We'd better get used to it as oil prices barrel upward
Houston Chronicle, May 19
By Loren Steffy
IF you drive one of those monstrous SUVs, you're not going to like what Boone Pickens has to say about the price of a barrel of oil.
"I think you could see $45," he says. "We're getting pretty high. All the fundamentals would indicate they can go even higher. "
In other words, the $41.85 a barrel we saw Monday on the New York Mercantile Exchange — the highest intraday price in the 21 years that the contract has been trading — may look cheap by midsummer. So might gasoline prices of $1.80 to $1.90 a gallon, which are the norm around Houston.
Pickens predicts gasoline may top $3 in the coming months.
This is a variation on a theme for Pickens, and it's been largely ignored by the rest of the industry until recently. The Dallas oilman has been saying since last year that oil prices are likely to stay well over $30 a barrel for a long time. Most industry pundits at the time predicted a brief spike, then a return to $28. Now, he's even more blunt: "I think you'll see $50 before you see $30 again."
Pickens, who turns 76 on Saturday, is well known for his hostile takeover bids for Gulf Oil, Phillips Petroleum and Unocal back in the 1980s. More recently, he's gotten a lot of ink over his plans to sell water from under his ranch in the Panhandle.
In 1997 he set up BP Capital, a private trading operation that has, by his account, made him more money than anything he's ever done. Investors who put $1 million in his oil and natural gas fund seven years ago would have a return of about $22 million today. In all, Pickens, who also has an energy equity hedge fund, oversees $675 million in energy investments.
As high as gasoline prices are, they aren't yet high enough to convince people to leave the Hummer in the garage. The question is, at what point do prices get so high that people stop driving? Pickens is betting we'll get some clues over Memorial Day weekend, the official kickoff of the summer driving season.
"I thought a long time ago that the public had mentally accepted $2 gasoline prices," he says. " They just realize that $2 gasoline isn't that expensive compared to other markets around the world, so $2 was digested. Now I don't know how much more they're willing to accept."
Gasoline for $3 a gallon may actually help the situation, although not for drivers of Hummers or Suburbans or other land barges. Higher gas prices may curb demand, which will ease the current squeeze in refining.
"Oil isn't the driver of the gasoline price; it's the refining capacity," Pickens says.
Talking to Pickens, I'm reminded of just how much things have changed in the oil patch. The industry hasn't responded to higher prices with the flurry of drilling we've seen in the past.
The U.S. working rig count is at its highest in a year, but it's increased only 11 percent compared with a 41 percent increase in oil prices during the same time. New wells, of course, don't mean new production. Domestic oil production has fallen by 10 percent, to 5.8 million barrels a day, since 1999, according to the Independent Petroleum Association of America.
Here in Texas, we're not used to such a dichotomy. We've always taken comfort in the idea that while we might pay more at the pump, at least higher crude prices help our economy and create jobs for our oil companies. Remember the 1980s, when we used to fantasize about $100 oil? Well, if Pickens is right, we're almost halfway there, but without the euphoria we felt when $40 oil made another Texas city worthy of a weekly television soap opera.
These days, there are fewer places to drill, and the best exploration prospects take more capital to tap.
Meanwhile, worldwide demand for oil continues to rise. Currently, the world's oil producers are churning out about 80 million barrels a day, and Pickens says he doesn't believe there's excess capacity of more than 2 million barrels beyond that. That's not a lot of wiggle room.
Pickens endorses the theory that world oil production has peaked, which draws rancorous debate in the industry. Some experts disagree, arguing that Kuwait and Saudi Arabia still have untapped oil because they've had no need to explore, given their vast producing reserves. And improved seismic and drilling technology allows producers to extract more oil from older fields.
In the short term, though, Pickens' prediction that oil would stay above $30 has played out, driven by increasing demand, unrest in the Middle East and a lack of refining capacity. None of those is likely to change in the next few months, which lends credibility to his call of $45 or even $50 oil.
And that's likely to mean a long, hard summer for SUV owners.
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