on Jan 18, 2009 11:53 AM:
" I hope oil hits 400 dollars a barrel so I can roll in the dough..... "
W wrote on Jan 19, 2009 5:37 AM:
" Frost needs to wake up and smell reality. Though government doesn't admit it, anyone who watched can see the oil spike ignited our economic crash. The spike started the cut backs on the part of businesses and individuals and drove up inflation and the cycle began. Anyone wishing to repeat the cycle yet again isn't thinking. If the industry doesn't stay controlled, the world will only get steadily worse. "
Richard Wahl wrote on Jan 13, 2009 11:26 AM:
My guess is....NO! They will drain every last cent out of oil that they can.
Why lose out on all that money, when they can drain our pockets of our hard earned money, and put it in theirs. Will people actually begin to start buying fuel efficient autos on a larger scale than today? Anybody's guess, for the American public is sometimes very slow to catch on to a very real problem. We shall see what we shall see. Then, those auto companies will HAVE to do better, or..................
their end will be inevitable! "