When crude oil prices closed above $100/bbl on US markets for the first time on Feb. 19, Senate Energy and Natural Resources Committee Jeff Bingaman (D-N.M) responded immediately.
"Today's record-setting close for oil illustrates our energy vulnerabilities," he declared. "Right now, we depend on everything going right, and when there is a refinery outage or the threat of cutbacks abroad, our prices go up. Congress took some meaningful steps to get out of this rut last year when we required, for the first time in 32 years, that fuel economy standards for cars and trucks go up.
"There is still a lot left to do in energy policy. We need to be sure energy markets are functioning well and aren't being driven by manipulation or excessive speculation. We need to manage our nation's Strategic Petroleum Reserve in a more sophisticated way. And we need to make sure that we strike the right long-term balance between protecting the environment and producing new energy domestically, whether our production is from traditional sources of oil and gas or from new alternatives such as biofuels," Bingaman continued.
The US Department of Labor's Consumer Price Index, which was released on Feb. 20, showed a 0.7% increase in energy costs on an adjusted basis during January. This followed a 1.7% increase in December and a jump of 6.9% in November. The CPI's energy index had a 43.6% compounded annual rate during the three months ended Jan. 31, according to DOL's Bureau of Labor Statistics. On an unadjusted basis, it grew 19.6% over 12 months, compared to 4.3% for all items in the CPI, BLS said.
Government economists and analysts generally agree that oil markets will remain volatile and prices will stay high for the next few months. They're less certain about what will happen beyond that period.
Will prices ease?
While conceding that oil markets probably will remain tight with higher prices through June, the US Energy Information Administration has predicted that prices could ease in 2008's second half as production capacity increases and demand growth slows down. But two economists at the Federal Reserve Bank of Dallas have suggested that traders in the world's oil markets don't expect prices to fall very far despite recent volatility.
The Dallas Fed and EIA analysts generally agreed that retail US oil product prices are poised to climb in the weeks ahead. EIA said in its latest Short-Term Energy Outlook on Feb. 12 that it expects both motor gasoline and diesel fuel prices to average more than $3/gal this year. It said that the monthly average gasoline price is expected to peak near $3.40/gal this spring.
Using a pricing model they developed, Stephen P. Brown and Raghav Virmani of the Dallas Fed said in their latest quarterly energy update at the end of January that they expect spot gasoline prices to peak at $2.25/gal the week before Memorial Day. This would result in a record national average retail price of about $3.30/gal, 7 cents more than last year's record which also was set the week before Memorial Day.
Brown and Virmani also look for higher refining margins as the summer driving season gets under way, noting reports in January that refiners were cutting production runs because margins weren't profitable.
EIA suggested that prices could ease after June as production capacity is added both within and outside the Organization of Petroleum Exporting Countries. It suggested that OPEC production during the first quarter will average about 32.2 million b/d, approximately 600,000 b/d more than its average for 2007's final three months. "The increase mainly reflects higher production from Saudi Arabia, Angola, Kuwait and the United Arab Emirates," the Feb. 12 STEO said.
Growth outside OPEC
In a supplement to the forecast, EIA said that oil production outside OPEC could grow by 900,000 bbl a day in 2008 and 1.5 million b/d in 2009, compared with 500,000 b/d growth in 2007. "The largest contributions to non-OPEC supply growth over the next two years are expected to come from Brazil, the United States, Azerbaijan, Russia, Canada and Kazakhstan," it said. Sizable production declines in the United Kingdom, Mexico and other non-OPEC producing nations are expected to partially offset this growth, it added.
The outlook represents an acceleration of non-OPEC supply growth from the 200,000 b/d it averaged the past three years, EIA said. Some projects which now are expected to come into production during the current forecast period were delayed from earlier planned start-ups, it explained.
"There is also some evidence that the sustained period of higher oil prices has motivated additional investment at existing assets, which has acted to partially stem the decline in production at older, more mature oil fields," EIA said. But it also warned that recent history suggests that actual non-OPEC capacity growth falls short of projections.
It also suggested that falling demand could also help reduce upward price pressure. In its latest STEO, it said that it expects world oil consumption to grow by 1.4 million bbl a day in 2008, 200,000 b/d less than its January prediction because of increased risks of a global economic slowdown. It lowered its US petroleum consumption growth projection for the year to about 140,000 b/d from 230,000 b/d last month.
"The outlook over the next two years points to an easing of the oil market balance in 2008. Higher production outside of [OPEC] and planned additions to OPEC capacity should more than offset expected moderate world oil demand growth and relieve some of the tightness in the market," EIA said. It predicted that the spot price for West Texas Intermediate crude, the US benchmark, would average about $85/bbl in 2008 and $82/bbl in 2009.
Might not materialize
Meanwhile, Brown and Virmani of the Dallas Fed suggested in their latest quarterly energy update that an oil price decline might not necessarily materialize over the next year and that markets could remain volatile.
They noted that oil prices rose sharply at the beginning of 2008, peaking at $99.63/bbl on Jan. 2, due to escalating tension in the Middle East, fears of disruptions in Nigeria, further declines in the US dollar's value and growing concern that oil resource development may not match demand growth. But they added that the peak was still short of a record: Oil prices would have to exceed $102.81/bbl to break their April 1980 record on an inflation-adjusted basis.
The increase was followed by a decline to $87.32/bbl in the third week of January as declines in stock markets worldwide and fears that a global economic slowdown could reduce oil demand growth exerted downward pressure. By the end of the month, prices were back around $90 in response to optimism that monetary easing and fiscal stimulus measures would have a positive economic impact, and to OPEC's declaration that market fundamentals did not warrant a production increase, Brown and Virmani said.
"While long-term oil price expectations strengthened by about 10% since November, these expectations remained little changed through the volatility seen in January. As of Jan. 31, the long-term oil-price expectation, measured by the December 2010 price, stood at just above $88. Futures prices, consequently, showed far less backwardation at the end of January than they did at the beginning, suggesting that the market did not expect a strong decline in oil prices from their January-end levels," they continued.
Meanwhile, prices for WTI for March delivery on the NYMEX stayed above $100/bbl for a second consecutive day on Feb. 20 as it closed at $100.74.
Contact Nick Snow at [email protected]
