US Economic Recovery Boosts Demand for Oil

Climb in the price of oil cheers up industry executives and environmentalists

IF there is one thing upon which oil companies and environmentalists agree, it is that low oil prices are bad. The companies lose money and the environmentalists cannot rationalize investments in transportation efficiency and alternative fuels.

Both should be cheered up slightly - although consumers will be annoyed - by the recent end to bargain-basement oil prices.

``We've passed the low point in the cycle for this year,'' says Tom Burns, manager of economics for Chevron Corporation in San Francisco.

In trading this week in New York, oil sold for more than $16.60 per barrel, up from $12 in January.

Motorists are noticing the rise. The average cost of self-serve regular gasoline has inched above $1.08 per gallon, up two cents since January, says Geoff Sundstrom, a spokesman for the American Automobile Association.

Oil prices weakened last October after the Organization of Petroleum Exporting Countries (OPEC) failed to restrict its output. After a second futile gathering of OPEC members, prices collapsed in December. Mr. Burns says the market overreacted to weak demand in Europe and Russia, growing output from the North Sea, and an expectation that embargoed-Iraq would resume oil exports.

Now demand is rising, driven by economic recovery. Company stocks are low. An Iraqi resumption is nowhere in sight.

Producers will not really be comfortable until oil climbs to $18. But analysts do not expect to reach that level this year. Jay Hakes, who heads the Energy Information Administration (EIA), foresees ``gradual increases.''

``In oil, the problem is never scarcity. It's surplus,'' says Ed Rothschild, energy policy director for Citizen Action. OPEC produces 25 million barrels per day. It could pump 26.5 million bpd, not counting Iraq, Burns says.

The way Gigi Lazenby sees it, Saudi Arabia is ``trying to push us out of business.'' Ms. Lazenby is president of the National Stripper Well Association.

At least 15 percent of the 6.6 million bpd of United States oil production comes from 460,000 low-producing, highly price-sensitive stripper wells.

``Fifty percent are uneconomic right now,'' Lazenby says. If that does not change, the wells will be sealed, throwing away millions of barrels of producible oil.

As it is, the EIA forecasts that imports will supply 60 percent of net US oil consumption by 2010, up from 37 percent today. ``No one has argued with that number,'' Mr. Hakes says.

Steve Layton, executive vice president of Equinox Oil Company in The Woodlands, Texas, calls the recent price uptick ``a welcome sign'' but says the situation is ``still very critical.'' Producers will not spend money to maintain stripper wells unless sure higher prices will hold.

If the wells develop a problem first, they will be abandoned, Mr. Layton says. That is why he says 50,000 stripper wells will cease production this year, compared with 16,000 in average years.

Low oil prices keep people ``hooked on oil,'' Mr. Rothschild says. To rectify that, he says he would like a phased-in addition of 50 cents per gallon to gasoline taxes. But he acknowledges the political chances are nil.

A higher gasoline price might make alternative fuels more attractive, but it would not cut down on travel, Mr. Sundstrom says. ``Very little driving is discretionary,'' he says.

And thanks to air pollution concerns, dual-fueled industries no longer switch as quickly from cleaner-burning natural gas when the price of oil drops. ``People used to turn on a penny,'' says Charlotte LeGates, a spokeswoman for the Natural Gas Supply Association.

Since electric utilities burn little oil, research on efficiency and alternatives is unimpeded by low oil prices. ``For us, that's not a problem,'' says Scott Sklar, director of the Solar Energy Industries Association.

One beneficiary of low oil prices is the strategic petroleum reserve (SPR). The Department of Energy expected to buy just 3 million barrels of oil with the $75 million that Congress appropriated for this fiscal year. But the DOE added 4 million barrels to the 591-million-barrel reserve and still has $9 million left.

``It makes us happy,'' says SPR head John Bartholomew.