In Congress and on the campaign trail, high gasoline prices are loosening opposition to offshore drilling. But there is no panacea for drivers this summer. As head of the Energy Information Administration (EIA), a non-policy component of the Energy Department that collects and analyzes energy data, it is Guy Caruso’s job to forecast how long the pain at the pump will last. The bad news: likely through 2009. Below, Caruso explains why oil prices have risen so precipitously and what could eventually cause them to drop back to historical levels.
Q: What has changed in the last 10 years?
There are two things that I think top the list. One is the very strong global economic growth since ’02. We’ve had six years in a row now where we’ve had some of the strongest growth ever recorded by the [International Monetary Fund]. That has concentrated in places like China and India — places that you hear about — but also even in Latin America.
What that has meant for oil demand is that we’ve had, on average, for the last six years, about 1.4 million barrels per day, per year of growth.
On a percentage basis, there is very little cushion in the system. And any time events took place that threatened supply or added to demand, the only balancing item was price. In economist parlance, short-term demand and supply responsiveness is very low. It takes a huge price change to rebalance supply and demand in a market that is so tight.
Q: How do you account for oil speculation in your projections?
The way we handle that is we look first at the fundamentals: What are the demand numbers I just talked about, and where supply is coming from, and what is the lack of spare capacity? And we find that just looking at those fundamentals really explains much of the price run-up.
There are obviously other things going on here. Geopolitical fears over the Middle East. Nigeria has had unrest. Venezuela has had problems. All of these things contribute.
But the way we look at those things ... is that [investors] are reacting to the fundamentals. It’s not the other way around. Our view is that fundamentals are pulling the markets along and the investors are looking at the same factors we are and saying they think this market has more upside potential.
Q: Is there anything that Congress can do or that the administration can do to lower gas prices?
The near term is very difficult because much of the change, either on demand or supply, will take time.
The EISA bill — Energy Independence and Security Act — was a good start in terms of improving efficiency in automobiles, improving efficiency in other appliances and other energy-using equipment, adding biofuels to supply.
We think the components of [EISA], when you look at what our projections were before the bill and then after the bill, would reduce demand for petroleum by 2 million barrels a day in 2030 from what it would have been without the provisions of the bill.
We use 20 and a half million barrels a day now. We see it going up to about 23 million now. Previously we were saying 25 million barrels.
Q: If [demand] continues to go up, do we get any price benefit from the bill?
We think that over time, this short-run, low elasticity of the supply will actually improve and we will get more responsiveness by consumers purchasing more efficient equipment, especially automobiles.
Secondly, the high prices will attract investment in alternative sources of liquid fuels. That includes petroleum in places that would have been uneconomic at, let’s say, $50 a barrel that are now economic.
We’re seeing that already in natural gas, but oil takes a bit longer for a number of reasons.
One is so much of the prospective areas are off-limits. Not only in this country, but you can’t drill in Saudi Arabia unless you are Saudi Aramco. You can’t drill in Kuwait unless you are the Kuwait Petroleum Company. There are other places around the world where we know there is oil, but where companies have not been given access.
Q: How accurate are EIA’s figures? Were you predicting that gas would be $4 a gallon?
Oh, no. ... We were low in our projections really every year for the last five years. We certainly did not anticipate some of the events that took place that are part of this story. Katrina and Rita, of course. Nigerian unrest.
There have been a lot of geopolitical events, unpredictable weather events, and frankly, the responsiveness on supply has been disappointing. We’ve been consistently too high.
On the one hand, our price projections were too low. On the other hand, we were too high in what we thought would be produced from some of the new non-OPEC supplies.
There have been big disappointments in a lot of places. We thought there would be more produced out of Russia than is produced now. The Caspian production has been slower to come online — Kazakhstan, Azerbaijan. There have been a number of delays to projects.
One of the things the economic boom that I started this story with has done is driven up the prices for all commodities. ... Most precious-metals prices have gone up probably as much percentage-wise as oil has. Cement. Steel.
Companies tell us that when they initially started these different projects, whether it be drilling or building a refinery or pipeline, the projected costs then were probably half of what they turned out to be.
Q: Getting back to oil speculation: A couple of weeks ago, when oil prices shot up $11 on that Friday, what do you think caused that?
Without a doubt, on any given day or even week, this rush of money certainly ... increases the volatility above and below the projection.
I have no doubt that the rush of investment has a volatility impact, but I don’t think that it is a driver of the market. It is a follower of those other factors. ...
There is this real uncertainty out there: “Gee, is there really going to be enough oil to meet this new growth coming from China and India?” And you get a lot of conflicting views about peak oil, and a lot of people are investing on the belief that this is a long-term structural change.
We think that’s true, but not to the extent that it’s onward and upward forever. But there will be a peaking and declining. The real question is the timing and the pace.
Q: What would drilling in the Arctic National Wildlife Refuge do for the price of gas?
We did a report for Sen. Ted Stevens [R-Alaska] which indicated from the day you start the clock running — approval, permitting and other things — it’s about a 10-year process before you see first oil.
Even at that point you have a gradual ramp-up to approximately 800,000 barrels a day. It takes a very long time to develop.
When you have something that takes that long and the market anticipates it, you don’t get that much of a price impact.
Q: Same way for the Outer Continental Shelf?
Depends — for the natural gas, it could be developed quicker. Because of the arctic conditions, it takes longer to develop that. So for some of the Outer Continental Shelf it would be a quicker process. Probably five to seven years before you see first gas or oil. ...
The amount in OCS areas withdrawn from leasing is 18 billion barrels of technically recoverable resources for oil; 77 trillion cubic feet of natural gas.
Proved reserves that we have now are 22 or 23 billion barrels. So this is almost a doubling of that. How quickly it could be developed and brought on stream would be very difficult to project. But [the potential resource] is a big number.