Some oil executives worry prices may fall
By Jad Mouawad The New York Times
SUNDAY, DECEMBER 4, 2005
NEW YORK Hold on to your gas guzzlers: Cheap oil may once again be just around the corner. Even as consumers worry about high gasoline prices and rising heating bills, oil executives in London, Texas and Saudi Arabia seem to be concerned about a prospect of falling oil prices.
In a recent speech in Singapore, John Browne, the chief executive of BP, spoke of a possible sharp drop in prices and called current levels "unsustainably high."
John Hofmeister, head of Shell Oil in the United States, said during an interview, "This high price cycle is artificially inflated."
The notion of a steep falloff in energy prices may seem far-fetched.
After all, in the past year, the market has experienced crude oil prices that touched $70 a barrel; huge disruptions in the Gulf of Mexico; strong demand from the United States and from the world's fastest-growing market, China; continuing problems in producing Iraqi oil for export; and mounting tensions with Iran, a large OPEC exporter.
If anything, most of those situations would point to a sustained period of high energy prices. Most analysts said they expected crude oil prices to remain above $40 a barrel for the foreseeable future.
But the oil business has witnessed a succession of booms and busts, and oil companies have found it impossible to balance their future production with the world's need for oil. Too much capacity, and prices fall; too little, and they rise.
Today, producers are again under pressure to step up production and refining, and to increase investments to get more oil to the markets quickly. But oil executives and government ministers are concerned that if demand slowed down, even a little bit, those investments might create a large oversupply in two to three years, pushing prices down again.
Only a few years ago, the industry was dealing with a glut in production capacity, sluggish demand and a financial crisis in Asia. All of that led to an oil-price collapse in 1998, with futures contracts falling to about $10 a barrel.
Prices eventually rose, but the experience left a lasting impression among producers. As Saudi Arabia's oil minister, Ali al-Naimi, said recently at a news conference in Riyadh, "As producers, we don't want to build capacity without demand."
This recurring debate in the industry may seem odd. Recently, the theme has been the end of cheap oil, prompted by a surge in Chinese demand and a lack of spare production capacity. Traders' concerns that producers would struggle to catch up with consumer demand pushed prices to $60 a barrel from $30 in less than two years. Doomsayers saw signs that the world was running out of oil.
But there are indications that high oil prices may be coming to an end. After briefly topping $70 a barrel when Hurricane Katrina interrupted supplies from the Gulf of Mexico, prices have fallen on the New York Mercantile Exchange. Analysts at Citibank said oil might fall to $50 a barrel, and possibly less, in coming months.
"The big issue is what demand is going to be next year," David O'Reilly, the chief executive of Chevron, said by telephone. "High prices tend to attract higher production and higher supplies. The question then is, What will happen to the demand side? The fact is, we rarely know what is going to happen."
Naimi of Saudi Arabia said his country had "expressed a concern with consuming countries that it would be helpful for producing countries to have a better forecast and a more reliable projection of what demand is."
But Naimi, and most oil experts, know that predicting the future is more art than science.
In November, the International Energy Agency, an adviser to industrialized nations on their energy policy, pared its growth forecast for 2006 for the fourth-straight month. It now expects demand to grow to 85 million barrels a day next year, up 2 percent, or 1.7 million barrels from this year. This year, however, demand is expected to grow by 1.5 percent.
Part of the uncertainty lies in what is going to happen to the Chinese economy. In 2004, global oil consumption grew by 3.7 percent to 83 million barrels, more than twice the average annual growth over the past decade. China alone accounted for a third of that growth. Its demand for oil surged 15 percent.
This year, Chinese growth is expected to subside somewhat, expanding at a rate of 3.3 percent, according to the energy agency. Growth is expected to pick up again in 2006, though, rising an estimated 6 percent, thanks to strong car sales and electricity generation.
But such wild swings have led some analysts to express doubts about the reliability of information from China. The reality is that it will take some time before anyone knows for sure what Chinese demand will be.
There are other clouds on the horizon, among them fears of an economic slowdown in the United States and of an outbreak of the avian flu, which could cut international travel, hitting airlines hard and hurting regional economies.
In a widely read and much-discussed report, Cambridge Energy Research Associates, a consulting firm in Massachusetts, estimated that global production would grow by 16 million barrels - a jump of nearly 20 percent - by 2010, far outstripping the estimated growth in demand over that period.
For oil executives, the experiences of the 1985 and 1998 price collapses remain a stronger influence than their belief that the world has entered a period of more expensive energy.
Lee Raymond, the chairman of Exxon Mobil, said in his recent Senate testimony. "In the energy industry," he said, "time is measured in decades."
Raymond said that Exxon Mobil was involved in a $13 billion project in eastern Siberia that began 10 years ago and is expected to produce for 40 years.
"All told, that's more than 50 years for one project," he said, adding, "Fifty years ago, Dwight Eisenhower was president." He might have added that this was before the U.S. interstate highway system was built and sport utility vehicles became the vehicle of choice.
Depending on your point of view there are different things you can read into this article.