Oil's Pressure Points

April 13, 2003
By NEELA BANERJEE
www.nytimes.com

FOR weeks, oil prices have swung wildly on news from the
battlefronts in Iraq. But the painful truth is that Iraq is
only the most extreme example of the world's reliance on
hot spots to slake the thirst for oil.

Through the winter, oil prices climbed steadily, not only
in expectation of another Persian Gulf war but also because
political strife in Venezuela was choking off that nation's
exports. As the fighting began in Iraq, ethnic clashes in
Nigeria's oil-rich Niger Delta forced Royal Dutch/Shell,
ChevronTexaco and TotalFinaElf to shut down their
operations there, slicing the country's oil production by
almost 40 percent.

Demand for oil continues to rise, bumped ever higher by the
growing prosperity of emerging markets like China and India
and the unquenchable demand of the United States, by far
the world's largest consumer of oil.

The upshot of all this, energy experts say, is a global oil
industry and world oil markets that are more volatile and
unpredictable than they have been in a decade.

Increasingly, oil companies are shying away from holding
large stocks of oil and drilling every time oil prices
rise, for fear of the financial hit that comes when oil
prices plummet. Without that extra cushion of oil at
refineries or in storage, consumers have begun to feel
every swing of oil prices - and will continue to do so for
the foreseeable future. "Volatility is the norm, not the
aberration," said Lawrence J. Goldstein, president of the
Petroleum Industry Research Foundation.

OPEC, the cartel that spurred past oil crises by cutting
off exports to the West, now tries to steady the market,
with Saudi Arabia, Kuwait and others priming the pumps when
less-stable producers falter. Under American influence, if
not outright control, Iraq's huge reserves may offer
further ballast in an uncertain energy world.

But industry experts say the unavoidable reality is that
the search for diverse sources of oil - a keystone of
American policy - is sending the oil industry into one
fraught corner of the world after another. And the
discovery of oil is itself almost a guarantee of conflict.

"People have to stop thinking that oil markets will be
affected by embargoes, because embargoes are a thing of the
past," said Mois?s Na?m, a former Venezuelan minister of
trade and industry and now editor of the journal Foreign
Policy. "The problem is failed states. It's a harbinger of
things to come: when internal political turmoil limits oil
to world markets."

Prosperity and Consumption


More than anything, the force driving oil companies into
ever more perilous parts of the world is the middle-class
consumer: the American suburbanite in her sport utility
vehicle and the Chinese city dweller behind the wheel of
his first car.

Last year, the world burned 76.7 million barrels of oil a
day, according to a report by Cambridge Energy Research
Associates.

The United States far outpaces any other country in the
consumption of oil. With just 3 percent of the world's
population, it consumes more than 25 percent of crude oil,
roughly equal to its share of the global economy.

But industry experts predict that most of the increase in
demand for oil over the coming decades will result from
growing prosperity in the developing world, led by China.
As people there make more money, they buy more products,
including cars. As they leave the countryside for cities,
they rely on buses and cabs to move around. By 2030,
according to to the International Energy Agency, China will
import as much oil as the United States does now.

The American economy is not as reliant on oil as it was 20
years ago, mainly because of significant improvements in
energy efficiency and a shift away from heavy industry to
service businesses. So when oil prices climb, the economy
may slow, but it does not easily sink into recession,
analysts and economists say.

Nonetheless, American prosperity stokes this country's
appetite for oil - and it shields most consumers from
having to adjust their behavior when gasoline prices rise.

Consumers grumble when oil prices spike, but there has
been only the faintest evidence that high pump prices are
chilling their ardor for S.U.V.'s. In part, that is because
recent gas prices of $2 a gallon or more were still lower,
when adjusted for inflation, than the record prices 23
years ago.

The Bush administration has backed long-term research into
hydrogen to replace crude oil, but that technology - at a
competitive price - is still 15 to 20 years away, most
experts agree.

In the meantime, the public debate continues over efforts
to slow American oil consumption without damaging the
economy. Just Thursday, the House of Representatives
rebuffed legislation that would compel automakers to
increase the fuel efficiency of S.U.V.'s.

Politics and Production


Eager to reduce America's
dependence on Middle Eastern oil, the Bush administration
has been encouraging the search for oil in new places.

Yet many of the sites that Washington has lauded for their
abundant oil resources are political quagmires, one way or
another - from the steaming Niger Delta to the frigid
coastal plain of the Arctic National Wildlife Refuge.

In Nigeria, the run-up to this month's parliamentary and
presidential elections turned bloody when ethnic clashes
erupted - in large part over the complaints of the Ijaw
tribe that they had been deprived of their fair share of
the proceeds from oil development. The violence has largely
abated for now, but dozens of Nigerians died, and major oil
companies halted production in parts of the Niger Delta for
weeks.

Two years ago, Vice President Dick Cheney's energy task
force promoted the prospects of big gains in Nigerian
production. But the problems have highlighted the risks
rather than the opportunities.

Because the sweet crude from Nigeria is particularly good
for making gasoline, refineries on the East Coast rely on
it, especially as the United States enters the spring and
summer driving season. It is still unclear how the
temporary curtailment in Nigerian exports will affect
American gasoline prices.

Oil and government interests in the United States have
nurtured ties to Venezuela for decades, as a conveniently
close supplier. But there, too, politics has interfered
recently with oil production, as a popular strike against
President Hugo Ch?vez's rule sliced oil exports for months
by more than 80 percent from usual levels of about 3.1
million barrels a day.

The government has restored exports to about 2.5 million
barrels a day, even as 17,000 oil company employees remain
off the job - but not before the oil markets had driven
home the vulnerability of supplies that had never been
cause for worry.

"Even if there were no Iraq crisis, what happened in
Venezuela and Nigeria would have registered at the gas
pumps," said Daniel Yergin, chairman of Cambridge Energy
Research Associates. "What no one pays attention to is that
the disruption of Venezuela was even larger than Iraq.

"The working assumption" in oil markets, Mr. Yergin added,
has to be "that there will be political turbulence or other
kind of turbulence."

Despite the volatility abroad, most major oil companies,
including American ones, are steadily shifting their
investments away from the United States. Oil production is
declining in the United States, where proven reserves are
small. For big payoffs, companies are turning to more
technologically challenging - and therefore more expensive
- areas here, like the deep waters of the Gulf of Mexico.

But sites in the United States come with their own
political perils. The administration and its Congressional
allies, for example, see the Arctic National Wildlife
Refuge in Alaska as the next big drilling opportunity in
the United States. Yet opposition from many Democrats and
environmental groups has for years kept the refuge
off-limits for exploration.

The seemingly endless battle has quelled the oil industry's
enthusiasm. Though oil companies publicly back the
administration, most executives say in confidence that they
would rather look elsewhere. No one really knows how much
oil is in the refuge, they say, and they worry that
drilling would be stymied for years by legal fights - or
that leases would be reversed if Washington shifted from
support to opposition of development.

This world of uncertainty, industry experts say,
underscores the fact that the sole oil producer that can
dampen volatility is Saudi Arabia.

When Venezuelan exports plummeted this winter, for example,
Saudi production rose sharply - and American imports from
Saudi Arabia climbed to record highs.

"Saudi Arabia is the central bank of oil," said Roger
Diwan, a managing director at PFC Energy, a consulting
group. "When things go wrong, they deliver. They always do
things that are good for oil markets, and they know that
extreme prices and disruptions are not good."

Prospects and Technology

The West, though, is
uncomfortable relying on the kindness of Saudi Arabia and
on other big producers, like Russia and Mexico, that also
guard their oil resources jealously.

Big oil companies complain that because they cannot work in
many of the world's richest fields, production is growing
at a far slower pace than they had forecast just a year
ago.

Many American and British companies have core projects in
the North Sea, Alaska and the shallow waters of the Gulf of
Mexico, all areas where oil production is declining.
Earlier this year, BP, Royal Dutch/Shell and ChevronTexaco
announced that they had missed their production growth
targets for 2002 and would no longer offer forecasts.

The prospects are not all bleak. Competitors are closely
watching BP's plans, announced in February, to plow $6.75
billion into a development partnership in Russia.

And as the Bush administration fashions a plan to govern
Iraq after the war, it hopes to foster institutions that
make the country a model of peaceful, democratic governance
for oil-exporting states. The raw material is promising,
regional experts say, including a domestic oil bureaucracy
whose managers and scientists are widely respected for
their professionalism and lack of venality.

Much closer to home, the United States already has a large,
stable supplier of oil in Canada, with proven oil reserves
second only to Saudi Arabia's.

Canada supplies 17 percent of American oil imports, more
than Saudi Arabia or Venezuela. Conventional oil reserves
in western Canada are gradually declining, but they are
being replaced by new oil fields off the coast of
Newfoundland and Nova Scotia and deposits of tarlike oil
sands in northern Alberta.

The drawback of the Canadian oil sands is the high cost of
production. "Instead of 50 cents a barrel in the Middle
East, it's more like $6 or $7," said Brian Prokop, an
energy analyst at Peters & Company in Calgary, Alberta. The
oil sands are either mined or extracted by injecting huge
amounts of hot water underground, after which the tar is
processed into crude oil.

Such technology is the main reason production has remained
viable. Another example is deep-water production in the
Gulf of Mexico, which would not be possible or economically
feasible without the great strides made in seismic
technology and drilling methods.

In testimony before Congress recently, Mr. Yergin predicted
that new oil technology could expand world oil reserves by
125 billion barrels - more than the proven reserves of
Iraq.

"We're in one of those periods when a technological
revolution is changing the economics and capabilities of
the oil industry," he said in an interview. "What
technology does is lower the costs and expand the horizons.
And it keeps pushing the day of shortage and depletion out
into the future."?

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