Hope on the horizon for oil prices, analyst says

Hope on the horizon for oil prices, analyst says Sky-high oil prices are not a foregone conclusion in the future and could recede back to the $40 per barrel range in the mid-term once new production comes online in the coming years, according to James Bartis, a policy researcher at the RAND Corp.
   Bartis, speaking at a Capitol Hill forum to announce the kick off of RAND's Supply Chain Policy Center, said consumers won't see much relief from fuel prices until 2009, when oil prices could drop as low as $40 per barrel, he said.
   The underlying price is closer to $40 than it is today because of market volatility and could swing back, according to oil companies.
   'We should not confuse volatility with an underlying trend,' Bartis said.
   He characterized reports that oil reserves are permanently declining as a 'myth,' adding that production capacity will grow 20 to 25 percent in the next decade.
   The high price of oil has spurred oil companies to ramp up exploration and development of new oil fields after more than 20 years of low investment during the previous low-price era.
   The return on investment makes it profitable for companies to try enhanced oil recovery techniques and search alternative sources of energy such as heavy oil, tar sands in places such as Alberta, Canada and Venezuela, liquid coal, biomass and oil shale. Bartis said U.S. oil shale deposits in Wyoming and Colorado are equivalent to three times the amount of oil reserves in Saudi Arabia, one of world’s top oil producers.
   The period of flat capacity has coincided with unexpectedly high oil demand in the United States and Asia in recent years, as well as political instability that has roiled the markets, Saudi oil rationing, nationalization of oil companies in places such as Venezuela that limits production, and a fragile refining infrastructure.
   No new refineries have been built in the United States in the past 35 years, and some refineries are out of action or producing at lower capacity due to recent accidents, scheduled maintenance and damage from Hurricane Katrina.
   The fact that crude oil represents only about half the price for diesel fuel, which is selling for roughly $3 per gallon at the pump, indicates how refining and distribution problems are amplifying the situation in the oil markets, Bartis said. About 50 cents per gallon goes for state and federal fuel taxes and the remaining $1 for refining and distribution. The situation is even starker in the gasoline market because of shorter term contracts and a more complex marketing environment.
   Freight transportation providers and shippers have experienced steep run ups in fuel prices and surcharges during the past two years. Fuel is one of the top two expenditures for transportation providers.
   Refiners have no incentive to maintain reserve capacity because unless utilization rates are above 90 percent they don't make enough money to justify more investment.
   The long-term outlook calls for oil prices to rise again, but in a very gradual fashion, Bartis predicted. As prices rise again, more expensive alternative energy sources will kick in.
   Many alternative energy sources 'are very competitive at $70 per barrel and extremely competitive at $100 per barrel,' Bartis said. It takes about 25 years to commercially develop new energy sources.
   Bartis cautioned investors and policymakers from jumping on the alternative energy bandwagon until the volatility sorts itself out. 'If the new equilibrium is $40, then not many of these technologies will pan out,' he said.
   Oil price contracts on the New York Mercantile Exchange jumped up more than $2 to close at $64.86 per barrel on Thursday, and surged to more than $70 per barrel for London Brent crude on news that Murphy Oil shut a crude unit at its refinery in Meraux, La. The shutdown exacerbates the already tight refining situation and escalated worries about low gasoline inventories ahead of the summer driving season.