Oil and gasoline prices have risen to their highest levels in two years, and analysts say prices could shoot up dramatically this year as the thirst for fuel grows in the U.S. and around the world.
The former head of Shell Oil has warned that gas prices could hit $5 a gallon by 2012 because of fast-growing demand in emerging countries such as China and India, where more and more people are buying cars, combined with restraints on drilling in the U.S. in the wake of last year's disastrous Gulf oil spill.
Less-worrisome forecasts are calling for a rise in gas prices to $3.75 a gallon by spring from today's $3.07 average level, with premium crude prices easily exceeding $100 a barrel this year as demand for oil around the world returns to pre-recession levels last seen in 2007.
"We'll definitely see $100 oil," Carl Larry, president of Oil Outlook and Opinions, told Platts Energy Week TV last week. "The way things are going — the cold weather, supply issues — $100 oil is inevitable and it's on its way." Higher gas prices will follow the lead of oil, as they usually do, he said.
Premium crude prices surged to nearly $92 in New York trading last week before falling back to end at $89.18 at the close of trading Thursday.
Mr. Larry said the spike in energy prices is being driven by robust growth in oil consumption in Asia as well as steadily rising demand in the U.S., which remains the world's largest consumer of oil.
"All signs point to an economic recovery, and that's going to increase demand," he said.
Energy consultant Wood Mackenzie estimates that developing economies pushed world oil demand last year to 86.7 million barrels a day — 100,000 barrels more than in 2007 — and will feed further demand growth to 88 million barrels in 2011.
The Organization of Petroleum Exporting Countries was mistaken in blaming the uptick in prices on "speculators" rather than an unexpectedly strong increase in demand in the developing world last year, and that led the oil ministers to put off any increase in production at a meeting last month, Mr. Larry said.
He said that was reminiscent of mistakes the oil cartel made in 2007 that led to a run-up in prices to $147 per barrel in mid-2008 — a record high that helped throw the world economy into recession.
The return of developments similar to those that led to the surge in energy prices in 2008 is attracting investors and speculators into the oil market, where they see the chance to make money by further driving up prices, he said.
Mr. Larry does not see as dire an outlook as does John Hoffmeister, former president of Shell Oil who now heads the activist group Citizens for Affordable Energy. He sees $5 gas by 2012 because politicking and gridlock over energy issues in Washington are jeopardizing access to U.S. energy supplies and have virtually shut down new production in the Gulf of Mexico.
"If we stay on our current course, within a decade we're into energy shortages in this country big time," he said last week. "Blackouts, brownouts, gas lines, rationing — that's my projection based upon the current inability to make decisions."
While the Obama administration lifted its moratorium on deep-water drilling in the Gulf weeks ago, Mr. Hoffmeister said huge regulatory barriers to development remain, and will prevent more than one or two "token" wells from being drilled in the next two years.
Analysts attribute the sudden jump in energy prices in the past month to several developments besides growing demand and restraints on supply.
Because oil is priced in U.S. dollars, it tends to rise when the dollar falls. The dollar has been declining recently in response to moves by the Federal Reserve and Congress to further stimulate the U.S. economy in a way that generates enormous budget deficits that the Fed is helping to finance by printing dollars and purchasing Treasury bonds.
Investors also are starting to bid up the price of oil and other commodities such as gold and copper, as they did in 2007 and 2008, because those commodities hold their values when the dollar is falling and are seen as good hedges against inflation.
Speculators also are zeroing in on evidence that world oil production may not keep up with fast-rising demand, creating the potential for tight markets and oil shortages especially if the U.S. starts experiencing healthier economic growth.
With global production nearly flat at circa 86 million barrels a day since 2004, some analysts fear that the world may already have reached so-called "peak oil" output, thus may be unprepared for another big run-up in demand like that seen in the past decade.
Tom Whipple, analyst at the Post Carbon Institute, said the International Energy Agency appeared to concede recently that the world reached peak production of 70 million barrels a day of conventional crude oil from underground wells in 2004.
Still, the agency continues to predict that technology breakthroughs will produce new oil sources that will replace the world's fast-declining major wells because it is under political pressure to do so from the United States and other developed nations, Mr. Whipple said.
The world's political leaders do not want to admit that the world economy cannot grow without oil and any absolute limit in supplies means the end of growth, he said.
In the meantime, prices will escalate, he predicted.
"Oil prices are nearing the point that, based on what we saw in 2008, they will do serious to devastating economic damage to the global economy," he said. "The idea that oil prices will remain below economically damaging levels for the next 25 years seems far-fetched."
David Greenlaw, an economist at Morgan Stanley, does not see a cataclysmic scenario or energy price shock in coming years, but agrees that supplies remain tight as a result of fast-declining wells in Mexico, Alaska, the North Sea, Russia and other major producing regions.
Nonconventional sources of oil like the Canadian oil sands and oil shale deposits in the United States will ease some of the strain, he said, but will not be able to make up for the falloff from conventional wells.
"Some fear that rising energy prices will be a chronic headwind for U.S. and global growth," he said. "We recognize the hurdles, but we think such fears are overblown."
A sudden and sustained surge of $30 in oil prices would "threaten the U.S. consumer and the economy," he said. But Morgan Stanley expects to see only gradual price increases that will not be "a major threat to the economy," he said.
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