US oil price warning but there's some hope

PUBLISHED : Sunday, 16 July, 2006, 12:00am
UPDATED : Sunday, 16 July, 2006, 12:00am

Producers are not in control now, says energy secretary

Oil's rise to a record high of US$78.40 a barrel, pushed up by Israel's attack on Lebanon, shows that producers have lost their ability to rein in prices, US Energy Secretary Samuel Bodman has warned.

'This is the first time in my professional lifetime, almost 50 years, that the suppliers of oil in the world have really lost control of the markets,' Mr Bodman told reporters in Calgary. 'They have ceded control to the traders.'

The oil price reached a record high of US$78.40 a barrel on the New York Mercantile Exchange on Friday. Oil futures rose 4 per cent last week as violence continued in Lebanon. The average pump price of petrol in the US is poised to top US$3 a gallon for the first time since the week after Hurricane Katrina.

Mr Bodman, speaking after touring facilities that extract crude from the oil sands in northern Alberta, said that instability in the Middle East was boosting oil prices.

His warning came as a study claimed US imports of oil could be eliminated by 2030 if the US turns to an aggressive programme of energy efficiency and commercialisation of four technologies for making transport fuels.

The study, sponsored by a nonprofit group of legislators and governors called the Southern States Energy Board, urges a crash programme to meet fuel needs without imports, a strategy it says will lead to an American 'industrial rebirth'. The strategy could create more than a million new jobs, reduce the trade deficit by more than US$600 billion and end oil price shocks that hurt the economy.

Roger Bezdek, an author of the report, to be released tomorrow, said the volatility in fuel prices is driven by the narrow dependence on a limited number of big oil-producing countries as practically the sole source of energy for transport.

'Right now,' he said, 'if a couple of oil workers get kidnapped in Nigeria, the price goes up US$5 a barrel.'

The study said that for the strategy to work an expansive investment of private funds would be required, with encouragement from 'appropriate fiscal, regulatory, and institutional support mechanisms' for 20 years.

The four technologies for producing the fuels are profitable when the price of the oil they replace is US$35 to US$55 a barrel, the study said. Three are closely related. The one with the biggest potential - estimated to displace 29 per cent of imported oil - is making liquid fuels from coal, using the Fischer-Tropsch method.

A second is to take the carbon dioxide created in both that process and other combustion processes and use it to put pressure on old oil fields to push more oil to the surface, a technique called enhanced oil recovery.

A third is to use organic material, including wood and crop wastes, as feedstock for factories that make a fuel gas consisting of carbon monoxide and hydrogen. That so-called synthesis gas is the same as that made from coal in the Fischer-Tropsch method and it can then be turned into a liquid.

The fourth is production of oil from shale, a technique tried after the oil shock of 1979, but abandoned when prices fell.

An energy expert not connected to the study, Jason Grumet, executive director of the National Commission on Energy Policy, said that the goal of saving or displacing the amount of oil contemplated in the study was probably possible over the time period, although he said the challenge was 'herculean.'

But Mr Grumet warned that such a programme still would not eliminate oil imports because oil from abroad would be less expensive than oil from domestic sources.

Stock markets in the Gulf Arab region tumbled yesterday as escalating violence in the Middle East unnerved investors.

The Saudi Arabian exchange, the region's largest, dropped nearly 8 per cent, while Kuwait lost more than 3 per cent and Dubai fell nearly 3 per cent.

Gulf markets crashed earlier this year after rising an average of 92 per cent last year.

Bloomberg, The New York Times, Reuters