Chicago Tribune | Oil analysts: Get Used to it

An article not using “Peak Oil” but highlights gas prices as well as the complications of higher oil prices for manufactured and shipped goods. The Goldman Sachs “superspike” is mentioned instead of Peak Oil. Note: It was on the FRONT PAGE of the Chicago Tribune on a Sunday.

http://www.chicagotribune.com/business/chi-0504170286apr17,1,6162382.story?coll=chi-news-hed&ctrack=1&cset=true

Oil analysts: Get used to it
Besides gas pump, other goods, services feel pinch from record prices

By Robert Manor, Tribune staff reporter. Tribune staff reporter Mark Skertic contributed to this report
Published April 17, 2005

If you’re waiting for gasoline prices to fall below $2 a gallon, forget it.

No one can say for sure what the price of petroleum will be in the future, but some industry observers are warning that the cheap crude oil of the past is gone forever.

“I think it is more likely to stay in the $50 range than in the $40 range,” said Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University.

“If people can depend on it stabilizing at this price, they can conduct their business and plan their future,” he said. “If so, the economy will be a lot more comfortable.”

Unevenly, sometimes imperceptibly, higher petroleum prices are filtering through the nation’s economy, affecting everything from the cost of plastic car parts to the suffering of bankrupt airlines.

A spectrum of factors drove crude oil above $58 a barrel this year, although its price has fallen back into the low $50s recently. Two years ago it was at $28.

The world is in no danger of running out of oil anytime soon. Many billions of barrels await extraction.

But industry analysts say world petroleum output barely meets demand and it will take years to increase production.

Political unrest threatens oil supplied by the Third World, while China’s thirst for energy grows daily. America’s demand for crude is strong, despite the highest prices in a generation.

Some symptoms of inflated oil prices are obvious.

A gallon of regular gasoline in Illinois cost an average of $2.273 on Friday. A year ago it was $1.831. Taxi drivers in Chicago have won a fare hike and truckers are demanding surcharges to cover their higher fuel costs. The airline industry continues to hemorrhage money, as jet fuel is its second-largest expense.

“My sense is that we are reaching a tipping point here,” said David Hayes, a deputy interior secretary during the Clinton administration.

“There are some industries that are really hurting,” Hayes said.

Domino effect

Consider Wexco Corp., a Lynchburg, Va., manufacturer of steel cylinders used in plastics processing equipment.

President Peter Jones said he is paying more for his steel because trucking costs are up. On top of that, his company uses natural gas in its manufacturing process, and natural gas is higher because it tends to follow petroleum prices.

And his customers in the plastics industry are getting slammed by their own higher energy costs.

So far, his company is eating the higher prices.

“It has been the most frustrating thing to us,” Jones said.

Illinois Tool Works Inc. of Glenview, which makes a variety of plastic parts for the auto industry, also is getting squeezed.

“For those of us who process plastics into a final product, crude oil or natural gas is the feedstock,” said Mike Lynch, vice president of government affairs for the company.

Lynch said automakers won’t tolerate price increases for the door latches, gas cap fasteners, and other products they buy from Illinois Tool Works.

“The Big 3 have been adamant in not allowing any cost pass-throughs,” he said. “You have long-term contracts and those contracts don’t include surcharges.”

Of course, Ford, General Motors and DaimlerChrysler have their own petroleum issues.

Large sport-utility vehicles are among the most profitable vehicles for America’s carmakers, and get the lowest gas mileage. Frequently any mention of SUVs is prefaced with the phrase “gas guzzling.”

Now there are signs that America’s passion for SUVs is cooling as gasoline prices rise.

J.D. Power and Associates said that so far this year, large SUV sales have plunged nearly 21 percent.

Price pendulum

Petroleum is still cheaper than in 1981, the last true oil crisis. Adjusting for inflation, oil touched $80 a barrel then.

For more than a century, prices have risen and fallen violently as shortage turned to glut, followed by intervals of stability.

Historically, high prices tend to cure themselves by cutting consumption while encouraging exploration and production.

So the financial house Goldman Sachs rattled the oil market last month when it said crude could “superspike” to $105 a barrel.

Their theory? Higher exploration costs, political instability in oil producing regions and the unwillingness of nations to allow foreign companies to exploit their petroleum deposits mean oil will likely go higher.

Goldman Sachs said one way to lower the price of oil is “demand destruction,” meaning prices high enough to change public behavior.

“Is $3.50-$4.50 per gallon U.S. retail gasoline prices needed to curb demand?” the company asked. According to its analysis, the answer is yes.

Goldman Sachs’ near-doomsday view is not universal. Some analysts say the price of crude will fall, perhaps a lot, for the same reasons it has in the past.

IFR Energy Services is forecasting oil will drop to $28 a barrel, roughly its cost from 2000 to 2003. The fall could come by midsummer.

The research firm noted that year after year, more oil is discovered than consumed. The U.S. government is set to stop buying oil for the Strategic Petroleum Reserve, which will free up more for refining.

Or there is the middle view that oil will stabilize and the world will learn to live with the higher cost. Certainly some economies are already comfortable with the price of oil.

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela, which make up the Organization of Petroleum Exporting Countries, earn millions of dollars an hour from oil exports to the U.S. and other countries.

The U.S. government estimates the cartel will get $345 billion from petroleum exports this year. In 2003, the last year of less-expensive oil, OPEC took in $243 billion.

And, of course, for some businesses, expensive crude is a godsend.

“You’ll see it in the energy companies,” said James Curley, who directs global foreign exchange for FC Stone Forex in New York. “When you look at earnings from them, you’ll see enormous profits.”

For example, the stock of ExxonMobil is up 49 percent over the past year. ConocoPhillips’ stock is up 65 percent.

“There has been a lot of money made,” Curley said. “Unfortunately, we’re paying at the pump.”

———-

Mskertic@tribune.com; Rmanor@tribune.com