Crude Prices: How High Until They Hurt?


SAN FRANCISCO – Crude oil prices may be at record highs, but they could very well go higher still – quite a bit higher. That was the message heard here last week by the refining industrys biggest trade group.

Speakers at the annual meeting of the National Petrochemical and Refiners Association told members that plenty of oil and other fossil fuels are available to meet the worlds growing energy needs. But they also argued that the ability to refine those fuels is being held back by environmental policies and other obstacles, creating a bottleneck that threatens the balance of energy markets.

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Crude oil prices this month have returned to record levels set last fall, driving gasoline prices in the United States to new highs, too. Several speakers at the NPRA meeting warned that crude prices may rise considerably higher before peaking – one suggested as high as $80 per barrel. They agreed the increases are due to tightness of supply – but maintained it is not for want of raw material.

Patricia Woertz, executive vice president of global downstream for ChevronTexaco Corp., noted that proved reserves of crude and natural gas have swelled 75 percent in the past 25 years.

Fossil fuels will remain the primary energy source fueling our economy for decades to come, she said.

The problem, she and others contended, is that industrys ability to turn those materials into usable products is being hampered by a variety of factors. The Organization of Petroleum Exporting Countries (OPEC) continues to control much of the worlds oil supply, but cannot increase its output without expanded infrastructure.

We are not saying that OPEC is running out of oil, said Arjun Murti, managing director of Goldman Sachs. But there is a question of allocating capital to create that capacity, and OPEC cant simply turn on the taps any more. OPEC nations, particularly those in the Middle East, need stability and economic development for infrastructure investments, Murti added, but Goldman Sachs believes they will continue encountering political strife.

In developed countries, speakers said, environmental regulations have constrained the refining industry in several ways. By forcing refiners to spend money on pollution reduction measures, they have diverted capital investment from capacity projects. In the United States, the tendency toward boutique fuels has reduced supply chain flexibility, increasing the likelihood of local, temporary shortages.

More than one speaker expressed surprise and concern at how readily markets have accepted the run-up in crude costs.

Energy [costs] just seem to be less relevant to corporate decisions or the economy, Sunoco Inc. Chairman and Chief Executive Officer John G. Jack Drosdick said.

Murti said it appears more and more that the only thing that can stop the rise in fuel prices is a change in consumer behavior – decisions by motorists to drive more fuel-efficient vehicles and by businesses and households to cut energy consumption.

Our view is that oil prices have to keep rising until the economy is affected, Murti said. Butcurrent prices appear to have had little effect, he added,and energy costs now account for 3 percent of the economy, compared to 7 percent during the energy crisis of 1979-80. He suggested that it may take crude prices of $80 per barrel – the level at which energy would account for 7 percent of todays economy – to compel changes by consumers.

Alejandro Granado, vice president of refining for Venezuelas national oil company Petroleos de Venezuela S.A., said nations in the Western Hemisphere should work diligently to develop a coordinated energy policy.

Ladies and gentlemen, we need to act and act quickly, he said. Inaction will lead to an energy crisis in the region.

Woertz said the U.S. government and industry should take a number of steps to help refiners meet the nations future energy needs. She said that governments should streamline processes for permitting new refineries and expansions and rationalize refiner liability rules. Refiners, she said, should foster better relationships with communities where they operate, lend more support to conservation and be more open to alternative fuels.

Drosdick predicted that new crude production and new refineries will be built outside the United States, closer to reserves. But he also raised hopes that existing American refineries can manage significant gains in output – especially with the market offering more incentive.

Ive got to believe were going to see a lot more [capacity] creep, Drosdick said. Creep is going to become crawl and even walk.

To the surprise of no one, Granado was asked to comment on PdVSAs plans for Citgo, its wholly-owned subsidiary in the United States. Venezuela President Hugo Chavez, a stringent critic of the United States, declared recently that PdVSA will divest Citgo and export the oil it now sends to the United States elsewhere. PdVSA has since softened its stance, saying it is considering what to do with Citgo.

Granado echoed the latter sentiment, saying the company is evaluating its U.S. subsidiary, along with operations in Germany, Belgium, Sweden and the United Kingdom. He did suggest that PdVSA is leaning toward redirecting resources from abroad to exploration and refining opportunities in Venezuela and neighboring countries.

As in any business, you change positions according to what is most convenient for the shareholders – in this case the Venezuelan people, he said.

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