The dramatic increase in global demand for oil, and the resulting price spiral in the last couple of months, may be early warnings of a fundamental change in the economies of industrialized nations.
“If you believe America has been built on cheap resources – oil, gas and coal – and think the nation will not be affected, you are in for a big surprise,” said Charles T. Maxwell, senior energy analyst at Weeden & Co. in Greenwich, Conn.
Because the United States now gets 60 percent of its oil from foreign sources, demand elsewhere affects the price here.
That’s what has been happening recently. A surge in demand from China and India has strained supplies and threatens to outstrip them later in the year.
“It’s no longer a national market. We have to pay up or go without,” said Maxwell, who is considered a dean of energy analysts because of his four decades in the field.
In fact, prices for crude oil and gasoline reached record highs Thursday. Despite a commitment a day earlier by the Organization of Petroleum Exporting Countries to increase production, oil for April delivery reached $57.60 a barrel before ending the day at $56.40, down 6 cents.
The early jump prompted scattered speculation of $80 a barrel oil later in the year.
The national average retail gasoline price was $2.055, said AAA, breaking the record of $2.054 set in May 2004.
Even if oil stabilizes, pump prices are expected to increase over the next three months as refineries switch to expensive summer blends and the driving season begins.
Maxwell and others believe that the balance between supply and demand will become even more critical later in the decade – because, despite the efforts of the oil companies, production will begin a gradual decline in areas not controlled by the Organization of Petroleum Exporting Countries. OPEC production also will begin declining as early as 2015, certainly by 2020, Maxwell predicts.
The economic impact will be apparent well before production peaks. Prices will skyrocket as oil companies scramble to produce oil from new fields and sources, using expensive new technologies. That process might have already begun; Canadian companies are producing oil from tar sands that were not economically feasible before today’s high prices.
Still, profligate energy use will end. “Think European,” Maxwell said. “Europe already has high taxes on fuel. Their communities grow up, not sprawl out. They have better public transportation – and better sweaters than we do.
“A German would think nothing about a 55-degree house. About 45 percent of their cars are diesel. That is coming to the United States.”
Future oil prices will be significantly higher, agreed James Halloran, energy analyst with National City Private Client Group in Cleveland. But they are not likely to spiral out of control, he said.
“I don’t think prices will go to $100 or $200 and stay there,” Halloran said. “It’s not economically attainable. People will cut back. You simply cannot afford that. You will find ways to change your way of life.”
Maxwell’s scenario assumes that today’s price increases are structural rather than cyclical, said A.F. Alhajji, energy economist and associate professor at Ohio Northern University.
Past oil price spikes have been largely cyclical – they retreated after oil producers invested in new wells and technologies, Alhajji said.
In contrast, a structural change is permanent; higher production costs to produce a barrel of oil is a structural change, as is gasoline that costs more because it’s reformulated to meet stricter environmental standards.
“Both sides can present arguments,” Alhajji said, “but we don’t have proof. It’s an academic question.”
He disputes the idea that OPEC oil production will begin to decline by 2020. “In Saudi Arabia, production will not peak any time soon. You would need at least two or three decades.”
That would give the country more time to adapt to change – not like during the 1979-80 oil crisis, when prices quickly peaked at about $80 a barrel, in today’s dollars. But that jump was temporary; in less than a decade oil prices were down in the teens.
Since then, prices have moved up gradually, with occasional jumps. Prices last September were just above $40. They skyrocketed to more than $55 in October before settling back down to below $45 in early January.
The run-up in crude prices has prompted some analysts to revise previous estimates that prices would continue to hover between $40 and $50 this year, with occasional spikes, said Andrew Weissman, analyst and chairman of Energy Ventures Group in Washington.
Alhajji agrees that prices will stay high. “How high depends on the ability of Saudi Arabia and others to bring more oil to market,” he said.
Weissman noted that “people are beginning to expect $80 per barrel later this year. I can’t tell you how high oil prices will rise. Nobody knows how much of a price increase will be needed to bring supply and demand back into balance.”
But inventories already are beginning to catch up with demand, Halloran argued. “Things will calm down in the second half of the year. You will see more supply coming on and a demand response,” meaning efforts to rein-in demand will take hold.
But in the long run, energy efficiency and new technologies will drive economic growth, he said.
“You will see alternative sources of energy, maybe radically different – hydrogen, for example,” Halloran said.
“The market will allow people to make decisions about energy – smaller cars, for example, more efficient appliances and production.”
