GO
Loading...

Oil Prices Find a Sweet Spot for World Economy

Clifford Krause|The New York Times
Wednesday, 31 Mar 2010 | 9:58 AM ET

Oil prices have done something remarkable over the last half-year or so: they have barely budged.

Memories are still fresh of the chaotic climb to $147 a barrel only two summers ago, accompanied by gasoline costing $4.11 a gallon. The spike led to accusations from drivers and politicians that oil companies were price-gouging. Then crude prices plummeted along with the economy, to around $34 a barrel just over a year ago, only to double again in a matter of months as confidence began to recover.

off shore oil rig
off shore oil rig

And there the price has stayed, more or less, since August, reaching a rough stability in the $70 to $83 range.

Economists and government officials say that if prices remain in that band, it could benefit the world economy, the future security of energy supplies and even the environment. The price is high enough to drive investment in future oil production and in supplies of alternative energy, they note, but low enough that consumers can bear it.

“It’s a sweet spot,” said Kenneth S. Rogoff, a Harvard professor of international finance. “It’s not too low that it’s crushing demand for renewable energy sources or causing debt and fiscal crises in oil-exporting countries. And it’s not so high that it’s driving African countries deeper into poverty and threatening the recovery in the U.S. and Europe.”

Gasoline prices have stabilized along with oil prices, with the average national price for a gallon of regular gasoline ranging from $2.50 to $2.80 since June. Prices are expected to go as high as $3 a gallon during this summer’s driving season. That is a relatively high price by historical standards, but it is more tolerable than in the summer of 2008, when prices exceeded $4 a gallon for weeks, and rose above $4.50 in a few states.

Oil prices have jumped somewhat this week, but they are still within the band they have occupied for months. Light, sweet Texas crude closed on Tuesday at $82.37 a barrel.

Oil Tomorrow
CNBC's Sharon Epperson discusses the day's activity in the commodities markets, and looks ahead to where oil is likely headed tomorrow.

Energy experts say that several far-flung global developments have converged to put supply and demand in relative equilibrium, at least for the time being.

Members of the Organization of the Petroleum Exporting Countries have remained fairly disciplined in complying with their announced production cuts. Meanwhile, among non-OPEC producers, growing oil output in Brazil, Russia and the Gulf of Mexico has counterbalanced production declines in the North Sea, Alaska, Venezuela and Mexico.

On the demand side, growing appetites for oil in China, India and other developing nations have been offset by declining demand in the United States and Europe, because of their slowing economies, conservation efforts and growing use of biofuels.

“The current price range provides a geopolitical benefit,” said David L. Goldwyn, the State Department coordinator for international energy affairs. “With ample capacity in oil, and commercial inventories at five-year highs, markets are well positioned to absorb any potential supply disruption, even without resorting to strategic stocks.”

While the last four decades have been punctuated by various oil price booms and busts stemming from oil embargoes, wars and recessions, periods of relative stability lasting months or years have been commonplace.

Not surprisingly, oil producers prefer stability to plan their investments. “The worst thing that happens in our industry is volatility,” said G. Steven Farris, chairman and chief executive of Apache Corporation. With prices stabilizing, his company has increased its exploration and development budget by 50 percent, to $6 billion, this year.

The new return to balance is rooted in the price spike that occurred from 1999 to 2008, when oil prices climbed from under $20 to nearly $150 a barrel. Those high prices performed their elementary economic function: they called forth additional supply.

As prices rose, producers invested in expensive exploration and production projects around the globe. At the beginning of the last decade, fewer than 20 drilling ships were capable of finding and developing deepwater oil; today there are well over a hundred. Saudi Arabia and Russia undertook big expansions of their production capacity.

When oil prices suddenly collapsed in late 2008, future supply gains were put in doubt. Several large companies postponed decisions on whether to go forward with big projects to develop oil sands in Canada, for instance, and smaller independents slashed their exploration budgets.

But now most of the suspended oil sands projects are going forward, with an estimated 580,000 barrels of new capacity under construction. Meanwhile, many of the independent oil companies are pumping up their oil exploration investment budgets as well.

“If we still had $35 oil prices, you would not have seen us be nearly as active in the Gulf of Mexico,” James T. Hackett, chairman and chief executive of Anadarko Petroleum, said in an interview. With prices recovering, he said his company was moving forward with an aggressive program of installing 30 deepwater exploration and appraisal wells this year in the Gulf, Asia and Africa, each costing $50 million to $200 million.

“An $80 price curve tends to work for us,” Mr. Hackett added.

The biggest long-term threat to the new balance is growing consumption in China and other developing countries. But some analysts express hope that such countries can curb their oil demand growth as they build power transmission lines that will enable them to replace inefficient diesel generators with alternative power sources like gas and nuclear.

Stable, relatively high prices also may encourage conservation. Energy experts note that American drivers still have an incentive to buy efficient vehicles with gasoline prices at $2.80 a gallon, while high oil and low natural gas prices are encouraging use of compressed natural gas vehicles and biofuels in many countries.

“The price range we are in is positive for encouraging diversity of supply,” said Mr. Goldwyn, the State Department energy official. “It’s high enough so that countries that subsidize the price of oil still have a high incentive to reduce those subsidies and it’s high enough to support energy-efficiency measures that are positive for mitigating climate change.”

For all the good that stable prices can do, however, no one is willing to predict they will last forever.

“Demand will change; supply will change,” said Christof Rühl, chief economist of BP, the oil company. “The world changes all the time.”

  Price   Change %Change
APA
---

Featured

Contact Energy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More