Unless US economic growth subsides, oil and gas companies should expect political silliness over energy prices to increase through November. Markets for oil products and natural gas will tighten as important national elections approach.
An alert from companies and industry associations is in order. It won't prevent mindless diatribes from politicians who never acknowledge the working of market fundamentals. But a warning about the growing potential for price increases would be helpful to consumers. It might even make some of them ignore the inevitable price rant.
Discomfort seen
Government market watchers see potential for consumer discomfort later this year.
"Oil market fundamentals, including the loss of 40-50 million bbl of Iraq crude, point to a significant future tightening of the market," warns International Energy Agency's current Oil Market Report. If global economic growth meets expectations, oil demand will swing from down 900,000 b/d year-on-year in the first quarter to up 1.5 million b/d by the fourth quarter. Unless members of the Organization of Petroleum Exporting Countries raise target production levels, the market will tighten enough to pull industry stocks in the developed world below the bottom of the 5-year average range by the end of September.
Under these conditions, at the height of an intense political campaign in the US, crude prices would rise rapidly, pushing product prices up as well. Opportunistic politicians would pile scorn on oil and gas companies. Sen. Carl Levin (D-Mich.) is already stoking suspicion with claims that the refining industry has become so concentrated that companies in some regions can manipulate product prices (OGJ, May 13, 2002, p. 80).
Pressure for a price surge late in the year will ease to some degree. Despite statements to the contrary, OPEC might raise quotas. Several times in recent years it has adjusted production targets early enough to moderate market swings and won compliance sufficient to make the moves effective. It would serve OPEC members' interests to do so again to keep leaping oil prices from threatening economic recovery.
But the group needs to act fast. Touchy politics in the Middle East and Venezuela might make quick action impossible. Even without a quota change, though, production from OPEC members will climb as crude prices rise.
The US Energy Information Administration's May Short-Term Energy Outlook assumes additional oil from OPEC. It cites a recent statement by Saudi Oil Minister Ali al-Naimi that "we will probably have to take action to increase the supply side."
Still, EIA sees a gradual increase in the price of West Texas Intermediate crude through yearend. The retail price of gasoline, demand for which will increase, therefore could rise by 8-10¢/gal by June from the April average of $1.40/gal, it says. The summer-long average would still be 10¢/gal below the year-earlier level. But that won't preclude political complaints about the increase.
The market for natural gas is tightening at the same time. The bargain prices consumers enjoyed from September last year through March have vanished. EIA's base case assumes a drift in the Henry Hub spot gas price to just below $3/Mcf this summer followed by a seasonal increase starting a month before the election. That might be the last sub-$3/Mcf gas consumers see for a while. Rapid depletion of current gas reserves and growing demand are intensifying questions about future supply. EIA expects the average wellhead gas price to increase to $3.10/Mcf next year from $2.80/Mcf this year.
Market information
For the industry to alert its customers to these trends would be a service. In an election year, of course, antioil politicians will brand any such warning as an effort to pry up energy prices with rhetoric. But oil and gas companies will have to endure undue political scoldings anyway as prices rise. They have nothing to lose and much to gain by telling consumers what's probably ahead.
Market information is good for consumers. Politicians suggesting otherwise should have to square their fuss with energy legislation now headed for House-Senate reconciliation that would raise the cost of gasoline manufacture, put a floor under the price of natural gas from Alaska, and foreclose exploration of important parts of the US petroleum resource. Lawmakers truly concerned about consumer interests would resist all those measures.
