Energy Crisis Fears May Be Moving to the Back Burner

Oil inventories increase again this week and futures have declined for three weeks.
By David A. Gaffen ,

Now then. There was an energy crisis sitting around here somewhere.

Believe it or don't, but an increasing number of people think that the worst of the country's energy problems may be on the wane (save for problems in a particular large state out West). Oil inventories increased again this week, to the surprise of many, and the three-week decline in the price of oil futures reflects the expectation that the peak is safely in the past.

Analysts expect crude oil prices to drop to $22 to $25 a barrel later this year. Crude oil futures lately traded at $27.72, down from $30 on May 22. A decline in prices to those levels wouldn't hurt producers and refiners terribly, but it would ease the burden of consumers. High heating and fuel costs were a significant reason why discretionary spending fell last year. It should continue to hurt spending, but to a lesser extent.

With those prices declining, gasoline prices should follow, although gasoline is subject to local refining issues, and price spikes during the summer are a possibility. But the fears that a gallon of gasoline would rise to $3 are at this point unfounded. The

American Petroleum Institute

stated in a late April report that current supplies of gasoline should be adequate for the summer. The

Energy Department

, meanwhile, said the average price for a gallon of gas fell to $1.68 for this past week, compared with $1.71 three weeks ago.

"It looks like retail prices have crested," says Tim Evans, senior energy analyst at

IFR

, who expects gas prices to fall 10 cents to 12 cents in coming months because of falling crude oil prices. "It's almost like a spring flood. They reached flood stage, and you can sort of watch the crest move down the river now."

Compared with last year, when crude oil prices jumped dramatically, reaching $35 a barrel late in the year, the price is falling because the supply-demand impasse of last year is being alleviated.

OPEC

, which was contributing to higher prices by cutting production, has raised daily production of crude oil in recent months.

Meanwhile, drillers, which had slowly increased drilling in late 1999 as oil prices rose from a trough of $13, dramatically stepped up their efforts in 2000. Rig counts, a measure of drilling activity, as reported by

Baker Hughes

(BHI)

, have increased significantly. As of April, the worldwide rig count was 2,165, a sharp increase from April 2000, when the rig count was just 1,553.

Not Out of the Woods

The recent decline in prices doesn't mean the cross-country trip in that tractor-trailer you just

had

to purchase should be planned tomorrow. A number of sticky problems remain, and consumers are still going to maintain adjustments to higher energy costs, to some extent.

Refiners have been able to increase capacity at the margins, to a degree, reducing the supply bottlenecks that were contributing to high prices. Last week a record number of barrels of oil were processed by refiners -- 16.2 million, according to API. But if there's a candidate for the more likely problem, it's this one -- refiners are currently strained, using 97% of their total capacity. And while they've shown the ability to increase capacity, they're doing it only incrementally.

Interruptions, such as rolling blackouts in the Western states due to California's utility problems, would hinder production of refined oil products like gasoline. Already, there's a concern that this could produce sharp spikes in gasoline prices.

"Inventories are being replenished rapidly now," says Mike Fitzpatrick, an analyst at

Fimat USA

. "If, for some reason there were refinery snags, we could see a hit in gasoline prices. But as far as the whole (energy) complex turning around, it would take an act of God at this point."

Fitzpatrick did point out the usual saber-rattling from Iraq, which is threatening to cut off production of its 2.1 million barrels a day if its oil-for-food deal isn't renewed for another six months (the

U.N. Security Council

voted to renew it for just one month). But that would only be an ongoing problem if OPEC decided to cut production for economic reasons (OPEC plans to make up Iraq's daily production).

However, some nervously note the OPEC meeting scheduled for July 3, a day prior to one of the busiest on the U.S. highways (go out to New Jersey's

Garden State Parkway

or Chicago's

Eisenhower Expressway

if you're skeptical).

Furthermore, while gasoline demand is actually down slightly from last year, that's not to say it can't increase sharply in the summer. U.S. fuel economy is at its lowest level since 1980 -- just 24.1 miles per gallon. That reflects a few lucky years of low gas prices during the booming late-90s, when fuel conservation wasn't much of an issue and SUV purchases exploded.

They're paying the bill now, which makes it unsurprising that SUV sales have fallen off in recent months as consumers try to find a way to cope with higher prices. Depending on where they live in the country, they could have more problems to deal with. But the worst, at least for the moment, may have passed.

Loading ...