Sunday, February 27, 2011

Pump Prices Could Hit $4 This Year in the U.S.

February 27, 2011

Pump prices could hit $4 this year

Saudi Arabia could be key in coming years as new leaders take power

By Jenny Munro and David Dykes
Staff writers

Turmoil in the Middle East and North Africa is pushing crude oil prices skyward, with gasoline prices following.

Sen. Lindsey Graham, R-S.C., said in the Upstate this past week that the unrest in the Middle East “is not some distant thought.”

“You're looking at $4-a-gallon gas by the end of this year,” he said. “The more unstable the Mideast, the more you're going to pay in gasoline prices.”

After increasing rapidly all week long, average gas prices in the Upstate jumped nearly 11 cents a gallon on Friday to $3.152 a gallon.

Economists are concerned about where the prices will go, how high they will go and the effect on the fragile U.S. and world economies. Consumers worry they'll be affected adversely by higher gas prices and higher costs associated with increased shipping costs of products.

Higher energy prices have already cut into January's retail sales numbers, though the hit to economic activity will be more dramatic if oil prices rise, on a sustained basis, to above $115 a barrel, said economist Mark Vitner and analyst Joe Seydl of Wells Fargo's Economics Group. At that point, GDP growth would be weakened.

They said that higher oil prices have not yet had a discernible impact on Wells Fargo's economic forecast, but that “we continue to believe that a sustained increase to $115 a barrel or more would have a meaningful negative impact. Higher energy prices of this magnitude will reduce incomes through higher gasoline prices and rising transportation costs, which will impact food prices both directly and indirectly.

“Real after-tax income would be about 0.6 percent lower for 2011 if prices were to remain above $115 per barrel through the end of the year. Reduced after-tax income would restrain the rebound in consumer spending, shaving at least 0.3 percentage points off 2011 growth,” they said.

Libyan leader Moammar Gadhafi's grip on power has continued to slip as rebels control the eastern part of the country and fighting increased in and around Tripoli, the capital. The mayhem has disrupted crude exports from Libya, which produces about 1.6 million barrels of crude per day and has the biggest oil reserves in Africa.

The uprisings shaking the Arab world reflect popular calls for change, especially among young people demanding reforms, Graham said.

“In the Mideast, your lot is cast based on the tribe you're in or your position in life,” he said. “And the world is changing and these young people in the Arab world are saying, ‘I've had enough.'”

Graham said, “We've got to challenge old friends to do better and we've got an opportunity to replace some enemies that have been thorns in our side.”

“These are dangerous times, and it will take the best of this country to succeed,” he said.

David Bodde, a Clemson University professor with energy experience, is looking beyond the current unrest in North Africa and the Middle East and is not sanguine about the mid-range future.

He said the futures market — the bets that are made daily by international oil traders — suggest a gradual increase in prices from now to the end of 2012. He anticipates that crude could be $100 a barrel by the end of this year, adding about 10 percent to the cost of gasoline at the pump. Crude on Friday was $97.70 a barrel but that is likely to drop as the unrest eases.

Traders also look at a range of prices that could occur, Bodde said. During the Egyptian unrest the range for traders was from $60 to $170 a barrel but is probably somewhat higher now. It changes on a daily basis. The traders have a 95 percent belief that these prices could happen.

The highest price “will be if something goes bonkers in the Middle East,” he said. “They see much more risk on the upside than risk on the downside.”

Fears of the Libyan disruption, with the current idling of between 500,000 and 750,000 barrels a day of production, has caused a rapid spike in crude oil and gasoline prices. However, the price of crude fell from as high as $103 a barrel on Thursday to nearly $98 a barrel after the International Energy Agency said the disruption was about half what was first announced.

Bodde said that Libyan oil has a disproportionate effect on prices because it is light, sweet crude, the most desirable type.

But another subtle tension in the region is found in those countries with a split between the religions of their rulers and the majority of the population, he said. That is found in Bahrain, with Sunni rulers and a primarily Shite population.

However, Saudi Arabia — which has 20 to 25 percent of the world's oil reserves and also produces light, sweet crude — is the key, said Bodde, who has done consulting work with Saudi Aramco, the state-owned national oil company. The country produces around 8.3 million barrels a day of crude, more than any other single OPEC member. Last year, it was the second largest producer of oil, following only Russia.

“They are in this strange meta-stable state,” he said, explaining that meta-stable means any small event could easily push the country into turmoil. A major part of the country's problem is demographics. The Saudi princes' average age is 83, with the youngest 77. But 60 percent of the Saudi population is under age 18 and “these are the ones tuned in to satellite television, mobile phones and social media” and other types of communication.

“Within five years, we will see a transition” there, he predicted. “The transition is unlikely to be smooth. Even if not violent, it will be turbulent.”

The real question is whether the Saudi royal family can create a succession plan that brings in younger people with the same skills the current rulers have. But Saudi Arabia, with a monarchy, has more benefits in its favor than a country ruled by a dictator, Bodde said. It can remove governments and ministers and have the money for social programs, with the possibility of remaining somewhat above the fray.

Bodde said that a Saudi transition, at best, will include a period when people don't know who's in control. The end result could be a democracy, but it could just as easily be a theocracy, Bodde said. “Theocrats love money, too. But they could use oil as a weapon.”

Even if the United States increases its oil drilling and production, it would change little when it comes to prices, he said. “The price is a world price. We can't escape from Saudi Arabia.”

The world currently consumes about 85 million barrels of crude a day, he said. That is the amount of oil that must be replaced by new discoveries. Oil is a finite resource and eventually “it gets too expensive to get to,” Bodde said.

Although the U.S.–Saudi alliance of interests has been remarkably durable, “the best thing we can do now is get off oil,” Bodde said, adding that ethanol is not the answer. “We need to transition ground mobility toward electric power as quickly as we can.”

Even if the entire U.S. fleet of vehicles moves aggressively toward electric power, it would take at least 20 years, he said. But “we can begin the journey. If you never begin, you never get there.”

Stewart Spinks, chairman of Spinx Oil, said the industry expects a diminished demand for gasoline in the United States as hybrid and electric cars become a larger part of the market. Electric cars are now viable, he said, and “it's the first time the industry has said for real that these cars will affect demand.”

Also, improvements in the efficiency of internal combustion engines could help lower U.S. need for oil, Bodde said. Extended-range electric vehicles also will be needed. Those vehicles would have a small engine to generate power for the battery that would turn the wheels of the vehicle, he said. That engine, which might use gasoline, also could be run with diesel fuel and eventually with a hydrogen fuel cell.

Another short-term possibility is to use natural gas to fuel U.S. cars. The country has a relative abundance of that fuel, he said. Natural gas can be made into liquid fuels or vehicles could have natural gas engines. This is currently a niche market, although some fleets operate on natural gas.

But Americans and the rest of the world are likely to be faced with gas prices higher than they are today before the transition off oil is made, he said.

Prices of $5 or more a gallon “would be a shock. It would be an adjustment. I expect we will have to do that,” he said. Europe already pays prices in the $5 to $6 range.

But Bodde said he's optimistic about the future.

“I really think that we are serious” about the danger, he said. “I think we're at the point now where we realize it's not plausible to depend on oil long-range. It's simple security — economic security and national security.”

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