Tight crude supplies, refining capacity dampen hopes for resurgence of cheap oil
 

By Tarek El-Tablawy, Associated Press Writer 10/25/05
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While the most dire predictions have been largely dismissed as alarmist -- gasoline prices in the U.S. of up to $6 a gallon and crude oil climbing to $105 a barrel in 2007 -- analysts warn consumers could face new price spikes and won't soon be returning to pump prices that propelled the popularity of gas-guzzling SUVs.

The consensus is that the era of cheap oil for U.S. consumers, accustomed to some of the lowest prices in the industrialized world, is over -- at least for the next few years.

"We have very little spare capacity internationally to provide enough crude oil to the system to tolerate any more of these types of disruptions," said Ken Miller, an analyst with the Houston-based consultancy Purvin & Gertz.

Price surges over the past couple of years were in part driven by unrest in countries -- Iraq and Nigeria, for example -- central to international oil production.

But the impact of hurricanes Rita and Katrina brought into sharper focus the tenuous supply and demand balance in the United States and rekindled debate about how it would affect consumer driving patterns.

Preliminary indications from the federal government are that consumer demand for gasoline cooled slightly in the face of high prices further inflated by the aftereffects of Rita and Katrina. Americans are simply not as used to high gasoline prices as are Europeans, for example, who have learned to conserve more as a result of hefty government taxes at the pumps.

Global petroleum demand, however, continues to grow, according to the Energy Information Administration. The Energy Department's statistics arm said growth is projected to average 1.8 percent in 2005 and 2006, based largely on Asian markets, tight refining capacity and no new oil. The projected figure is actually half of the 3.2 percent last year.

"I don't think anybody anticipated the huge growth in demand for 2004," said the EIA's Dave Costello. "That, of course, was part of the problem."

Also part of the problem was a roughly two-thirds reduction in the daily spare crude oil production capacity of 4 to 6 million barrels.

"The first line of defense used to be drawing on stocks, and the last was price," said Larry Goldstein, president of the Petroleum Industry Research Foundation in New York.

"Today, there's not enough spare crude or refining capacity," Goldstein added. "So, there's only price that's left as the defense mechanism."

Katrina and Rita temporarily shut down at least 80 percent of the Gulf Coast crude oil and natural gas production and crippled many refineries at a time when they would have been shifting away from gasoline to heating oil.

This has set the stage for further price spikes, assuming the global economic growth continues at 3 percent and some refiners take down their plants for maintenance deferred by the hurricanes, argues oil economist Philip K. Verleger.

Verleger, in September, wrote that the projected U.S. economic growth of more than 3 percent, coupled with refinery outages and more hurricanes could push gasoline to a high of $6 per gallon without additional supply to match demand.

In an Oct. 17 report, he expressed concern that so many analysts and economists were confident that supply would be available.

"My question is, where will the supplies come from?" Verleger wrote. "Will the world import products from the moon?"

The EIA predicts gasoline prices will average $2.45 per gallon, down from $2.73 per gallon currently.

Analysts and economists have indicated that high global energy prices could dampen demand in the coming year. They mean demand will continue to grow by average of 1.8 percent over the next couple of years, according to the EIA's Short Term Energy Outlook released this month.

Such growth predictions have fueled a slew of analyst reports projecting sustained crude oil prices in the mid-$60s for the next couple of years, declining to the $40s range by about 2010 when OPEC has pledged to add another 5 million barrels of day of crude.

In a September report, Goldman Sachs Group Inc. reiterated an earlier projection that a super-spike scenario is possible where crude prices would surge to a sustained high of $105 per barrel that would drive demand down long enough for a supply cushion to be recreated.

Fadel Gheit, an oil analyst with Oppenheimer & Co., says such projections are grossly inflated. But he concedes that prices are unlikely to decline soon.

"I truly believe that oil prices have been artificially low for so long that we're now beginning to pay the real price," said Gheit. "But if gasoline hits $6 per gallon, I guarantee you'll car pool with your next door neighbor, even if he smells."