Processing Magazine

Don''t get used to cheap oil

January 7, 2009

All that money you''re saving these days at the gas pump? You might want to put it in the bank. The same cheap oil that''s providing relief to drivers and businesses in an awful economy is setting the stage for another price spike, perhaps as soon as next year, that will bring back painful memories of last summer''s $4-a-gallon gas. According to the Associated Press the oil industry is scaling back on exploration and production because some projects don''t make economic sense when energy prices are low. And crude is already harder to find because more nations that own oil companies are blocking outside access to their oil fields. When the world emerges from the recession and starts to burn more fuel again, and higher demand meets lower supply, prices will almost certainly shoot higher. Some analysts say oil could eventually eclipse $150 a barrel, maybe even on its way to $200. In such a scenario, gasoline would easily cost more than the record high of $4.11 a gallon set last summer. Oil trades at about $50 today. No one knows for sure, but some analysts say the spike could happen as soon as next year, perhaps in 2011 or 2012. High prices at the pump last summer -- more than $4 per gallon for gas on average -- helped slash demand for oil. From November 2007 to October 2008, Americans drove 100 billion fewer miles than the year before, according to government figures. The nation''s biggest automakers lurched toward bankruptcy as sales of sport utility vehicles and trucks plummeted. Oil giants like Exxon Mobil, Chevron and ConocoPhillips have yet to announce their 2009 capital spending plans, but analysts say even the cash-rich companies are likely to shelve some projects. Already, Royal Dutch Shell has postponed a near-doubling of production in Canada''s oil sands -- an operation that analysts say only makes economic sense when oil is about $20 a barrel more expensive than it is now. Marathon Oil says it expects to cut capital spending by 15 percent in 2009. Canceled or postponed oil and gas projects could contribute to a drop of 7 percent or more in global oil production this year. Smaller oil producers could cut spending by 30 percent. The majority of U.S. crude and natural gas is supplied by smaller, independent companies, not the Exxons and Chevrons, and smaller producers have been forced to pull back because of frozen credit markets. All this comes as the Organization of Petroleum Exporting Countries, which controls about 40 percent of world crude supplies, embarks on its biggest single production cut ever. Big Western oil companies like Exxon and ConocoPhillips have also been cut off from crude reserves under the control of nationalized oil companies from Saudi Arabia to Venezuela. Late last year, the International Energy Agency said it will take more than a trillion dollars in annual investments to find new fossil fuels over the next two decades in order to avoid shortages that could choke the global economy.