Weak Infrastructure Threatens Energy Crisis-Oil Economist

PETROLEUMWORLD Caracas, Nov. 29

DJ/The world is headed for an energy crisis in the coming few years that could send crude oil to $50 a barrel if current trends continue, a leading oil-market economist said Wednesday. The rise in energy prices over the past two years has been driven by trends that have had a gradual, cancer-like effect, as opposed to the heart-attack-like oil shocks of the 1970s, said Philip K. Verleger, Los Angeles-based economist for the Brattle Group.

"The energy story comes around every ten years, but each time it's got different characteristics," Verleger said in remarks to the Institute for International Economics.

Unlike the shocks of the 1970s and 1990, the recent oil-price rise has had little to do with crude production.

"I don't think that it's a resource story so much as a critical infrastructure story," he said.

Seven Factors Building Toward Crisis The first of the seven trends Verleger sees behind current problems is a gradual "sclerosis" of oil, gas and electricity infrastructure.The energy industry hasn't expanded or renovated refinery, pipeline or tanker capacity to keep pace with growing demand.Neither George W. Bush nor Al Gore has proposed policies that would solve the shortage of refining and transportation capacity, he said.

Second, a shortage of capital in the energy sector has made it difficult to invest in new capacity, as the Internet and other sectors draw more interest from investors, he said, noting oil and gas companies also face a shortage of engineers and manual labor.

Third, the frenetic pace of mergers in the petroleum sector since 1995 has led to low-inventory policies and less overall investment.

Mergers "have tended to make prices more volatile and, I think, added $3 to $5 to the price of crude oil," Verleger said, claiming increased use of just-in-time inventory methods coincided with the merger frenzy.

Fourth, the U.S. and Europe have issued so many regulations to clean up fuels that they've created a patchwork market for gasoline and diesel, making it harder to trade between regions. Verleger cited U.S. plans to remove sulfur from gasoline and diesel, which he said could cut diesel supplies by 25%.

"Unfortunately there's no one overseas who can make these products," he said.

Meanwhile, in the U.S. environmental regulation makes it difficult to expand refineries.

Fifth, the advent of automobile technologies like fuel cells may deter oil companies from investing in new refineries for fear their market could soon disappear.

Sixth, instead of cooperating, the auto and oil industries have often been at odds on fuel issues. Verleger cited the auto industry's call for zero-sulfur diesel as an example of antagonism between the two.

Finally, despite increased diplomacy, antagonism continues between the major oil-exporting and oil-importing countries over issues like fuel taxation in consuming countries.

"I think an undeclared war has broken out between oil producers and consumers," he said.

Tension between the two sides has become more clear because of the Organization of Petroleum Exporting Countries' newfound cohesion and effectiveness in raising prices.

Verleger attributed OPEC's resurgence in large part to Venezuelan President Hugo Chavez, who in 1999 ended his country's long-running role as a quota-buster. Warns Of Impact On Broader Economy Verleger warned an audience filled with economists of the broader repercussions of an energy crisis on economic growth.

"We have been heralding the increase in productivity, and the sclerosis of the energy system could easily break this productivity," he said.

Government intervention in the energy markets may end up as the short-term solution if prices continue to rise, Verleger said.

Japan, the European Union and the U.S. could use temporary releases from their 1.2 billion in strategic reserves to address short-term price issues, he said. Verleger supported the U.S. decision to release crude from its Strategic Petroleum Reserve, but said it should have released twice the 30 million barrels it did.

The U.S. could also alleviate supply shortages by easing fuel specifications and allowing non-U.S. tankers to operate U.S. waters, he said.

Consumers, for their part, could stop buying so many sport-utility vehicles and other gas-guzzling automobiles, he said. In a generally gloomy assessment for oil consumers, Verleger sounded one positive note.

Despite market anxiety about a possible halt in Iraqi oil exports during the Northern Hemisphere winter, Iraq isn't likely to cut supplies now, he said.

"The timing isn't right," Verleger said.

Iraqi President Saddam Hussein is more likely to wait until after the winter to see if world economic growth continues before playing his oil card again, he said. Until then, brinkmanship with the United Nations is more likely, he said.

This story was first on line on the Dow Jones News Wire on Nov. 29 and was done by Campion Walsh, Dow Jones Newswires in Washigton.

http://www.petroleumworld.com/story1545.htm

-- Martin Thompson (mthom1927@aol.com), November 30, 2000