The Wall Street Journal: The Relentless Rise in Oil Prices: Royal Dutch Shell PLC cautioned that their customers also could suffer supply disruptions.: Thursday 1 September 2005
Demand Defies Cost Increases
Amid Razor-Thin Excess Capacity;
Pain at the Gasoline Pump Mounts
By CHIP CUMMINS, BHUSHAN BAHREE and PETER A. MCKAY
WHAT WILL STOP the great oil-price spike of 2005? Increasingly, it looks as if it will have to stop itself.
After Hurricane Katrina's damage to the Gulf of Mexico -- the largest fuel-production hub in the U.S. -- the world energy market is unlikely to see a big increase in supply soon. The Bush administration yesterday said the government would lend refiners emergency oil stockpiles to ease refining disruptions, but that won't provide significant, long-term relief.
Any price letup, then, will have to stem from a drop in demand, which has proven resistant to the doubling of crude prices over the past two years. Signs of economic deceleration in the U.S. and China haven't abated petroleum consumption. In the U.S., for example, drivers have stayed on the road as low interest rates and rising home values offset the sting of prices at the pump -- so far. Yesterday, as images and news of Katrina loomed, some Americans paid more than $3 a gallon for gas, and there were reports of lines at the pump in some states.
At least some investors and analysts are calling a peak in oil, but tentatively.
"The stage is being set for lower prices in the future, but the timing remains uncertain," said David Kelly, economic adviser at Boston mutual-fund company Putnam Investments.
Jim Burkhard, an oil analyst at Cambridge Energy Research Associates, said oil demand is more affected by how long prices stay robust, not how high they spike. Oil futures, which are at nearly $70 a barrel, would have to rise to and remain at $75 a barrel for about three years to have the same economic impact as the oil shock of the early 1980s, he said. "There is no magic number at which we all decide to start driving less or turning down the heat," Mr. Burkhard said.
Benchmark crude-oil futures traded at more than $70 a barrel intraday, before closing at $68.94, down 87 cents from the previous day, on the New York Mercantile Exchange.
The pain is mounting for drivers and other end-users of fuel, especially in the U.S., which is both the world's biggest market and the main price setter. So far this year, gasoline demand in the U.S. has been rising despite prices that hit an average of $2.61 for a gallon of regular gasoline just before Katrina struck.
On futures markets, the gasoline price jumped 17.55 cents to $2.65 a gallon yesterday on Nymex. Since retail prices tend to be about 65 cents higher than wholesale, many forecasters said U.S. drivers could see $3-plus-a-gallon gasoline for months.
Things could get nastier. Yesterday, one of the largest independent U.S. distributors of wholesale gasoline, Petroleum Traders Corp. of Indiana, said BP PLC had cut off gasoline supplies because of Katrina. Earlier, Exxon Mobil Corp. and Royal Dutch Shell PLC cautioned that their customers also could suffer supply disruptions.
Marshall Adkins, director of energy research at Raymond James & Associates, predicted that crude will hold at current levels for the next few weeks, but retail gasoline prices could soar, possibly to $4 a gallon.
Philip Verleger Jr., an oil economist and senior fellow at the nonprofit Institute for International Economics, said that gasoline prices probably can't climb high enough to reflect Katrina's damages to refineries. Instead of soaring to stratospheric highs of as much as $10 a gallon to match demand and supply, he sees a much likelier scenario in shortages that lead to lines at the pumps. But in a cruel twist of fate, Katrina's ultimate legacy could be an energy glut, Mr. Verleger said, should it lead to a recession.
"I am betting that Gulf Coast refineries and natural-gas facilities come back on line just as demand starts to collapse," Mr. Verleger wrote in a research report.
Elsewhere, there are signs oil demand is slowing. In July, Japan's crude-oil imports fell nearly 5% amid mild weather from a year earlier and Italian drivers pumped 10% less gas.
Even in places where demand is still strong, there are dislocations: A handful of countries, including oil producer Indonesia and major consumer China, are groaning under the fuel subsidies they provide in their home markets, which are hugely popular but also hugely expensive. Of course, these subsidies protect everyday consumers and thus also feed demand, which could plunge were the subsidies to be cut or eliminated.
Eric Chaney, chief European economist at Morgan Stanley in London, said there are signs the Chinese already are switching fuels away from high-price oil to less expensive energy sources like coal, leading to what he sees as a flattening of demand there recently.
Back in the U.S., a slowdown in petroleum demand "is still a prospective" development, Mr. Chaney said. He believes oil will peak around $70 to $75 a barrel and fall back to the $40- to $45-a-barrel range as higher prices eventually erode demand -- but that fallback might not happen until 2007, he said.
Demand for crude oil from which gasoline and other fuels are refined never has been higher in the U.S, reaching 21.3 million barrels a day on average in June, according to the most recently revised data provided by the Department of Energy. That edges past the previous record seen last December.
So far, the global oil industry -- led by the biggest producer, Saudi Arabia -- has been able to supply that oil by pumping flat out. But with a razor-thin margin of excess pumping capacity, the unprecedented disruptions caused by the hurricane have ended any semblance of balance.
There is one possible upside from Katrina's destruction: Depending on how quickly crude-oil production facilities in the Gulf are put back on line, there may be a significant buildup of crude supplies in the region. Indeed, inventories of crude already were rising before Katrina struck, and even more stockpiling could mean lower gas prices once refiners get back up.
In other commodity markets:
COFFEE: Futures surged to one-week highs on the New York Board of Trade on speculative buying and short-selling. Industry members expect much of the 1.6 million bags stored in New Orleans may be lost to structural and water damage or health concerns. The September contract rose 3.25 cents, or 3.4%, to 97.75 cents a pound.
LUMBER: Prices climbed on the Chicago Mercantile Exchange to their daily exchange-imposed limit of $10 per 1,000 board feet. Television reports on hurricane damage sparked short-covering, said Brian Leonard of Rosenthal Collins Group LLC. September lumber rose 11% to $297 per 1,000 board feet.
-- Susan Buchanan and Lester Aldrich contributed to this article.
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