By Dan Piller

16-09-04

Question: Why has the price of crude oil ranged from $ 10 a barrel five years ago to almost $ 50 this year? Surely the supply-and-demand equation hasn't changed that much.

Answer: It hasn't. Analysts say the price of oil, based purely on supply and demand, should be around $ 35 per barrel. But other factors are pumping up the price this year: sabotage in the Iraqi oil fields; a political quarrel that has threatened to shut down operations in Russia, now the world's largest producer; political instability in Venezuela; and the expected 20 % annual increase in demand from China. That has created a "fear factor" of up to $ 15 per barrel.

Question: Once, OPEC could set the world price. Can't it do that anymore?

Answer: No. Prices today are set on the International Petroleum Market in London and the New York Mercantile Exchange. OPEC can raise the price by withholding oil. But with world demand rising by 3 % to 4 % annually, OPEC can't boost production fast enough to lower prices the way it could in the early 1980s.

Question: How dependent are we on OPEC?

Answer: Less than before. In 1977, OPEC accounted for 70 % of US imports. That's now 42 %. Canada and Mexico are now bigger suppliers to the United States than Saudi Arabia is. If you take away OPEC member Venezuela, our third-biggest supplier at 12 %, Persian Gulf countries supply only about 17 % of US crude oil.

Question: Can't the president use the Strategic Petroleum Reserve to influence international oil markets?

Answer: The reserve isn't big enough to affect world markets. Stored in salt domes in Louisiana and Southeast Texas, the reserve contains about 600 mm barrels, or a 30-day supply for the US domestic market.

The White House has been criticized by some for buying 90,000 barrels of expensive crude oil each day to add to the reserve. The maximum 660,000 bpd that could be lifted from the reserve is unlikely to shift the supply-demand equation in the world's 80 mm-bpd market.

Question: There has beenthe usual talk from both parties on energy this election year. Republicans want to drill more, and the Democrats want to conserve and work toward alternative fuels. What aren't they telling us?

Answer: Both would do well to drop the "energy independence" talk. It isn't going to happen when our domestic crude production stands at 5.5 mm bpd against consumption of 20 mm barrels and when North American crude oil reserves amount to less than 5 % of the world's total.

Question: There's talk that "Big Oil" is colluding to keep prices high. The companies certainly are making enough profits this year. Is it true?

Answer: If the oil giants could collude to push up prices, they certainly didn't in 1998-99, when the price of crude dropped below $ 12 per barrel.

While collusion charges are often made, Bill Lockyear, the California attorney general, said this year that his investigations didn't turn up evidence of collusion.

Question: Why do retail gasoline prices seem to go down slower than they go up?

Answer: Partly because of the four-to-five week lag in the time it takes to turn oil into gasoline and get it to the retail pump. You read about $ 42 crude, but the gasoline in the retailers' tanks was probably made from $ 45 to $ 48 crude shipped in July and August.

Question: Are the big oil companies at all responsible for higher prices?

Answer: When prices are high, the big refiners keep tight, just-in-time inventories of crude to protect themselves against sudden price drops. This puts upward pressure on gasoline supplies and prices. Also, Big Oil isn't always on the forefront of developing new sources of energy. ExxonMobil Chairman Lee Raymond defiantly says that fossil fuels will be our prime source of energy for the next half-century and that his company has wasted enough money, thank you, on alternative energy.

Another criticism is that despite the record prices, oil companies have been slow to increase their exploration and drilling budgets. The Paris-based International Energy Agency, no fan of Big Oil, has gone public with such a criticism. Big oil companies say they're just being careful, that they've been burned before by falling crude prices. But world demand, barring a cataclysm, seems to suggest that sub-$ 30 oil is a thing of the past.

Question: Is it realistic to push alternative fuels as a replacement for crude oil?

Answer: The hybrid engine, combining oil and electricity, is already here with the Toyota Prius and the new Honda Civic. Waiting lists for those cars are between eight months and a year. Detroit says it is readying its own hybrids, but they have yet to reach the market. Carmakers still aren't sure that the market for the hybrid goes beyond trendy greens who bought the early versions. Remember, the United States embraced the SUV and the minivan within a decade of the oil shocks of the 1970s.

Beyond the hybrid, the fuel cell, which combines hydrogen and oxygen in a type of battery that produces electricity, went through a boom similar to the dot-com enthusiasm in the late 1990s. But questions remain about power, duration, hydrogen sources (natural gas, the expected chief source of hydrogen, is itself increasingly scarce in the United States) and the general expense of creating a new hydrogen fuel infrastructure.

Question: What is the latest, best prediction about when the world will run out of oil?

Answer: Such predictions have been issued regularly since the modern oil industry began at the start of the 20th century. At one point, we were supposed to have run out of oil by 1980. The US Energy Information Agency and the International Energy Agency now put the world's known reserves at about 900 bn barrels, with two-thirds in the Persian Gulf. World daily consumption this year is 80 mm barrels (20 mm in the United States). Consumption is expected to rise to 140 mm bpd (most of the increase coming from Asia) by 2025.
That seems sufficient until it is realized that much of that oil lies beneath deep sea bottoms, inside mountains or other expensive terrain. Less than 5 % of the world's known reserves are on the North American continent. So the best guess -- and that's all there is -- is that we have until about 2025 before the serious crunch sets in. It might happen sooner, or later. Take your pick.

Question: Is offshore drilling significant?

Answer: Yes. In 2003, drilling off the coasts of Texas and Louisiana produced 1.6 mm bpd, more than the 1.1 mm barrels produced onshore in Texas and 244,000 bpd in Louisiana.

Trouble is, offshore wells can be four or five times more expensive than onshore wells. And they tend to play out faster, as quickly as three years.

Question: How is Alaska doing?

Answer: About the same. In 1988, Alaska produced about 2.2 mm bpd of oil. That figure, like Texas, has dipped to just below 1 mm bpd.

Question: We hear so much about the Arctic National Wildlife Reserve in Alaska, where President Bush wants to drill. How much would that add?

Answer: The US Geological Survey reported in 1998 that oil resources there are projected at 10.3 bn barrels technically recoverable. The reserve could be counted on for another 1 mm bpd for 20 to 30 years.

Question: Has the United States done anything to manage its demand?

Answer: The United States, with 5 % of the world's population, consumes one-quarter of the world's daily production.

US demand stood at 18.5 mm bpd in 1978 and fell to 15.7 mm barrels by 1985, largely because of price-imposed conservation.

Question: Isn't there talk that Saudi Arabia is running low on oil?

Answer: Houston energy banker Matthew Simmons has created a stir this year by declaring that Saudi oil production has peaked. Simmons reports the Saudis have to use water pressure injections to coax more oil to the surface, a sign that wells are mature. He says future Saudi oil, like much crude elsewhere, will be harder to get and more expensive.

Question: Will Iraq ever be a factor?

Answer: Iraq provides about 5 % of our imports. Since the "fear factor" stemming from sabotage in Iraq had addedup to $ 15 per barrel to crude prices this year, the bet on Iraqi oil hasn't turned out well so far.
Still, Iraq's reserves have been estimated at 115 bn barrels, just behind Iran's 125 bn barrels. But as a producer, Iraq is no Saudi Arabia. Production is down from peaks of nearly 3 mm bpd to about 1.6 mm this year. The problem is due less to sabotage than simple neglect by former dictator Saddam Hussein, who preferred to terrorize his own people than to use oil to threaten the rest of the world.

Question: Can Russia help us out?

Answer: Russia can match Saudi Arabia's world-leading daily production of 10 mm barrels. None of it comes to the United States, mainly because of transportation constraints. But US companies, from ExxonMobil on down, are eager to get into Russia.

Russia's reserves are pegged at 60 bn barrels, three times larger than US reserves. Greater production depends on more investment, less government interference and more pipelines and transport structure. This year has seen the president of the country's largest oil producer thrown in prison and the company dunned for back taxes, events that shook the world energy markets. If Russia ever gets its act together, the country could wield worldwide power that Josef Stalin, Nikita Khrushchev and Leonid Brezhnev could only dream of.

Source: Knight Ridder Newspapers