REALITY CHECK: US OIL INDUSTRY SEES NO NEAR-TERM PRICE DROP
By Gary Rosenberger
NEW YORK (MktNews) - U.S. oil executives say tight inventories, a resurgent Asian economy and a reinvigorated OPEC will keep energy prices at elevated levels at least through summer.
Some suggest that gasoline prices, now averaging about $1.50 a gallon nationwide, could go as high as $2.00 a gallon when the summer driving season hits a peak, particularly if worldwide demand continues to outrace supply.
They also note that dramatic price increases for distillates like gasoline and heating oil have not prompted any deterioration in demand, a sign that the economic consumption remains on a very robust footing.
They point out that a year ago, when gasoline prices averaged less than a $1.00 a gallon (the Department of Energy says average gasoline prices this week were at $1.49 a gallon), consumption was 1% lower than it is today.
Though industry players say OPEC nations should agree to production increases at their next meeting March 27, there will be a lag between rising production and lower fuel prices, particularly with the peak driving season getting in the way of things.
Most officials add that the market is self-regulating and current prices may already have set the stage for increased exploration and drilling -- and, if OPEC has its own best interests at heart, it will increase production to thwart any possibility of a recession.
Fred Gorell, a Chevron spokesman, argues that very tight supplies at a time of strong worldwide demand were the main constituents in reversing oil's drop to uncharted depths a year ago.
"You had oil-producing nations independently ramp up crude oil production at a time when the economy of Asia suffered significantly, creating overhanging supplies when there was a reduction in demand," he said.
But with OPEC reducing production by 4 million barrels a day and consumption now outpacing production by around 2 million barrels a day, inventories are bone-thin with no expectations for a recovery before the summer driving season, he said.
"There's been a reversal of the supply-demand equation from the international crude oil market's point of view -- inventories are near 10-year lows in all categories of crude oil, diesel and motor gasoline," he said.
Gorell, citing trade publications, also noted problems with "a number of West Coast refineries" that hampered regional production and creating further localized price pressures.
Ironically, he noted that despite fuel prices having risen 50% in the last year, U.S. demand for gasoline is up 1% from the same period.
Despite higher fuel prices, "more individuals and businesses are deciding to do things that require gasoline," he said.
While there is some inelasticity of demand when it comes to gasoline, the fact that demand has strengthened in the face of sharply higher fuel prices speaks to a robust economy, he said.
"There are just not that many good substitutes -- you can put off driving, use public transportation -- but normally we would see a reduction in demand," he said.
Refiners also have done their part in reducing inventories by having adopted real-time inventory techniques from retailers in the refining and marketing of petroleum products as a cost-cutting measure.
"Most of the time, that's good for the consumer -- just not in times of tight supply," Gorell said. But he believes that there is a limit to this atmosphere of high crude and distillate prices.
"I have to believe that the laws of supply and demand would dictate that higher prices will eventually create more inventory -- that it will have the reverse effect of closing down wells and delaying investment in exploration and drilling," he said.
He stated that there are only two scenarios that would engender a drop in oil prices at this time -- a recession brought on by too-high energy prices and over-production brought on by OPEC discord -- neither of which seem very likely.
He added that Chevron's policy all along has been one of "constancy of purpose" -- a steady policy of drilling and exploration in the face of fluctuating market conditions.
The direction of future inventories is unpredictable -- but the bias is toward keeping them lean, one official said.
The official noted that oil companies are increasingly viewing undrilled oil as a form of "storage" -- as opposed to the costly above-ground tanks that are the traditional measure of inventory.
In fact, inventory building is considered a bad idea when prices are too low or too high, he said.
For instance, at $10 a barrel, oil companies think they're better off keeping inventories "underground" rather than extract them at a loss. At $32 a barrel, there are few who would speculate that prices will go much higher and choose storage over the spot market.
Geoff Sundstrom, a spokesman for AAA, said "it would be a good thing" if Department of Energy estimates that gasoline will "top out" at another 20 or 30 cents a gallon this summer prove true.
"We're concerned that gas prices could go as high as $2.00 a gallon -- we think that would have a severe impact on the travel industry, for instance," he said.
He also considers it a good sign that consumers have basically brushed off the increases and continue to drive big cars longer distances.
"It means the U.S. economy is not in a recession. It means that U.S. consumers can better withstand increases in prices," he said.
"It's amazing that we've had prices go up as much as they have and there's been no detectable effect -- it seems that people who have $35,000 to spend on SUVs don't consider $1.50 a gallon an issue," he said.
"But we also think there's going to be a breaking point," he said.
"If there's a place where people will change their behavior it's at $2.00 -- people at that point will change the types of vehicles they drive and alter their vacation plans," he said.
"If gasoline prices double from where they were last year, will people try to economize in other parts of their budget? Also the increased costs of transportation will eventually have to be passed on," Sundstrom added.
In the previous two years, gasoline prices actually declined during the peak driving season, but Sundstrom strongly doubts a repeat in 2000.
"We often think about prices in terms of seasonal increases and peak-use -- but what goes on with the world economy, geopolitics or the inability of OPEC to organize itself can outweigh seasonalities," he said.
"But OPEC is organized for the first time in many years, and in the scenario that we're dealing with prices have no place to go but up," Sundstrom predicted.
Ron Planting, an economist for the American Petroleum Institute, believes that a lot is riding on the next OPEC meeting.
"If OPEC, Mexico and Norway increase production significantly it will take the tightness out of the market," he said.
"There are some differences of opinion on pricing by OPEC members, but at least a majority have some concern that if prices go too high, they'll spur economic problems for their customers," he said.
Planting noted that current prices for crude and distillates remain inside a kind of frame of reference for most consumers, which is why demand remains strong at $1.50 a gallon.
"Part of it is that the rebound is from the lowest inflation-adjusted price since the Great Depression," he said, adding that from an inflation-adjusted standpoint the all-time high was about $2.50 a gallon in the early 80s.
He also observed that while demand is up 1%, the rate of increase has slowed from a high of 3% in '98 and 2% in '99.
That demand for gasoline continues to be positive is not surprising "in an economy where everything from computers to casual business attire is seeing growth," he said.
But at least one sector, the nation's trucking industry, foresees an advanced stage of gloom and doom.
"We're getting pummeled -- diesel is at $1.49 a gallon, which may not sound like a lot to the average motorist paying the same amount, but gasoline isn't 20% of the average household budget," said Bob Costello, chief economist for the American Trucking Association.
Costello said that fuel surcharges, where they can be extracted from customers, do not adequately cover the additional cost of fuel.
"There's the potential for a lot of small carriers to go out of business," he said. "I know of small independents that owe their fuel suppliers a lot of money and they've been cut off. That is not a good situation." |
