Is there reall an oil cost crisis?

You be the judge.

At the age of 7, when most kids are climbing trees, John Hess was surveying foreign oilfields. The son of Leon Hess, a forceful entrepreneur who built a small home-heating business in New Jersey into a global oil company, the younger Hess immersed himself in the oil world from an early age, studying Arabic and Farsi to better connect with Middle Eastern oil executives. Now the CEO of Hess Corp., he's become an advocate for energy conservation and investment in alternative fuels. NEWSWEEK'S Fareed Zakaria spoke to him about the new world of $100-a-barrel oil, and the likelihood of an energy crisis. Excerpts:

Zakaria: Why has oil moved over $100 a barrel?

Hess: We've moved from a supply-led market to a demand-led one. In the past, the world has relied on OPEC's spare capacity, which in 1985 was 10 million barrels per day. Today that number is about 2.5 million barrels a day. We no longer have a safety margin to ensure price stability in the face of supply interruptions and demand spikes. Right now it's hard to see any relief in sight. Then there's demand. About 50 percent of oil demand is for transportation, and auto ownership in the developing countries is growing swiftly, especially in India and China. Goldman Sachs estimates that by 2050, they could have 1.1 billion cars on the road, up from just 20 million three years ago. That's an overwhelming increase in the need for automotive fuel. Put those two things together—limited supply and increasing demand—and you get high oil prices.

Oil prices have quintupled in the past six years, from $20 to $100 a barrel. Why hasn't that weakened demand?

I think that's been a huge surprise to everyone. I remember meeting with government officials when oil was heading towards $25, and they thought economic disaster was around the corner. They thought the same thing at $50 and $75 a barrel. The reason we've withstood the increase is that consumer income has grown faster than energy expenditures have. We spend about 6 percent of our income on energy, down from 8 percent 20 years ago. Energy just isn't the largest or most important item in our personal spending. Even after the recent price increases, gasoline is still two times less than the cost of Evian water, and 10 times less than a Starbucks latte.

Do high oil prices make affordable new methods of recovery that weren't possible before?

Definitely. They have increased investment in exploration and production, which is currently about $350 billion a year. Some of that money is going to new frontiers, like deep water. Ten years ago you wouldn't even think of drilling in 7,000 feet of water. Now people are doing that in the Gulf of Mexico, Brazil and West Africa. There are also unconventional oil resources now being brought to the market, including shale oil from tar sands.

Will that solve the supply problem?

No. The two big tar-sands deposits are in Canada and Venezuela. They produce 1.7 million barrels a day of it, and, if everything goes right, that could be 4 million barrels a day by 2015. But the world is consuming 86 million barrels a day, and each year we use 1 to 1.5 million barrels a day more than we did the year before. An extra 4 million barrels, while nice to have, is a drop in the bucket. We don't just need more investment in tar sands; we need a whole new oil province every year, a new Azerbaijan or Alaskan North Slope. The recent discoveries in Brazil's Santos Basin are very exciting, and very promising. But you're probably not going to get much new supply from it until eight or 10 years from now, and by then we're going to need a new one at least as big.

http://www.newsweek.com/id/123482

Hess: We've moved from a supply-led market to a demand-led one. In the past, the world has relied on OPEC's spare capacity, which in 1985 was 10 million barrels per day. Today that number is about 2.5 million barrels a day. We no longer have a safety margin to ensure price stability in the face of supply interruptions and demand spikes. Right now it's hard to see any relief in sight. Then there's demand. About 50 percent of oil demand is for transportation, and auto ownership in the developing countries is growing swiftly, especially in India and China. Goldman Sachs estimates that by 2050, they could have 1.1 billion cars on the road, up from just 20 million three years ago. That's an overwhelming increase in the need for automotive fuel. Put those two things together—limited supply and increasing demand—and you get high oil prices.

While Hess is partically right he skips a couple very important factors.

First, according to Bloomberg demand has fallen off. This is evident by the increase in reserves in the US over the past several weeks. This proves demand whilean important driver isn't the only driver.

Secondly, the dollar is worthless. It now takes more dollars to buy a barrel of oil since it has fallen to record lowes against the Euro and toher wrold currencies.

Third, Mr. Hess fails to tak into account geopolitical issues, such of Vensualia and Iran. Remember the the vast majority of oil is produced in politcally unstable places. Companies producing oil int hese areas attach a premimum for the risk they are taking.

Fourth, speculators are investing hugh sums of money in commodities as a hedge against inflation. Oil is now acting like gold. People aren't interesting int he amoung of gold that is produced, they are interested in the fact it holds its value.

Cato

Fourth, speculators are investing hugh sums of money in commodities as a hedge against inflation. Oil is now acting like gold. People aren't interesting int he amoung of gold that is produced, they are interested in the fact it holds its value.

Very wise insight, Willy. As a matter of fact, I believe this is the single biggest factor in the price of oil at the moment. It will get worse as the market charges all the traffic will bear.

TerryRC wrote:Fourth, speculators are investing hugh sums of money in commodities as a hedge against inflation. Oil is now acting like gold. People aren't interesting int he amoung of gold that is produced, they are interested in the fact it holds its value.

Very wise insight, Willy. As a matter of fact, I believe this is the single biggest factor in the price of oil at the moment. It will get worse as the market charges all the traffic will bear.

That is the American "free enterprise" way.

Even the "not so free enterprise" way, the Government does that with taxes and the State of WV does it with all the whiskey that is sold within the State.


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This accounts for approximately $35 to $40 of the price of oil.

TerryRC wrote:Fourth, speculators are investing hugh sums of money in commodities as a hedge against inflation. Oil is now acting like gold. People aren't interesting int he amoung of gold that is produced, they are interested in the fact it holds its value.

Very wise insight, Willy. As a matter of fact, I believe this is the single biggest factor in the price of oil at the moment. It will get worse as the market charges all the traffic will bear.

I don't think anyone has a clue as to where the market will go. I do know this, there is very little any of us can do about the markets. The only thing we can do is become more efficient with our usage, thus lessen the percentage of our income that goes to energy use.