Don’t Get Used To Cheap Oil, Analysts Say

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HOUSTON, TX — All that money you’re saving these days at the gas pump? You might want to put it in the bank.

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.

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

No one knows for sure, but some analysts say the spike could happen as soon as next year, perhaps in 2011 or 2012.

think those supply limits will come back to bite with a vengeance,"
said Sean Brodrick, a natural resources analyst at Weiss Research Inc.

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

"We wouldn’t be bailing out the automobile industry
today … had we not had this crazy situation with oil prices," said
Daniel Yergin, chairman of Cambridge Energy Research Associates, a
consulting firm, and author of "The Prize," the Pulitzer Prize-winning
history of the oil industry.

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.

Brodrick said 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, said Oppenheimer & Co. analyst
Fadel Gheit. 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.

adds up to another round of price shocks for consumers that’s probably
inevitable, said Bruce Vincent, president of Houston-based Swift Energy
Co., an independent producer.

"Demand will start growing, supply
will start coming down, and you’ll have that intersect again where
prices will take off dramatically," Vincent said. "(But) it’s not
healthy for the economy. It’s not healthy for the industry."

the futures markets are pricing in more expensive oil. While a barrel
of light, sweet crude for February delivery costs about $50, the market
for September oil is already over $60.

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.

When the
world economy recovers from the current malaise, "Are we going to get
another one of these violent cycles where prices overshoot and you get
back in the same spiral?" asked Yergin. "Some volatility is inevitable
in global commodity markets, but this kind of extreme volatility is bad
for everyone. It creates deep wounds."

Another part of the
problem, said Judy Dugan, research director for the nonprofit Consumer
Watchdog, is that oil companies didn’t invest enough in new exploration
over the past several years, as they raked in billions in profits.

screaming, ‘Drill, baby, drill,’ but they didn’t invest anywhere near
where they should have been investing when prices were high," she said.
"Now that prices have crashed, they say prices are too low, knowing
full well prices are going to go back up."

Consumer Watchdog
Consumer Watchdog
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