Motorists may groan, but the times of $2-a-gallon gasoline could look like the good old days before the decade is over.
The problem is that global demand for oil is rising briskly, fueled primarily by economic growth in China, India and other parts of Asia. At the same time, production in old oil fields is declining and new fields are increasingly hard to find.
When faced with an unexpected supply crunch, as happened this month when oil prices hit an unprecedented $55 a barrel, big oil producers like Saudi Arabia are no longer able to turn on a spigot to meet demand and dampen prices.
Industry analysts have been predicting for years that there will come a point when global oil production will no longer be able to keep pace with demand, driving prices skyward. The world may now have reached that point.
“My feeling is this is the beginning of the oil peak and the next administration, whoever it may be, is going to have to deal with this,” said Les Magoon, an oil geologist and scientist emeritus with the U.S. Geological Survey.
“We’re not going to run out of oil, it’s just that the demand on a daily basis will far exceed the ability of the world to produce oil so the price is going to go up,” Magoon said.
Optimists argue that the current tight market is the result of temporary world events that have hindered supplies: Sabotage in Iraqi oil fields; a tax battle between the Russian government and oil giant Yukos; political instability in Venezuela; ethnic violence in Nigeria; labor disputes in Norway; and production delays in the Gulf of Mexico caused by Hurricane Ivan.
Other analysts, however, note that supplies have always been vulnerable to political instability and natural disasters. The key difference is that unprecedented demand has made the market so tight that there is no longer the flexibility to accommodate unexpected supply disruptions.
Chinese oil demand was up 18 percent in the first seven months of this year, far outpacing forecasts. Globally, oil production hit a record 84 million barrels a day in September, up 6 percent from a year earlier.
“What we’re seeing is that any excess capacity is probably going to be taken up by India and China because their economies are expanding at a much more rapid rate than ours,” Magoon said. “So any excess production created by (the Organization of Petroleum Exporting Countries) or any other countries is unlikely to have an impact.”
Some forecasters predict that the price of oil could go at high as $80 to $100 a barrel in this decade.
“We’re possibly just a minor supply disruption away from that _ any kind of terrorist attack, the blowing up of a tanker or a real catastrophe in Iraq that stops the flow of that oil,” said Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas.
“Right now with respect to prices, we may experience bumps and occasional reprieves where the price drops, but I think the overall direction of prices will be upward as world oil suppliers are being challenged to meet demand,” Baxter said.
Jamal Qureshi, a market analyst at PFC Energy in Washington, is more optimistic about the ability of new fields coming online to meet growing demand through about 2015, but after that the picture looks grim.
“The world is increasingly well picked over,” Qureshi said. “In the past when you looked five to 10 years down the road, you knew what was the next big (source of supply) on the horizon. For the first time, nobody knows what that next big thing on the horizon will be.”
In the 1990s, global average surplus capacity was about 3 million barrels daily, down from 6 million barrels in the 1980s, Qureshi said. Today, global surplus capacity is about 1.5 million barrels, he said. Other analysts have suggested that spare production may even be less than 1 million barrels.
Almost all surplus capacity is in Saudi Arabia, but most of the Saudi spare capacity is heavy oil, rather than the preferred light, sweet crude, Qureshi said. That’s a problem because many refineries are not equipped to handle heavy crude, he said.
“China needs sweet crude,” Qureshi said. “You can throw as much Arab heavy at them as you want to, but they can’t take it.”
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(Contact Joan Lowy at LowyJ(at)SHNS.com. Distributed by Scripps Howard News Service, www.shns.com)
