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THE NEW YORK TIMES: With Oil Prices Off Their Peak, Are Supplies Assured?: "John Hofmeister, head of the Shell Oil Company in the United States, said in an interview, "This high price cycle is artificially inflated.": Monday 5 December 2005

By JAD MOUAWAD

Published: December 5, 2005

Hold on to your gas guzzlers - cheap oil may once again be just around the corner. Even as consumers worry about high gasoline prices and rising heating bills, oil executives in London, Texas and Saudi Arabia seem to be concerned about a prospect of falling oil prices.

In a recent speech in Singapore, Lord Browne, BP's chief executive, spoke of a possible sharp drop in prices and called current levels "unsustainably high." John Hofmeister, head of the Shell Oil Company in the United States, said in an interview, "This high price cycle is artificially inflated."

The notion of a steep fall-off in energy prices may seem far-fetched.

After all, in the last year, the market has experienced crude oil that touched nearly $70 a barrel; huge disruptions in the Gulf of Mexico; strong demand from the United States and from the world's fastest-growing market, China; continuing problems in producing Iraqi oil for export; and mounting tensions with Iran, a large OPEC exporter.

If anything, most of those situations would point to a sustained period of high energy prices. Indeed, most analysts expect crude oil prices to remain above $40 a barrel for the foreseeable future.

But throughout its history - ever since Edwin L. Drake discovered oil near Titusville, Pa., in 1859 - the business has witnessed a succession of booms and busts, and oil companies have found it impossible to balance their future production with the world's need for oil. Too much capacity, and prices fall; too little, and they rise.

Today, oil producers are again under pressure to increase production and refining, and to increase investments to bring more oil to the markets quickly. But oil executives and government ministers are concerned that if demand were to slow down, even a little bit, these investments might create a large oversupply of oil in two to three years, pushing prices down again.

Only a few years ago, the industry had a glut in production capacity, sluggish demand and a financial crisis in Asia that led to an oil-price collapse in 1998 with next-month futures contracts falling to about $10 a barrel.

Prices eventually rose, but the experience left a deep and lasting impression among producers. Indeed, Saudi Arabia's oil minister, Ali al-Naimi, said recently at a news conference in Riyadh, "As producers, we don't want to build capacity without demand."

This recurring debate in the industry may now seem odd. Recently, the theme has been about the end of "cheap oil," prompted by a surge in Chinese demand and a lack of spare production capacity. Traders' concerns that producers would struggle to catch up with consumer demand pushed prices from $30 to $60 in less than two years. Doomsayers saw a sign that the world was running out of oil.

But there are indications that high oil prices may be coming to an end. After approaching $70 a barrel after Hurricane Katrina interrupted supplies from the Gulf of Mexico, crude oil has fallen by more than $10 a barrel, settling in New York on Friday at $59.32. Analysts at Citibank said the price might fall to $50 - and possibly less in coming months.

"The big issue is what demand is going to be next year," David J. O'Reilly, the chief executive of Chevron, said in a telephone interview. "High prices tend to attract higher production and higher supplies. The question then is, What will happen to the demand side? The fact is we rarely know what is going to happen."

Mr. Naimi said Saudi Arabia had "expressed a concern with consuming countries that it would be helpful for producing countries to have a better forecast and a more reliable projection of what demand is."

But even as he calls for better data, Mr. Naimi and most oil experts know that predicting the future is more art than science, especially when it comes to oil.

In November, the International Energy Agency, an adviser to industrial nations, pared its growth forecast for 2006 for the fourth consecutive month. It now expects demand to grow to 85 million barrels a day next year, up 2 percent, or 1.7 million barrels from this year. Demand for all of 2005 is expected to be up 1.5 percent.

Part of the uncertainty lies in what will happen in the Chinese economy. In 2004, global oil consumption rose 3.7 percent, to 83 million barrels, more than twice the average annual growth in the last decade, a pace that surprised analysts and oil executives. China alone accounted for a third of that growth, its demand for oil up 15 percent.

This year, Chinese growth is expected to subside somewhat, expanding 3.3 percent, according to the International Energy Agency. It is expected to pick up in 2006, to 6 percent, as a result of strong worldwide car sales and electricity generating.

Such wide swings have led some analysts to express doubt on the reliability of information from China. The reality is that it will take some time before anyone knows for sure what Chinese demand is this year.

There are other clouds on the horizon - among them fears of an American economic slowdown, last week's strong economic data notwithstanding, or an outbreak of avian flu, potentially reducing international air travel and hurting regional economies.

"The biggest worry I have for next year is geopolitical," Mr. Hofmeister of Royal Dutch/Shell's American unit said. These, he said, included "disruption in supplies, greater distress in the Middle East, a slowdown in China, a collapse of Iraq."

Mr. Hofmeister continued: "My other worry is a slowdown in the U.S. economy. When you combine the high energy prices, the difficulties with vehicle sales, the backup in the supply chain, the problems with the retail chain, you could end up with a slowdown in demand."

In addition to these questions about where consumption may be headed, there are also uncertainties over how quickly oil companies are adding supplies.

In a much-discussed report, a prominent consultant, Cambridge Energy Research Associates of Cambridge, Mass., estimated that global production would rise by 16 million barrels - or nearly 20 percent - by 2010, far outstripping the estimated growth in demand over that period.

Some analysts fault the report, saying it is far too optimistic. And oil companies have been criticized lately for investing too little in exploration and refining capacity. A few weeks ago, the Senate held hearings and summoned the heads of the top oil companies to testify about their record profits and to justify their investment decisions.

Saudi Arabia, the world's largest producer, has been assailed for investing too little in new capacity.

One of the problems, the industry argues, is that forecasting the level of supplies needed to keep up with long-term demand can be tricky.

The International Energy Agency, in its recent global outlook, laid out diverging visions of where energy demand might be headed over the next quarter-century, and it found that the difference between them was nearly 20 million barrels a day by 2030, or twice the current Saudi production.

"This is a new era," said Fatih Birol, chief economist at the energy agency, which is based in Paris. "The risk is less of a drop than higher prices in the future."

But not everyone is persuaded. Shell, for example, assumes the opposite, lower prices, when it looks at future projects.

"We've very conservative," Mr. Hofmeister said, adding that projects he considers must be profitable at $25 a barrel. Some analysts argue that the break-even point on oil is unreasonably low and that it shuts the door to additional, if more costly, supplies.

But for oil executives, their experiences of the 1985 and 1998 price collapses remain a stronger influence than their belief that the world has entered a period of more expensive energy.

"If demand slowed, we'd be in a world of cheap supplies again," Mr. Hofmeister said. "But decisions I make today must still make sense in 25 years."

As Lee R. Raymond, Exxon Mobil's chairman, said in his recent testimony to Senate committees, "In the energy industry, time is measured in decades."

He said Exxon was involved in a $13 billion project in eastern Siberia that began 10 years ago and was expected to produce for 40 years. "All told, that's more than 50 years for one project," he said. To drive home his argument, he added, "Fifty years ago, Dwight Eisenhower was president."

He might have added that this was before the nation's Interstate System of highways was completed and before S.U.V.'s became Americans' vehicles of choice.