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Sunday
Jan132008

Future of oil? U.S. isn't in the driver's seat

With oil hovering at the $100-a-barrel mark, we're inundated by calls for a "Manhattan project" on alternative energy, more regulation of major oil companies and an end to our military presence in the Persian Gulf. The assumptions are that America's energy demand drives prices, the "majors" determine supply and instability in the Middle East explains recent spikes. So, if this is all our doing, then it can all be our undoing as well.

Would that Washington was so eminently in control of global energy markets.

The big driver on oil prices today is rising Asia's burgeoning demand. At the Cold War's end, Asia accounted for 10 percent of global oil demand. Today it gobbles up double that share. Before 2025, Asia becomes the oil market's global demand center, dislodging North America.

So it's basically our blood, their oil.

A second big driver is that many key producers are themselves becoming significant consumers, shriveling their capacity for exports. Indonesia became a net importer years ago while Mexico, a huge supplier for the U.S., heads down the same path unless it soon opens up its national oil company to foreign direct investment.

Meanwhile, strongman Hugo Chavez diminishes Venezuela's future export capacity by scaring off investors and - in essence - eating his seed corn: funneling today's windfall profits into socialist programs designed to buttress his popular standing. His latest scheme involves Venezuela's national oil company using its logistical networks to import foodstuffs currently in short supply.

Fire-breathing Mahmoud Ahmadinejad pursues a similarly shortsighted course in Iran to predictable outcomes.

In general, all of the big producers are seeing their oil consumption skyrocket far above global growth, with Saudi Arabia, Russia and Norway leading the way. So, while rising Asia demands a lot more oil, the biggest sources have trouble boosting production.

What can the major oil companies do about any of this? Not as much as you think.

Increasingly, it's the home team national oil companies that control the bulk of reserves. Today, these state-owned firms directly manage 40 percent of the world's known supply. By 2030, that percentage will rise to roughly three-quarters, meaning Exxon Mobil, BP and others will be squeezed out of new big projects as national oil companies grow rich enough to finance these on their own. Already, a significant chunk of the majors' current production is locked into sharing agreements that favor the national oil companies as prices rise.

As the national oil companies grab more control over future production, the majors face more restricted access to existing oil fields, pushing them toward increasingly complex ventures to discover new supplies: tougher geology, deeper sea beds, harsher arctic environments and thicker oil.

Those tougher conditions drive up production costs just as a worldwide shortage of rigs and workers emerges. Toss in years of under-investing by everybody, national oil companies and majors alike, in refining capacity, and this situation won't be remedied anytime soon.

Do continuing violence and threats in the Middle East add a surcharge on top of all of this? Sure, although the real problem comes in instability or rogue regimes keeping certain countries essentially off-line from comprehensive exploration, something the national oil companies increasingly accomplish even in stable nations, so stability's unlikely to improve the situation over the long term.

How about trusting in OPEC's ability to boost production sufficiently to cover rising global demand?

Growing international concern over global warming, combined with Asia's ballooning car fleet and associated air pollution, casts a long-term shadow over the oil industry. Simply put, it's hard to imagine Asia quadrupling its automobiles over the next two decades and surviving the resulting environmental degradation, even if it could import enough oil.

For the increasingly squeezed majors, it doesn't make sense to stick out their necks on long-term investments to grow supply-side infrastructure. Instead, watch them invariably warm up to new vehicle drive technologies that major auto makers pursue in their greed to stay on top.

As for national oil companies, expect them to invest in just enough production capacity to keep prices from rising too far above $100 a barrel but not enough to drive them much below that mark.

In sum, crude prices will remain relatively high for the long run as everybody involved ekes out maximum profits across the final decades of oil's supremacy.

As for what comes next, watch Asia because America's strictly in the backseat on this tumultuous ride.

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