Age, Demand May Drive Oil Prices Even Higher

London Oct. 31, 2007 (From The Wall Street Journal via Dow Jones Newswire)

Oil at $100 a barrel? That may not be the worst of it.

Several leading oil experts, gathered here yesterday for an annual energy conference, sketched a near-term future in which mounting global demand and shrinking supplies push oil prices well past the $100-a-barrel mark.

Consuming countries, they argued, will simply have to deal with the fact that new pockets of oil are getting far harder and more expensive to tap. That, combined with years of underinvestment by the industry, has led to a tapering off of new oil supplies that will continue for years, despite rising energy demand in Asia, the Middle East and some industrialized countries.

Yet on a day when U.S. benchmark oil prices retreated from Monday's record, closing down $3.15 a barrel, or 3.4%, to $90.38 on the New York Mercantile Exchange, two ministers from the Organization of Petroleum Exporting Countries at the same gathering insisted that the immediate problem isn't too little oil.

Prices have jumped nearly 40% since early summer, the oil ministers of Qatar and the United Arab Emirates said, because of the slumping dollar, widespread Wall Street speculation and bottlenecks in the refining process.

"Please don't blame us" for record oil prices, said Abdullah al-Attiyah, Qatar's minister of oil, expressing a sentiment that is widely held among major oil-producing countries. "You have blamed us for 50 years."

The debate over what is driving the surge in oil prices is sure to get more spirited if prices continue to soar and oil executives, consumers and politicians seek to assign blame. But the feuding theories at this year's Oil & Money conference also show how hard it is to pinpoint a cause.

Sadad I. Al-Husseini, an oil consultant and former executive at Aramco, Saudi Arabia's national oil company, gave a particularly chilling assessment of the world's oil outlook. The major oil-producing nations, he said, are inflating their oil reserves by as much as 300 billion barrels. These amount to hypothetical reserves that are "not delineated, not accessible and not available for production."

A lot of production in the Middle East is from mature reservoirs, and the giant fields of the Persian Gulf region, he said, are 41% depleted.

Global oil and gas capacity is constrained by mature reservoirs and is facing a "15-year production plateau," Mr. Husseini said. He predicted that supply shortages will continue to add $12 to the price of oil for every million barrels a day in additional demand. Global demand, now at some 85 million barrels a day, was on average 10 million barrels a day lower in 1999.

Nobuo Tanaka, the new executive director of the Paris-based International Energy Agency, which is funded by the world's leading industrialized consumer nations, said he sees little likelihood the world's spare capacity for oil production will increase notably in the near future, partly because so many oil-rich countries continue to shun outside investors.

"The IEA says that despite the high oil price, market tightness will increase from 2009, because new capacity additions won't keep up with reduced capacity from existing fields," he said.

IEA analysts insist that a sufficient resource base exists to supply demand through 2030, but Mr. Tanaka said he isn't confident there will be enough investment, skilled workers and technology to actually get to that oil "in a timely manner."

Andrew Gould, the chairman and chief executive of Schlumberger Ltd., an oil-services company, expressed similar concerns, noting that 70% of the oil fields that now quench world demand are more than 30 years old. The growth in global demand since 2003, he said, has been roughly the equivalent of the daily output from two of the world's larger suppliers: the North Sea and Mexico.

"Our industry simply cannot cope with these kinds of increases," Mr. Gould told the assembly. OPEC countries supply about 40% of world production. But that slice is expected to increase in coming years as output decreases in non-OPEC countries such as Mexico and Russia. Saudi Arabia, the world's largest single supplier, is looking to increase production substantially into the next decade.

But with oil prices now flirting with $100 a barrel, OPEC officials have been aggressive in batting aside talk that they are to blame. "The market is increasingly driven by forces beyond OPEC's control, by geopolitical events and the growing influence of financial investors," said Mohammed bin Dhaen al-Hamli, the United Arab Emirates' oil minister, who also serves as OPEC's president.

Mr. Hamli said prices still are "far below" the all-time inflation-adjusted high of $101 a barrel, set in the spring of 1980 after the 1979 Iranian revolution shocked oil markets. His Qatari counterpart, Mr. al Attiyah, noted that gold prices also have been skyrocketing. "Why are people concentrating on oil and closing their eyes on gold?" he asked, adding later that he is "fed up" with people blaming OPEC for fluctuations in oil prices.

Both ministers said the cartel won't formally consider whether to increase supplies to the world market during a heads-of-state meeting in Saudi Arabia next month. The group agreed last month to add about 500,000 barrels a day to world production, effective Nov. 1.

A top official at the Energy Department disputed OPEC's claim that supply isn't an immediate challenge. "We think the market still needs more barrels, as we look toward the next year or so," said Guy Caruso, an administrator at the department's Energy Information Administration. "The problem is we don't have cushions," in terms of spare production capacity and spare crude stocks, he said. "We have relatively low and declining inventories and a refining sector that's finding it hard to get the crude it needs."

Copyright (c) 2007 Dow Jones & Company, Inc.


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