Monday, October 04, 2010

Prepare for Higher Oil and Gas Prices

John Hofmeister, the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy, has some rather stark projections for the price of oil and gasoline. If he's correct, the outcome will adversely affect drivers, home-heating oil users, and American consumers in general.

Hofmeister says that future US energy production will be hampered by the offshore drilling moratorium that will effectively be in place until at least the middle of 2012. The oil industry veteran says that new rules won't even be in effect until the end of 2011.

Due to the moratorium, Hofmeister says Gulf oil production will be reduced by up to 1 million barrels a day. Imported oil now accounts for 67% of usage, but will rise to 75% by 2012. As a result, Hofmeister predicts that by 2012 crude oil will be up to $125, and gasoline will be between $4-$5 at the pump. And from there, he sees things getting even worse.

The heavy reliance on foreign oil puts the US in a precarious position as a super-power. In 1970, the US was still the world’s oil largest producer, but its crude production peaked at a level never since exceeded.

The US is currently the world's third-biggest oil producer, but its seemingly unquenchable appetite for oil also makes it the world's largest oil importer, by far. The US imports almost two barrels of crude for every one it extracts.

With consumption at roughly 21 million barrels per day, the US uses more oil than any other nation and equals the consumption of the next five largest national consumers combined (China, Japan, Germany, Russia and India).

However, demand for oil is increasing globally, particularly in developing nations, creating a growing competition for this finite commodity. In fact, global usage is outstripping new discoveries. For every four barrels of oil consumed, only one is discovered.

The International Energy Agency (IEA) notes the decline rate for oil production appears to have increased to about 7% annually. However, the IEA says that global demand should increase by 1.4%, or 1.2 million barrels per day, every year through 2015.

What is evident is that supply and demand are moving in the opposite directions, or, more accurately, the wrong directions. And what this tells us is that prices are going to rise.

“As excess supplies … shrink, oil prices should rise,” says Michael Bodino, head of energy research at Global Hunter Securities.

Perhaps Bodino hasn't seen the IEA data about the decline rate for oil production. Somehow, he envisions a 1% growth in global supply and 2% growth in demand. Based upon those projections, Bodino envisions $90-$100 oil in 2012.

Kevin Kerr, editor of Kerr Commodities Watch, thinks that may optimistic. For now, Kerr says he expects oil prices to range trade a bit longer and, "Then I expect a sharp move above the $90 level and a range of $90-$110 for some time, baring any unforeseen problems in the Middle East or other choke points.”

However, according to Kerr, within two years, crude’s record high price of around $147 “may seem cheap.”

“The long-term prognosis for oil prices is much higher simply due to growing global demand,” says Kerr. “While the economic turndown has slowed usage, the growth in places like China and India are increasing demand rapidly [and] as the economies of the planet improve, so will demand for oil and gasoline.”

Absent the ability to rapidly increase supply, that will result in higher prices for all of us, perhaps much higher.

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