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ChevronTexaco CEO: Oil's new high may persist

Price of crude topped $47 a barrel Wednesday, despite Saudis' recent talk of loosening spigots.

HOUSTON - War in Iraq. Instability in Venezuela. Civil unrest in Nigeria. Governmental wranglings in Russia. With so much uncertainty in so many of the world's leading oil-producing countries, energy prices continue a seemingly inexorable rise - provoking new speculation that the world may be heading into a period of permanently higher prices.

Even the once-mighty Organization of Petroleum Exporting Countries (OPEC) seems unable to bring prices down, reinforcing the view that fundamental change in world oil markets, and not just temporary psychology, is behind the latest price surges.

Indeed, while energy analysts debate whether this is really just a short-term spike or the beginning of the end of cheap oil, one thing is clear: Energy prices will face continued pressure. Demand is only going to increase, supplies are getting harder to reach, and tight refining capacity could make getting oil to market more problematic.

"This may not be a short-term aberration," said ChevronTexaco CEO David O'Reilly, in a recent speech before the US Chamber of Commerce. "I believe energy prices are going to face continued pressure - reflecting fundamental changes in demand, supply, and geopolitics. We are, in fact, witnessing a change in the basic energy equation."

Clearly, global events are contributing to the current run-up in prices. Iraq continues to produce less oil than it did before the war. Restiveness in West Africa and nervousness about more unrest in Venezuela, even after the recent referendum, have intensified worries about supply disruptions there. The crisis over Russian President Vladimir Putin's crackdown on Yukos, Russia's largest oil producer, has eased somewhat in recent days, but the situation remains volatile.

All this helped push crude oil prices to a new high early Wednesday at $47 a barrel. While this remains well below the peak prices of the early 1980s (when inflation is factored in), it still represents a 27 percent jump in just the past six weeks. "Near-term prices will be higher than we have been accustomed to," says Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. "But these current high prices are supported by geopolitical events rather than supply and demand problems."

He says if you were able to eliminate all the "fear factors," oil would probably be around $30 a barrel.

But others note that the spikes are so severe at the moment in part because of more fundamental trends. Global demand continues to rise. It is expected to increase by 40 percent in the next two decades. Much of that will come from developing countries - most notably China, whose energy needs are expected to more than double by 2020.

Yet while supplies have generally been keeping pace with demand, there's growing concern about whether that will continue. Moreover, some analysts note that the industry hasn't been investing in the needed refining capacity, pipelines, and other infrastructure needed to get oil products to market.

Normally, OPEC would be able to help bring prices down, which it has some interest in doing. Keeping prices too high only makes it profitable for other oil-producing regions, even those with limited capacity, to pump more crude.

That's one reason Saudi Arabia recently announced that it was considering raising production by more than a million barrels a day. But even that pronouncement hasn't been enough to affect prices, in part because analysts say the country - and even more so the rest of the member nations of the cartel - are already producing at near capacity.

"When you get really high prices, that attracts a lot of additional production from all over. And competition creates a problem for any cartel," says Pietro Nivola, an energy expert at the Brookings Institution in Washington.

Still, some analysts say that OPEC failed, perhaps intentionally, to manage the market in recent months. "They were afraid that increasing production too fast would collapse prices," says Amy Jaffe, an energy expert at Rice University in Houston. But that plan has backfired, she adds, and "OPEC has definitely lost control of the market."

She says cartel members didn't take into account how much - or in this case, how little - oil-producing capacity other countries have. In the 1990s, there were 5 million to 6 million barrels a day of spare oil. Even during the oil crisis of the 1970s, there were 4 to 5 million barrels a day of excess crude. Not today. "When OPEC is producing flat-out, there is not much diplomacy they can do," says Ms. Jaffe.

Still, with four-fifths of the world's known reserves in the Persian Gulf region, OPEC will continue to exert at least some leverage far into the future, says John Flemy, chief economist at the American Petroleum Institute in Washington.

What's hard to predict, though, is whether China's economy will remain robust or if the bubble will burst, helping send oil prices back to late 1990s levels of $9 a barrel. In either case, oil companies argue, this is not necessarily the beginning of the end of cheap oil. It may be the beginning of the end of easy oil. But prices could return to normal, they say, if they had access to more fields.

In addition, companies like Shell and Exxon are not going to go out of business when easy-to-get oil runs out. They will simply begin using unconventional drilling technology.

For their part, consumers will not put up with platinum-priced oil forever - and they may not have to. "It's not like we have to drill for $50 a barrel oil. There are a million things we can do," says Jaffe, referring to such things as tar sands, shale oil, and alternative fuels.

Editorial Notes: Unfortunately no mention of peak in oil, or (not surprisingly) any net energy analyses of the alternatives mentioned which would force a much more sobre conclustion. -AF

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