Why prices at the pump may go up more

Oil-rich nations have now agreed to cut production, buoying the industry but raising the cost of gasoline.

If the American oil patch has a face, it must be grinning right now. From the offshore wells of the Gulf of Mexico to the rugged derricks of the Mountain West, oil workers and producers are finally looking to the future with hope as the oil glut appears to finally be easing.

The unusual heroes ending this yearlong glut are the members of the newly resurgent Organization of Petroleum Exporting Countries (OPEC), which met in Vienna, Austria, this week to ratify massive cuts in production. Energy experts say OPEC countries simply couldn't continue to flood world markets with excess oil.

"From an oil producer's point of view, we had reached almost suicidal price levels," says John Lichtblau, an energy analyst with the Petroleum Industry Research Foundation in New York. The pinch hit not just small family-owned oil companies, but also entire nations that that depend on oil to drive their economies.

While suspicion of cheating on the cuts surely remains among OPEC nations and non-OPEC members such as Mexico and Norway, all appear to be united by a common need: They all need to cut production, says Mr. Lichtblau, to drive up the value of the oil they continue to pump.

Suddenly, it's morning in the American oil patch. Asian economies are shaking off recession, increasing their demand for oil. Foreign oil producers appear to have stopped cutthroat price wars for now and are focused on bringing the world supply under control.

For the hundreds of thousands of Americans whose livelihood depends on the oil industry, the OPEC cuts will push up oil and gasoline prices that had fallen to their lowest levels since World War II. In anticipation of these cuts, the average price for a gallon of gasoline has already jumped 8-1/2 cents in the past two weeks. Yet this rising cost of fuel is not expected to approach the bad old days of 1970s inflation.

will account for almost 30 percent of the worldwide cut, reducing its output by almost 600,000 barrels. Even if other countries start to cheat, leaving the Saudis and other Persian Gulf countries to their agreed-upon cuts, worldwide oil supplies will still be 1.3 million barrels less than they are today.

So far, the OPEC agreement has pushed up the price of a barrel of West Texas Intermediate - the national benchmark for oil prices. In just two weeks, it has gone from $12 to $15. That price may rise further once the cuts take effect, and once the world market becomes convinced that oil producers are serious about complying with the agreement.

"This is a big cut, and if it doesn't unravel, this would be a total paradigm shift in market dynamics," says Sarah Emerson, senior energy analyst at Energy Security Analysis Inc. in Boston. "I see $17 or $18 a barrel for West Texas Intermediate in the May-June-July time frame."

In oil towns across the Southwest, small independent producers are practically gushing at the news. "This is better than Christmas," says Dan Wallace, owner of Columbus Oil Company in Seminole, Okla., who has had to lay off 14 of his 19 employees in the past year because of low oil prices. Even so, oil prices will have to rise even more in order for him to make a profit. He gets $12.75 a barrel in current markets, and his lifting costs are $14.

But every little bit helps. "Gee whiz, at this point, hope is worth a lot."

For some, cheap oil has benefits

Still, not everyone is hurting in the era of cheap oil. Jim Baldauf, an Austin-area consultant for a number of oil and gas companies, says that the bad times for other oil companies means that his drilling costs are incredibly low - and attractive.

"A little company like ours can go out and rent one of these idle rigs, and not have to compete with an Exxon or a Union Pacific to get one of these oil leases," says the gravel-voiced businessman (who is not related to the writer). "We can drill a well that produces 300 or 400 barrels a day at $12 a barrel and still make three or four times our investment."

Of course, for the consumer, a resurgent market for oil means higher prices at the pump. But even if gas prices rise further, as experts predict, the effect on the pocketbook is likely to be small. If an average American puts 600 gallons of gas in his vehicle, an additional 10 cents per gallon would mean only $60 less in the wallet per year.

Few experts want to guess at how long the OPEC agreement will last. After all, in the oil business, cheaters do prosper.

"Any OPEC agreement will be the victim of its own success," says Mr. Beranek of Petroleum Finance Company. In the past, OPEC agreements unraveled when countries became tempted to take advantage of higher prices by increasing production.

But by asking for 2 million barrels in cuts, when only 1.5 million in cuts were needed to make up for shrinking Asian demand, OPEC may have planned for some wiggle room.

"They had a problem, but it wasn't this big of a problem," says Ms. Emerson of Energy Security Analysis. "They're taking a sledgehammer to an ant."

No need to sell the SUV

"The guys who bought SUVs [sport-utility vehicles] two years ago are still paying lower gas prices than they had when they bought them," says George Beranek, industry analyst for Petroleum Finance Company in Washington. "If you're going to cry about these prices,... buy a Saturn."

In total, the members of OPEC have agreed to cut more than 2 million barrels a day from their production starting in April. Saudi Arabia, the world's largest producer at almost 8 million barrels a day, will account for almost 30 percent of the worldwide cut, reducing its output by almost 600,000 barrels. Even if other countries start to cheat, leaving the Saudis and other Persian Gulf countries to their agreed-upon cuts, worldwide oil supplies will still be 1.3 million barrels less than they are today. So far, the OPEC agreement has pushed up the price of a barrel of West Texas Intermediate the national benchmark for oil prices. In just two weeks, it has gone from $12 to $15. That price may rise further once the cuts take effect, and once the world market becomes convinced that oil producers are serious about complying with the agreement. This is a big cut, and if it doesnt unravel, this would be a total paradigm shift in market dynamics, says Sarah Emerson, senior energy analyst at Energy Security Analysis Inc. in Boston. I see $17 or $18 a barrel for West Texas Intermediate in the May-June-July time frame. In oil towns across the Southwest, small independent producers are practically gushing at the news. This is better than Christmas, says Dan Wallace, owner of Columbus Oil Company in Seminole, Okla., who has had to lay off 14 of his 19 employees in the past year because of low oil prices. Even so, oil prices will have to rise even more in order for him to make a profit. He gets $12.75 a barrel in current markets, and his lifting costs are $14. But every little bit helps. Gee whiz, at this point, hope is worth a lot.

For some, cheap oil has benefits Still, not everyone is hurting in the era of cheap oil. Jim Baldauf, an Austin- area consultant for a number of oil and gas companies, says that the bad times for other oil companies means that his drilling costs are incredibly low and attractive. A little company like ours can go out and rent one of these idle rigs, and not have to compete with an Exxon or a Union Pacific to get one of these oil leases, says the gravel-voiced businessman (who is not related to the writer). We can drill a well that produces 300 or 400 barrels a day at $12 a barrel and still make three or four times our investment. Of course, for the consumer, a resurgent market for oil means higher prices at the pump. But even if gas prices rise further, as experts predict, the effect on the pocketbook is likely to be small. If an average American puts 600 gallons of gas in his vehicle, an additional 10 cents per gallon would mean only $60 less in the wallet per year. Few experts want to guess at how long the OPEC agreement will last. After all, in the oil business, cheaters do prosper. Any OPEC agreement will be the victim of its own success, says Mr. Beranek of Petroleum Finance Company. In the past, OPEC agreements unraveled when countries became tempted to take advantage of higher prices by increasing production. But by asking for 2 million barrels in cuts, when only 1.5 million in cuts were needed to make up for shrinking Asian demand, OPEC may have planned for some wiggle room. They had a problem, but it wasnt this big of a problem, says Ms. Emerson of Energy Security Analysis. Theyre taking a sledgehammer to an ant.