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Long-Term Oil Gloom Spreads in Houston

November 20, 2007 by White House Chronicle


HOUSTON — Saudi Arabia has more oil, Rotterdam has more tankers, New York has more money, but Houston has the heart of the global oil industry. These days, it is not beating well. Study after study, executive after executive, and analyst after analyst is warning that there are rough times ahead for oil supply.

Here oil news is analyzed, sorted and shelved. But in 37 years of writing about energy, in boom and bust, I have never found the kind of fatalism that now grips the oil patch.

The cause of the furrowed brows is simple: the global production and supply of oil, at between 85 and 86 million barrels a day, is straining the system. At those rates, supply and demand are in rough equilibrium which, according to many experts, should put the price at about $80 a barrel. The difference between that price and what we are paying (as much as $98 a barrel on some contracts) is a market premium extracted because of future fear–fear of war with Iran, fear that big oil producers will demand payment in euros, and simple fear that demand in Asia is outstripping the world’s ability to produce much more oil.

The gloomiest predictions come from a loose agglomeration of economists and geologists who believe in the theory of “peak” oil. This is a view that holds that Saudi Arabia, and other high-producing areas, have peaked and will begin to go into decline without enormous new discoveries and tremendous new investment that is not being made.

The most persuasive voice of this gloom is Mathew Simmons, a Houston-based geologist and banker. Given the production realities, he believes that $100-a-barrel oil would be a bargain, and that the world should brace for $300-a-barrel oil.

In pessimism, Simmons is closely followed by Chris Skebrowski of the Petroleum Review in London. Skebrowski, who used to work for British Petroleum and the Saudis, believes that the world will be in oil chaos within five years. In that time, he believes demand will grow by 7 million barrels, which will be in deficit.

A third voiced of gloom comes from Christophe de Margerie, head of the French oil giant Total SA. He says the world will be hard put to produce the 118 million barrels the Energy Information Administration of the U.S. Department of Energy has predicted for 2030.

If you think the negatives are coming only from oil patch radicals, try Rex Tillerson, chairman of ExxonMobil. He told the World Energy Conference in Rome that if the world oil-dominating, state-owned oil companies are not freed from political control and allowed to bring in Western technology and capital, then a crisis is inevitable.

There is evidence that the oil majors themselves are hurting. When oil passed $60 a barrel, their profits shot up. But they are not up commensurately with oil at $90 a barrel. The big guys are getting squeezed.

State-owned oil companies have been criticized for not spending enough on new exploration and technology. The big American companies have been accused of preening themselves for Wall Street, with stock buybacks and other beauty treatments, instead of finding and exploiting new oil reserves.

All of this makes Houston, well, a different place. It has not totally recovered from the collapse of Enron. Amid the prosperity, some of the old bombast has gone. Oil people used to love to ridicule Washington and pour scorn on New York. Now I find a more subdued, tolerant, and even chastised Houston.

I liked the old Houston with its larger-than-life wildcatters, even if they thought I was an effete, Eastern, big government-loving liberal. I liked the guy who told me I could ride with him to Morgan City, where the oil rigs are made, so that we could drink in the roughest bar in Texas. “If you don’t have a gun, they’ll issue one at the door,” he said matter of factly.

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