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We
are pleased to present the following
excerpt from the book
Black
Gold: The New Frontier in Oil for
Investors
by George
Orwel
Wiley - June
2006
Oil Prices Will Stay High and
May Even Rise to $100 a
Barrel
The world is experiencing its first
demand crisis in more than two decades. We
can blame China, OPEC, Iraq, and the oil
peak for that, but we must also admit that
the industry has gone through some
structural changes that have had enormous
influences on energy prices. Certainly, a
case can be made that oil and gas have
become asset commodities that are
attracting more investors at a time when
equity returns aren't great. In fact,
that's why the American Stock Exchange
introduced the first exchange-traded fund
(ETF) tracking crude prices in April 2006.
Exchange-traded funds have become hot on
Wall Street because they give individual,
average investors the opportunity to have
control over their investments, by taking
positions in crude oil rather than
investing in shares of energy companies or
mutual funds. In a kind of cyclical
effect, these new investors have added,
and will continue to add, market
liquidity, causing oil prices to continue
soaring, and energy companies also to make
more money.
Oil prices had climbed to $75 per
barrel in April 2006 and were set to hit a
new record, while gasoline prices passed
$3 per gallon, double what they had been
two years earlier in December 2004. Oil
was trading at $40 and we thought that was
high. Now, in retrospect, we were so
wrong. In fact, we probably won't see oil
that cheap again, unless there's a
temporary glut caused by OPEC, which is
unlikely. The sharp rise has nearly
everyone scratching their heads about
where oil prices may be headed next.
Consumers are paying through the nose and
traders are asking how they can get a
piece of that boom. Some think it won't be
long before we get to $100 oil, while more
aggressive analysts are setting their
sights as high as $180 per barrel.
The oil boom has made headlines across
the globe recently. Strong demand from
China and India, a lack of spare capacity,
or more accurately, the inability of OPEC
countries -- particularly Saudi Arabia --
to increase oil supply by any significant
margin, as well as weather-related supply
shocks have fueled the crude oil rally. As
a result, we have seen windfall earnings
for oil companies and painfully high fuel
costs for the consumer, all of which has
forced politicians and oil executives into
a corner as public outrage mounts.
The U.S. Senate Committees on Energy
& Natural Resources and Commerce,
Science, and Technology heard executives
of the world's five largest oil companies
at a public hearing amid charges of
gouging in November 2005. But the
executives offered strong defense of their
companies' high profits, as national
politicians pressed them to account for
soaring gasoline, diesel, and natural gas
prices in the months after Hurricanes
Katrina and Rita struck the Gulf Coast.
Later, senators heard from state officials
who urged Congress to pass a federal
anti-price-gouging law. The Bush
administration, however, cautioned against
such laws, saying competition was more
effective in controlling prices.
While admitting that high oil prices
were hurting consumers, the executives
said their profits were not out of line,
arguing in fact that prices were being
driven by larger forces often out of their
control. "Today's higher prices are a
function of longer-term supply and demand
trends and lost energy production during
the recent hurricanes," said James Mulva,
chairman and chief executive of
ConocoPhillips. But several senators,
mostly Democrats along with some
Republicans, appeared unsatisfied by those
responses, and they demanded to know what
the industry was doing to increase
supplies, and whether oil companies would
help promote conservation measures. "Most
Americans and most of the polls show that
our people have a growing suspicion that
the oil companies are taking unfair
advantage of the current market conditions
to line their coffers with excess
profits," Pete Domenici, Republican of New
Mexico, said during the televised hearing.
Senator Barbara Boxer, Democrat of
California, added: "Working people
struggle with high gas prices, and your
sacrifice, gentlemen, appears to be
nothing." She noted that the executives
were making millions of dollars in
salaries, bonuses, and stock awards.
Still, calls for a windfall profits tax on
oil profits that would help families pay
high heating bills and other energy costs
were beaten back.
Oil, gasoline, and natural gas prices
soared in the weeks after Hurricane
Katrina struck the Gulf Coast and shut
down the vast majority of offshore
production sites and 18 percent of
domestic oil refining. Gasoline prices
spiked past $3 a gallon in many parts of
the United States, though they retreated
to pre-Katrina levels by October. It was
clear the economic impact across the
country was going to cause problems, and
it was not long before politicians such as
Senator Conrad Burns, Republican of
Montana, began saying high diesel prices
were squeezing farmers and making American
agricultural products too expensive for
world markets. "Let the American people
understand, agriculture is going to get
shut down," he said. "We're not going to
turn on one tractor to produce food and
fiber for this country under these kinds
of conditions. We have to do something
different."
The executives of Exxon Mobil, Chevron,
British Petroleum (BP), ConocoPhillips,
and Royal Dutch Shell noted that they have
been investing most of their profits in
new production and refining. Lee Raymond,
chairman and chief executive of Exxon
Mobil, which reported a $9.92 billion
profit for the third quarter of 2005, said
that the industry's profits measured as
percent of revenue were no greater than
other industries. "We are in line with the
average of all U.S. industry," he said.
"Our numbers are huge because the scale of
our industry is huge. How are these
earnings used? We invest to run our global
operations, to develop future supply, to
advance energy-producing and saving
technologies, and to meet our obligations
to millions of our shareholders."
The oil chief executives asserted that
in the past decade their capital
investments matched their profits. Asked
what they were doing to increase domestic
oil refining capacity and bring on
additional sources of energy, they said
investments in their industry can take
decades to come to fruition. Mr. Raymond
said that even if the government
streamlined the approval process for
constructing new refineries, a move the
energy industry sought, it would still
take years to build new plants. Instead of
building new plants, Exxon has chosen to
expand existing plants.
"It is much more efficient because the
basic infrastructure is already in place,"
Mr. Raymond said. "Over the last 10 years,
Exxon Mobil alone has built the equivalent
of three average-sized refineries through
expansions and efficiency gains at
existing U.S. refineries."
Raymond's argument is rather lame
because acquiring another refinery doesn't
increase the overall refining capacity.
There has not been a new refinery built in
the United States since 1976. Companies
have expanded existing plants, which are
also being operated closer to full
capacity, but they have been coy about
building new plants from scratch. In 1980,
there were 425 refineries across the
country; there are 176 today.
-
Excerpt copyright
© 2006 by George Orwel. Reprinted
with permission.
George Orwel is an Oil
Analyst and Senior Writer for both the
Oil Daily and Petroleum
Intelligence Weekly. Previously, he
covered the oil market for six years as a
staff reporter for Dow Jones Newswires.
Orwel has appeared on key media outlets,
including CNN, BBC, and NPR, and
contributed articles to the Los Angeles
Times and the Christian Science
Monitor, as well as other
publications. He lives in Brooklyn, New
York.
Black Gold: The New Frontier in Oil for
Investors, by George Orwel
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