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Oil flow peaks as demand builds

WASHINGTON — Oil prices have backed down slightly from this summer's record levels, giving commuters and airline stockholders hope for relief from high fuel bills.

But any price declines won't last long, many energy experts say, and Americans may have to get used to higher prices for everything from gasoline to groceries.

If oil were to become as scarce and expensive as it was during the energy crisis of the late 1970s, a gallon of gas could rise to about $3, the American Petroleum Institute estimates.

That would increase the cost of driving, damage the auto industry — which last week reported that sales of popular sport utility vehicle models slipped more than 30 percent — and also drain money that consumers might otherwise spend on other goods and services.

And, higher materials and transport costs would push up the prices of everything from fresh vegetables to plastic garbage bags.

The biggest impact might be on the airlines, which predict fares would have to jump to keep pace with rising oil prices.

Oil production is failing to grow, experts say, just as demand for fuel is expanding rapidly in China, India and other developing nations. No major oil fields have been discovered in nearly three decades. And despite record revenues, oil companies are barely increasing their production capacity.

The result in coming years: fuel prices far higher than anything Americans have seen.

"The world is entering a period of runaway growth in demand for fossil fuels," said Matthew Simmons, founder of a Houston-based investment bank specializing in the oil industry.

For oil companies, "it's the end of growth — that's what peaking is all about," Simmons said. "A production decline doesn't mean you're out of oil, but it means that by 2010, maybe you are producing 75 million barrels a day, and the world demand is maybe 90 to 100 million. It's that gap that creates chaos."

For many airlines, chaos already has arrived. The Air Transport Association, an industry trade group, estimates that for U.S. airlines to simply break even, oil prices must stay below $31 a barrel. From 1992 to 2001, the median price was $20, allowing airlines to flourish.

On Aug. 19, the market peaked at a record of nearly $49 per barrel. Though prices have receded, they remain high enough to guarantee losses for airlines.

If airlines raise fares to cover the steeper costs, customers stay home. But if the carriers hold fares in check, they lose money.

"This is just untenable for us," said John Heimlich, the ATA's chief economist.

Already, inflation has been pushed up and consumer spending held down by a jump in gasoline prices that the Labor Department measured at 26.5 percent in urban areas for the year ended in July.

But oil is also used for heating and in plastics, fertilizers, ink, adhesives and many other goods. That means that oil price increases reverberate throughout the economy, further pushing up inflation and interest rates.

Still, the gas pump will provide Americans with the most visible signs. It may be of little consolation to them that motorists in other developed nations pay far more for gasoline than they do.

Last winter, when the U.S. price for premium unleaded fuel was about $1.85 a gallon, the price was $5.31 in Britain, $4.81 in France and $3.34 in Japan. However, that difference lies not in the price of oil, but in the fact that foreign nations levy taxes on gasoline that are up to six times higher than those imposed by the U.S. and state governments.

More expensive oil might push pump prices up worldwide, but it's not clear they would close the gap between the United States and other industrial countries.

Then there is the question of whether oil production can catch up to demand.

End of an era

This year, two books have argued that the age of cheap oil is wrapping up: "The End of Oil: On the Edge of a Perilous New World," by Paul Roberts, and "Out of Gas: The End of the Age of Oil," by physics professor David Goodstein of the California Institute of Technology.

One authority on oil, Kenneth Deffeyes, a Princeton geology professor emeritus, is writing a book due next year called "Beyond Oil." To underscore the urgency, he pinpoints Thanksgiving Day 2005 as the date world oil production will peak.

The notion that oil production from proven fields can fall off sharply is embodied in a concept called "Hubbert's curve."

In 1956, geophysicist M. King Hubbert noted that oil fields do not produce evenly. After about half the oil has been sucked from the ground, the second half becomes more difficult and more expensive to extract. When production falls off enough, the oil company abandons the field.

That means a typical field's production is represented by a curve that slowly rises to a peak and then falls sharply.

Using his model, Hubbert predicted that oil production in the continental United States would peak around 1971. It did, and has been declining ever since.

The solution has always been to move on to the next hole. But many geologists say that now, the entire planet is approaching the peak of Hubbert's curve.

Other experts say the pessimists go too far, noting that the end of oil supplies has been predicted since derricks first rose up in 19th century Pennsylvania.

After the Arab embargo of the 1970s drove oil prices to nearly $80 a barrel in today's dollars by 1980, companies became more motivated to produce oil. They drilled so vigorously that an oil glut caused prices to plummet after the mid-1980s.

"I've always been skeptical about this idea that we're moving into a new era and that we'll have to get used to high prices," said Fareed Mohamedi, chief economist for PFC Energy, a Washington consulting firm. "I believe in cycles for oil prices, that's all we've seen over the last 75 years."

Specific tie-ins

Optimists believe this year's price hikes have been tied to specific, short-term events: continued fighting in Iraq, an attempt to recall the president of Venezuela, the threat of terrorist attacks in Saudi Arabia and a dispute between the Russian government and its largest oil exporter, Yukos.

Other world events could cause short-term prices to spike again, Mohamedi said. "If we bomb Iran, I can assure you that would put an extra $10 premium on a barrel," he said, but such events are not related to long-term peaking.

The experts who believe demand will permanently outstrip supply say Americans must learn to conserve energy and develop new fuel sources.

There are other sources of oil, such as tar sands and oil shale. But getting the oil out would be costly.

Relying more on other energy sources — liquefied natural gas, coal and nuclear — will require overcoming environmental concerns.

And other sources — hydrogen fuel cells, wind, solar and the like — face technological hurdles before they can provide significant sources of energy at anything like the low cost of oil.

Simmons said no one should expect a breakthrough tomorrow.

"It's interesting that in the 20th century, the only new form of energy we invented was nuclear power, and we took 50 years to do it," he said. "This isn't like creating a new generation of computers."

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