Energy Information Administration develops two crude oil price

New Orleans CityBusiness, Jan 31, 2005 by Tommy Santora

Industry experts, analysts and investors are still playing the guessing game in trying to pinpoint energy price projections for 2005 and beyond.

The Energy Information Administration, an independent statistical agency in the U.S. Department of Energy, developed two projections in its 2005 Annual Energy Outlook, which projects crude oil prices for every year up to 2025 using two separate scenarios.

The first scenario assumes crude oil prices, defined as the average cost of imported crude oil, will close at $33.99 at the end of 2005, drop into the $20 to $30 price range in the next 20 years and then close at $30 in 2025. In this case, prices would decline as consumption slows and producers increase productive output in response to high market prices.

But the EIA didn't expect market prices to rise to record heights in 2004, leading to a second reference case, which says oil prices will close in 2005 at $43.63, then range between $30 and $37 the next 20 years and close at $35 in 2025.

We put into effect in the second case the amount of price volatility we have seen over the last nine months, said Paul Holtberg, spokesman for the EIA. Oil is a hard price cycle to predict but we can project based on the factors present both short term and long term.

Those factors are based on supply and demand.

The demand question centers around the worldwide recovery going on. Right now, everybody wants oil at the same time, said Eric Smith, consultant to the dean of Tulane University's A.B. Freeman School of Business and a former planner in the oil and gas construction industry. There is a stupendous demand in China, and that kind of ramp-up in demand with a fixed supply can cause price spikes like we have seen.

Crude oil prices peaked at $55.70 a barrel on Oct. 25, 2004, and have remained above $40 ever since. The average monthly oil price for 2004 was $37.77, or 32 percent higher than the 2003 monthly average of $28.53.

People's expectations have changed concerning oil prices, and the economy is comfortable with $35-and-above oil prices and ready to move forward, said Al Petrie, who handles investor relations for several New Orleans-area oil and gas companies. It's difficult to see oil falling below $35 anytime soon.

Oil and gas company investors agree.

Chris Edmonds, a research director at Pritchard Capital Partners, an investment firm headquartered in Mandeville, helped put on the Energize 2005 energy conference Jan. 4-7 in San Francisco for 108 oil and gas investors. Investors surveyed at Pritchard's conference believe prices will close at approximately $42 by December 2005.

From my perspective, the EIA is on target in its second case, said Edmonds. Crude oil will range from the high $30s to mid-$40s for the long term. A lot of people argue that crude oil prices are headed below $30 but I don't see it happening.

Edmonds' reasoning is twofold:

1. Long-term crude oil market fundamentals of supply and demand are in place.

2. China, Nigeria, India, Venezuela and the Middle East are all hot spots for drilling and as long as they are also politically volatile, prices will stay in the $40 range.

On the supply side, the Organization of Petroleum Exporting Countries pumps more than a third of the world's oil. OPEC agreed last month to cut production by 1 million barrels a day to keep prices from falling once winter ends. U.S. crude oil reserves rose by 3.4 million barrels to 292.2 million in the week ended Jan. 14, according to the Department of Energy. U.S. reserves are now 8 percent above the same period of a year ago.

World oil supplies are affected greatly by political turmoil in the Middle East. Iraq, which has the world's second-largest proven reserves, has had its oil infrastructure bombed several times by terrorists. Political tensions have also affected other key suppliers in areas such as Venezuela, Russia and Nigeria.

Oil demand, however, fueled by developing nations such as China, now the world's second-largest oil consumer, will continue to grow at 1.6 percent a year, according to estimates by Paris-based International Energy Agency. That would increase demand from 82 million barrels a day today to 121 million barrels a day by 2030.

The IEA increased its forecast for Chinese oil demand this year to 6.73 million barrels a day, up 5.7 percent from last year and up from its December forecast of 6.69 million barrels a day.

The China demand is not going away anytime soon, said Smith. Factors that could ease oil prices in the long run are China going back to its regular self, more oil being produced from the deepwater Gulf, more pipelines and more discoveries. But then you're just trying to list every possible factor that could make prices level out or go down. I just don't see those factors occurring and prices should stay above $40.