Tuesday, December 13, 2005

Oil prices expected to soar to feed global appetite
By Patrice Hill
December 13, 2005

The era of cheap oil is over, the government's chief energy forecaster said yesterday as it nearly doubled its previous forecast for world oil prices in the next 25 years.
Oil will stay near today's high levels largely because the oil-rich nations of OPEC are not investing in new supplies fast enough to easily meet growth in demand led by China and the United States, the Energy Information Administration said.
"It's what we would call deferred investment," said Guy Caruso, head of the respected forecasting agency, adding that he expects oil prices remaining well over $50 a barrel to spur consumers to purchase more fuel-efficient cars. If that does not occur, prices would climb even higher.
The sea change in the energy agency's thinking also reflects the increased cost and technical difficulty of extracting what oil is available in remote areas such as the deep-water ocean and arctic Siberia, he said.
Also driving up oil prices are the impediments oil companies have been encountering in gaining access to reserves in many countries -- including the United States, he said. Congress in the fall once again dropped legislation authorizing oil and gas drilling on federal lands offshore and in arctic Alaska.
While many private forecasters already had concluded that the era of cheap oil was over -- with some warning that the era of peak oil is not far away -- the energy agency had been perennially optimistic that oil would stay plentiful and inexpensive.
Its stand was increasingly dubious, however, in light of recent developments ranging from the failure to find any major new reserves of oil in recent years to questions about the reliability of Saudi Arabia's claims about having reserves large enough to feed the world's escalating appetite for oil.
Most telling was the failure of this year's 50 percent spike in prices -- which hit a record high near $70 a barrel for premium crude in September -- to spark much increase in the development of supplies.
Prices remain in the $60 range -- double what they were in 2002 -- but that has not spurred the billions of dollars of investment needed by the Organization of Petroleum Exporting Countries to keep pace with the world's increasing appetite for oil, the agency concluded.
Political struggles have prevented Iraq and Iran -- two of the four OPEC producers with the largest reserves -- from increasing production. Saudi Arabia has announced a modest increase to 12.5 million barrels a day from its top production rate of 11 million barrels.
But the world currently consumes 87 million barrels a day -- and demand is expected to grow to more than 100 million barrels by 2015. Many analysts question where the increased supplies will come from.
The energy agency expects "unconventional sources" such as liquid fuel derived from coal and natural gas to increasingly fill the gap, although the price of natural gas has jumped more than the price of oil.
Robert L. Hirsch, an energy consultant with Science Applications International Corp., noted that the energy agency was grossly overoptimistic about the outlook for natural gas as recently as 1999, when it predicted gas would cost one-fifth as much as it does today.
The agency yesterday gave only a nod to theorists who believe the world is nearing peak production of oil. But Mr. Hirsch believes the situation is more urgent, because it will take 20 years to develop transportation fuels to replace oil.
"Peaking could be soon -- within 20 years," he told the House Energy and Commerce Committee last week. "The economic future of the United States is inextricably linked to Saudi Arabia because they're the linchpin of future world oil production.
"No one outside of Saudi knows how much oil they have in the ground because that's a closely held state secret. Also, no one outside of Saudi knows how much and how fast the Saudis will be willing to develop what they have," he said.
A retired Saudi oil executive recently predicted the world is headed for an oil shortage, he noted, and even some members of OPEC are warning that supply will not be enough to meet world demand in 10 to 15 years.
Cambridge Energy Research Associates, a respected private forecaster, told the committee the peak should not come before 2030, however. It expects new finds of oil as well as technological innovations to make plentiful fuel available.