Bye-Bye to Cheap Oil?

A cogent opinion on oil from the LATimes Op-Ed page. It has some
possibility of being accurate, but their may be some people with great
power who will manage to get more oil for the short term to bring down
prices from where they are today. An interesting developing story that
will become more and more a part of everyone's life in the next 10
years.

Say Bye-Bye to Cheap Oil
Surplus capacity is history. The jolts will start with $3 gas pump
prices.

<http://www.latimes.com/news/opinion/commentary/la-oe-roberts25mar25,1,4690190.s\
tory?coll=la-news-comment-opinions>

By Paul Roberts
For the tens of millions of American motorists patiently waiting for
gas prices to come back to Earth, the news from the oil markets is
not encouraging.

For the last year, government forecasters have reassured us that the
unusually high oil prices we've seen since 2002 — around $30 a
barrel — were temporary: As soon as global markets recovered from
the mess in Iraq, oil prices would drop and gasoline prices would
eventually follow.

Yet nearly 12 months after "victory" in Iraq, oil prices are at an
eye-popping $38 a barrel, or about $15 above the two-decade average,
and some forecasters are now offering a far less sanguine prognosis:
Not only will oil stay high through 2005, but the days of cheap
crude are history. These aren't exactly glad tidings for a global
economy designed to run on low-priced oil, nor for a White House
that gambled it could deliver low oil prices with a mix of
diplomatic muscle and market liberalization.

What happened? In simplest terms, what we're seeing are the final
months of a 25-year oil boom. That boom was sparked by the oil
shocks of the 1970s, when sky-high prices touched off a feeding
frenzy among oil producers. Eager to cash in on the good prices, oil
companies and oil-rich states drilled thousands of new wells, built
massive pipelines, developed fantastic exploration and production
technologies and generally expanded their capacity to find and pump
oil.

This surge in capacity eventually brought prices down and helped
buffer consumers from subsequent oil crises. When a disruption
occurred — for example, when Saddam Hussein knocked out Kuwait's
huge oil fields in 1990 — the world's other oil producers, such as
Saudi Arabia, simply tapped their own surplus capacity and filled in
the shortfall. Surplus capacity helps explain why oil prices since
1982 have averaged just $22 a barrel.

Now, however, the world's surplus capacity is disappearing. Many
Middle Eastern countries lack the cash to expand production. Private
oil companies are struggling to discover oil fields. Worse, even as
industry worries about supply, global demand is growing far faster
than predicted — largely because China's economy has outpaced even
Beijing's expectations. And as everyone knows, when supply falls
behind demand, prices head for the sky.

Oil-price anxieties are especially acute among big energy users like
the U.S., which burns a quarter of the world's oil production and
whose economy is extremely vulnerable to price spikes. Indeed,
nearly every severe global recession of the last 50 years has been
preceded by a jump in the price of oil.

That's why every U.S. president since Richard Nixon has sweated
bullets to keep prices down — mainly by bullying producers like
Saudi Arabia but also by helping oil companies develop new
production capacity outside the Middle East. Both George Bush the
elder and Bill Clinton worked assiduously with Western oil firms to
tap new oil fields in the Caspian region.

That also explains why the current administration has so
aggressively courted new allies in oil-rich (if democracy-poor) West
Africa and Russia. And why White House strategists saw Iraq — and
the much-awaited "flood" of Iraqi oil — as key to lowering world oil
prices, bolstering the U.S. economy and ending OPEC's 30-year
stranglehold on the global oil market.

Sadly, Washington's cheap-oil strategy isn't working anymore.
Hampered by terrorism and unrest, Iraqi oil production won't reach
hoped-for levels for years. Political turmoil has also throttled oil
booms in Russia and Africa. In short, the advertised wave of new oil
that was to bring prices down hasn't materialized. Demand,
meanwhile, shows every sign of increasing.

Barring the unexpected, oil prices have no place to go but up — and
the U.S. isn't well prepared for a high-cost oil future. The world's
most technologically advanced nation has made only feeble efforts to
develop alternatives to oil or to improve fuel efficiency,
especially in cars. And though some of this reluctance is cultural —
Americans like big cars and hate being forced to conserve — the main
factor is economic: Oil has been so cheap for so long that most
consumers simply don't worry about the risks of relying so heavily
on a single fuel.

And if U.S. voters aren't worried about oil, U.S. politicians aren't
either. However, such complacence will soon be untenable. Despite
the recent minuscule drop in gasoline prices, some forecasters
believe prices will soon head back up and could crest at $3 a gallon
by Labor Day — well past the point, experts say, when even oblivious
Americans, and their elected representatives, start to pay
attention. And though some of that increase stems from gasoline
refinery bottlenecks inside the U.S., the price of gasoline is
ultimately driven by the cost of crude, so attention must ultimately
fall on the oil market.

Of course, few of us will take the market's hint willingly. Many
motorists and some opportunistic politicians will reflexively point
the finger at greedy oil companies and nefarious "foreigners." But
eventually, all of us, from the man in the Oval Office on down, may
be forced to concede that the days of cheap oil are over and that
the U.S. really does need an entirely new approach to energy.
Received on Fri Mar 26 11:08:59 2004