New Energy Crisis Brings Old Worry: High Oil Prices

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Sunday, September 17, 2000

New Energy Crisis Brings Old Worry: High Oil Prices

By JAMES FLANIGAN, Times Senior Economics Editor

The most serious energy crisis since the 1970s threatens to slow world economies and promises years of renewed concern over an old problem: the price and availability of energy. President Clinton last week cited the threat of global recession as he urged oil producing nations to increase production. Economic growth is slowing in South Korea and India because of higher prices for oil. The economies of European countries, already disrupted by protests over high gasoline prices, are especially vulnerable.

The U.S. economy, with inflation remaining low, doesn't seem to be suffering the effects of high energy prices. So far, the nation's greater productivity and its reduced reliance on oil and gas compared to the 1970s have offset the energy turmoil. But behind the aggregate statistics, small businesses are being hurt by prices for gasoline, diesel fuel, natural gas and heating oil that have doubled so far this year. And the true effect of the higher prices may not be realized yet. Competition has generally prevented business from raising prices to offset their higher energy costs. But their incomes are being cut, just as every consumer of gasoline, diesel fuel and natural gas has less to save or spend on other goods because of the drain of higher energy prices. There is no shortage of oil or of natural gas, experts insist. And in fact, increased supplies of imported oil arriving in the next two months are expected to ease concerns over heating oil availability for the winter.

But if there isn't a shortage, there is little oil or gas to spare, either. Commodities that were in surplus a year ago suddenly are in tight supply and subject to interruptions. Indeed, the world's industrial system has so little cushion that the slightest hiccup can cause an extreme reaction. That's why natural gas prices surged 3% on Friday, to $5.34 per thousand cubic feet--more than double the average gas price a year ago--because storms in the Gulf of Mexico could threaten gas production there. The buffer of surplus oil production in the world has been cut in half in the last year as prosperity in Asia, Europe and the United States has increased demand for fuel. Cambridge Energy Research Associates estimates that the oil surplus "cushion" is now equivalent to the annual output of Iraq. Thus Saddam Hussein, once again directing threats at Kuwait and Saudi Arabia, has leverage over the world's economies. This year's electricity troubles in California are a symptom of these imbalances, and they will continue. Moreover, the state's growing reliance on natural gas to create its electricity comes at the wrong time, as gas supplies are drawn tight.

Nationwide, and especially in California, the Internet-driven economy's need for super-consistent power supplies is adding to pressures on electricity systems. Internet systems like those used by most of the nation's major industries and institutions cannot be effective without a much more reliable flow of power than the power grid has traditionally supplied.

Energy Problem in the Making for Years Despite its seeming suddenness, the new energy problem has been taking shape for years, analysts point out. Relatively low prices for oil and gas in recent years caused a worldwide downturn in investment for new sources of fuel, said Joseph Stanislaw, president of Cambridge Research.

With little or no new supplies being developed since 1998, and demand rising as Asia's economies recovered from recession, today's tight supply situation was inevitable, Stanislaw said. To be sure, oil companies and governments of producing countries remain skeptical of a long-term new tightness in the supply-demand relationship. OPEC ministers were reluctant to agree to Clinton's recent demand that they boost production because the last time they increased oil output significantly, in 1998, the result was a plunge in the price of crude to an average of less than $12. Investors fled oil company shares and Wall Street criticized companies for investing in a "commodity" business. So companies used their capital for other things, like acquiring each other, rather than exploring for oil and gas.

Though it is hard to picture at times like this, oil remains prone to oversupply, say some analysts. "Even a mild recession today would cause prices to go down to about $22 a barrel," said Albert M. Anton, partner and head of research at Carl H. Pforzheimer & Co., a New York investment firm specializing in oil and gas issues. "And prices would certainly come down if President Clinton released oil from the Strategic Petroleum Reserve." Clinton can release oil from the reserve to alleviate temporary oil price pressures on the U.S. economy. He is considering such a move but is waiting to gauge the effect of increased OPEC output. "We need to watch the situation closely," Clinton said Friday. Even so, a release from the strategic reserve would be only a stopgap move in what has become a new era for oil, some analysts say. The long U.S. economic boom of the '90s gradually ratcheted up demand for energy, but sluggishness in Europe and stagnation in Japan limited the world's appetite. And Asia's short but intense economic crisis in 1997-98 helped to create a mini-glut of crude oil. Today, the picture has changed. Much of Asia is rebounding strongly, and Western Europe is enjoying its strongest economic growth in years. Along with the remarkable continuation of the American boom, the industrialized world is robust. And a new economic player, China, increased oil purchases dramatically this year to fuel its rapidly growing economy, analysts report. That's why, unless they induce a global recession, high energy prices are unlikely to be temporary. New oil and gas production cannot be brought in quickly.

Little Benefit Now From Investments Though investments now are increasing to develop oil and gas in the deep waters of the Gulf of Mexico and offshore Angola and other West African countries, it will take two to three years to bring supplies to market from such sources, analysts estimate. So experts recall the 1970s, the decade when two oil crises sent oil from $2 to $40 a barrel and inflation to double digits and caused two crippling U.S. recessions. "We're entering a new period of higher energy prices--not as severe as the 1970s, but a new, higher level for the next half decade," said Thomas Petrie, president of Petrie-Parkman Associates, a Denver firm that researches energy investments. If the average crude oil price in recent years has fluctuated between $15 a barrel and $21, now it will fluctuate between $22 and $28 a barrel with occasional spikes to current levels of $35 a barrel, Petrie predicts. These crude oil prices could translate into hikes of 20 to 50 cents a gallon in prices for gasoline and other fuels. In Europe, where value-added taxes are tacked on to rising fuel prices--with the burden compounded by a sinking euro--the effect on living standards has sparked demonstrations by truckers, taxi drivers and others in recent weeks, shutting down economic activity. In Asia, every $1 rise in the price of crude oil hits economies such as South Korea with a double whammy, making exports less competitive by increasing costs and also depressing sales of automobiles, which Korean companies make. In the United States, official figures showing low inflation belie the plight of small businesses and other institutions that are paying double last year's prices for fuel. "Fuel prices are killing," said Jorge Rodriguez, chief operating officer of Mercado Latino, a family-owned firm in City of Industry that has 150 trucks delivering Latin food specialties throughout Western states. But his higher costs can't be passed on in product prices because of competition. So the firm earns less or cuts costs to offset the new burden. "I worry about some of our smaller suppliers who may not have the accounting systems to know what's happening to them with these prices," Rodriquez said. The U.S. economy, already slowing, will slow further as the burden of energy costs restricts small business and leaves consumers with less money to spend. If oil prices rise 33% to the "new higher level" that analysts predict for the next five years, it could clip 2% a year from U.S. economic growth--meaning $165 billion less in annual output, 5.5 million fewer jobs.

How Slump Abroad Would Affect U.S. Add the ripple effects of a slowdown in Europe or Asia, whose businesses and consumers would buy fewer American products and undercut this nation's big export machine, and the direction is clear.

Such a slowdown would shift the economy's perspective, from today's enjoyment of growth to yesterday's concern over energy prices. Hybrid gasoline-electric cars that get 50 to 70 miles per gallon will be fashionable; gasoline-hungry sport-utility vehicles will arguably become less fashionable. Energy efficiency in industry will become a hot topic again, and thermostats in homes will be turned up a notch in summer and down in winter. Such conservation measures worked before. When the first energy crisis hit with full force in 1975, the U.S. economy required a 1% rise in energy use to produce a 1% growth in American living standards.

Today, thanks to more efficient use of energy in industry and more fuel-efficient cars, the U.S. economy requires a 0.6% rise in energy for a 1% rise in gross domestic product--less than two-thirds the previous total.

Small Changes Led to Energy Efficiency Incremental changes rather than great breakthroughs produced that energy efficiency. Electric motors were redesigned to work more efficiently in factories, and workplaces rearranged to conserve energy. Thermostats controlled temperatures more precisely. Cars today, even with the popularity of SUVs, average 27 mpg, compared with 18 mpg in the late 1970s. Similarly, analysts predict, this new era will see waves of investment in energy-saving devices and adaptations of old equipment. Fuel cells powered by hydrogen, solar electricity and local power generation will increase.

But development of such advances will take most of the decade, experts say. Meanwhile, the U.S. and world economies need both new energy production and new conservation measures to keep prices reasonable and continue the kind of economic growth that creates better jobs and maintains a good standard of living. Like the 1970s, this will be a challenging decade.

http://www.latimes.com/news/front/20000917/t000087881.html



-- Martin Thompson (mthom1927@aol.com), September 17, 2000


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