As Oil Prices Decline, Natural Gas Threatens to Upset the Trend

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

December 18, 2000 As Oil Prices Decline, Natural Gas Threatens to Upset the Trend By NEELA BANERJEE

How much longer will this go on? That seemed to be the question for everyone who felt the pinch of oil prices this year, as the cost of a barrel of crude shot past $30 in late winter. The price hit $37 in September, the highest since the Persian Gulf war a decade ago, and gasoline prices in the Midwest climbed to more than $2.50 a gallon, igniting consumer outrage and government inquiries. But the stubbornly high price has begun to slip, falling to less than $30 a barrel earlier this month, even with winter bearing down and stocks of heating oil in the Northeast still sharply below last year's levels.

Most analysts now expect the price to descend in the first half of next year, but few think it will slide far below $25.

The timing of the shift surprised analysts. "We were expecting the price weakness to come, but not so soon," said Leonidas P. Drollas, chief economist with the Center for Global Energy Studies. "We were saying for some time that the fall could occur at the end of December or the turn of the year. We want to see how long it will go on for."

The gradual, welcome decline in the price of oil could be halted and even reversed, however, by the continually rising price of natural gas. The price of natural gas has quadrupled in the last 18 months, through a combination of high demand and lagging supplies. It does not appear that demand will abate soon: natural gas is used to heat much of the West and Midwest, which are experiencing some of the coldest weather in years, and it will fuel most of the new power plants that are now being built. The federal government has forecast that residential consumers who heat with natural gas will face a 50 percent increase in their heating bills this winter.

As a consequence of the high natural gas price, many industrial consumers and utilities that can use either gas or fuel oil in their processes are switching to oil. Such a trend, if it spreads, may not propel the price of oil very high, but it could certainly buoy it at or near current levels.

The decline in oil prices that is otherwise expected has been months in the making, starting in March, when the Organization of Petroleum Exporting Countries, under pressure from the United States, moved to increase production for the first time since late 1997. Over the year, OPEC raised production four times, lifting output by 3.7 million barrels a day.

But the increase took months to work its way through ports, pipelines and refineries and into inventories of gasoline and heating oil. The full impact of the production rise is only starting to be felt, analysts said. Although heating oil supplies are low, for example, they have been creeping up, which has calmed the oil markets somewhat.

A price dip should come as a relief to countries that consume the most oil. High energy prices have begun to pinch business, and there are indications they have slowed the world economy. When Americans should be splurging on holiday gifts, many are carefully watching their budgets, partly because of the high energy prices.

OPEC, despite relying almost exclusively on oil revenue to prop up its members' budgets, is not entirely against the idea of lower prices. The cartel's de facto leader, Saudi Arabia, has repeatedly stated that a price above $30 is too high and may threaten to set off a worldwide recession. If that occurred, oil demand would plunge and the one-note economies of OPEC would suffer.

But the vast rewards that high prices have rained on OPEC have made the notion of a high price for oil a moving target. Earlier in the year, OPEC oil ministers were saying they would like to see the price fall to $25 a barrel or so, but at the group's last meeting, in Vienna in mid-November, OPEC's secretary general, Rilwanu Lukman of Nigeria, said $30 a barrel was not dangerously high. "Developed countries can afford these prices fairly comfortably," Mr. Lukman said at the time. "This level of price is not exorbitant, nor is it destroying the world economy."

With demand for oil expected to take a seasonal dip in the spring, OPEC is concerned that its production increases this year could produce a glut of crude early next year and send the price tumbling below $25. OPEC's goal next year, as it has been much of this year, will be to keep prices at a level that fattens its economies without stifling demand elsewhere on the globe.

Toward that end, OPEC is likely to begin trimming daily production in 2001. The question of production cuts is expected to be on the table at the group's next meeting, in Vienna starting on Jan. 17. But oil prices are notoriously difficult to micromanage, and OPEC could bungle things badly by acting too quickly or slowly, cutting too much or too little. Experts have said that the traditionally fractious group has varying opinions about cutting production in January. It will still be the dead of winter in the biggest consuming countries. If supplies shrink as a cold snap strikes, the price of oil could skyrocket.

But some OPEC members may be itching to act because they remember what happened in Indonesia in late 1997. The group decided then to increase production, and the Asian financial crisis hit soon thereafter, sending oil prices tumbling. If OPEC acts in January, refiners and consumers will only begin to feel the reduced production in March. For the time being, the trick to keeping oil prices at an "acceptably high" level may rest outside the official framework of OPEC, said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.

Saudi Arabia has taken the lead before to increase production above the official quota allotted to it at OPEC meetings to prevent prices from rising too high. Now "the Saudis will take a look at the market and see where prices are headed and act accordingly," Mr. Goldstein said.

http://www.nytimes.com/2000/12/18/business/18ENER.html?printpage=yes

-- Martin Thompson (mthom1927@aol.com), December 18, 2000


Moderation questions? read the FAQ