Oil's Pressure Points

<a href=www.nytimes.com>The New York Times April 13, 2003 By NEELA BANERJEE

FOR weeks, oil prices have swung wildly on news from the battlefronts in Iraq. But the painful truth is that Iraq is only the most extreme example of the world's reliance on hot spots to slake the thirst for oil.

Through the winter, oil prices climbed steadily, not only in expectation of another Persian Gulf war but also because political strife in Venezuela was choking off that nation's exports. As the fighting began in Iraq, ethnic clashes in Nigeria's oil-rich Niger Delta forced Royal Dutch/Shell, ChevronTexaco and TotalFinaElf to shut down their operations there, slicing the country's oil production by almost 40 percent.

Demand for oil continues to rise, bumped ever higher by the growing prosperity of emerging markets like China and India and the unquenchable demand of the United States, by far the world's largest consumer of oil.

The upshot of all this, energy experts say, is a global oil industry and world oil markets that are more volatile and unpredictable than they have been in a decade.

Increasingly, oil companies are shying away from holding large stocks of oil and drilling every time oil prices rise, for fear of the financial hit that comes when oil prices plummet. Without that extra cushion of oil at refineries or in storage, consumers have begun to feel every swing of oil prices — and will continue to do so for the foreseeable future. "Volatility is the norm, not the aberration," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.

OPEC, the cartel that spurred past oil crises by cutting off exports to the West, now tries to steady the market, with Saudi Arabia, Kuwait and others priming the pumps when less-stable producers falter. Under American influence, if not outright control, Iraq's huge reserves may offer further ballast in an uncertain energy world.

But industry experts say the unavoidable reality is that the search for diverse sources of oil — a keystone of American policy — is sending the oil industry into one fraught corner of the world after another. And the discovery of oil is itself almost a guarantee of conflict.

"People have to stop thinking that oil markets will be affected by embargoes, because embargoes are a thing of the past," said Moisés Naím, a former Venezuelan minister of trade and industry and now editor of the journal Foreign Policy. "The problem is failed states. It's a harbinger of things to come: when internal political turmoil limits oil to world markets."

Prosperity and Consumption

More than anything, the force driving oil companies into ever more perilous parts of the world is the middle-class consumer: the American suburbanite in her sport utility vehicle and the Chinese city dweller behind the wheel of his first car.

Last year, the world burned 76.7 million barrels of oil a day, according to a report by Cambridge Energy Research Associates.

The United States far outpaces any other country in the consumption of oil. With just 3 percent of the world's population, it consumes more than 25 percent of crude oil, roughly equal to its share of the global economy.

But industry experts predict that most of the increase in demand for oil over the coming decades will result from growing prosperity in the developing world, led by China. As people there make more money, they buy more products, including cars. As they leave the countryside for cities, they rely on buses and cabs to move around. By 2030, according to to the International Energy Agency, China will import as much oil as the United States does now.

The American economy is not as reliant on oil as it was 20 years ago, mainly because of significant improvements in energy efficiency and a shift away from heavy industry to service businesses. So when oil prices climb, the economy may slow, but it does not easily sink into recession, analysts and economists say.

Nonetheless, American prosperity stokes this country's appetite for oil — and it shields most consumers from having to adjust their behavior when gasoline prices rise.

Consumers grumble when oil prices spike, but there has been only the faintest evidence that high pump prices are chilling their ardor for S.U.V.'s. In part, that is because recent gas prices of $2 a gallon or more were still lower, when adjusted for inflation, than the record prices 23 years ago.

The Bush administration has backed long-term research into hydrogen to replace crude oil, but that technology — at a competitive price — is still 15 to 20 years away, most experts agree.

In the meantime, the public debate continues over efforts to slow American oil consumption without damaging the economy. Just Thursday, the House of Representatives rebuffed legislation that would compel automakers to increase the fuel efficiency of S.U.V.'s.

Politics and Production

Eager to reduce America's dependence on Middle Eastern oil, the Bush administration has been encouraging the search for oil in new places.

Yet many of the sites that Washington has lauded for their abundant oil resources are political quagmires, one way or another — from the steaming Niger Delta to the frigid coastal plain of the Arctic National Wildlife Refuge.

In Nigeria, the run-up to this month's parliamentary and presidential elections turned bloody when ethnic clashes erupted — in large part over the complaints of the Ijaw tribe that they had been deprived of their fair share of the proceeds from oil development. The violence has largely abated for now, but dozens of Nigerians died, and major oil companies halted production in parts of the Niger Delta for weeks.

Two years ago, Vice President Dick Cheney's energy task force promoted the prospects of big gains in Nigerian production. But the problems have highlighted the risks rather than the opportunities.

Because the sweet crude from Nigeria is particularly good for making gasoline, refineries on the East Coast rely on it, especially as the United States enters the spring and summer driving season. It is still unclear how the temporary curtailment in Nigerian exports will affect American gasoline prices.

Oil and government interests in the United States have nurtured ties to Venezuela for decades, as a conveniently close supplier. But there, too, politics has interfered recently with oil production, as a popular strike against President Hugo Chávez's rule sliced oil exports for months by more than 80 percent from usual levels of about 3.1 million barrels a day.

The government has restored exports to about 2.5 million barrels a day, even as 17,000 oil company employees remain off the job — but not before the oil markets had driven home the vulnerability of supplies that had never been cause for worry.

"Even if there were no Iraq crisis, what happened in Venezuela and Nigeria would have registered at the gas pumps," said Daniel Yergin, chairman of Cambridge Energy Research Associates. "What no one pays attention to is that the disruption of Venezuela was even larger than Iraq.

"The working assumption" in oil markets, Mr. Yergin added, has to be "that there will be political turbulence or other kind of turbulence."

Despite the volatility abroad, most major oil companies, including American ones, are steadily shifting their investments away from the United States. Oil production is declining in the United States, where proven reserves are small. For big payoffs, companies are turning to more technologically challenging — and therefore more expensive — areas here, like the deep waters of the Gulf of Mexico.

But sites in the United States come with their own political perils. The administration and its Congressional allies, for example, see the Arctic National Wildlife Refuge in Alaska as the next big drilling opportunity in the United States. Yet opposition from many Democrats and environmental groups has for years kept the refuge off-limits for exploration.

The seemingly endless battle has quelled the oil industry's enthusiasm. Though oil companies publicly back the administration, most executives say in confidence that they would rather look elsewhere. No one really knows how much oil is in the refuge, they say, and they worry that drilling would be stymied for years by legal fights — or that leases would be reversed if Washington shifted from support to opposition of development.

This world of uncertainty, industry experts say, underscores the fact that the sole oil producer that can dampen volatility is Saudi Arabia.

When Venezuelan exports plummeted this winter, for example, Saudi production rose sharply — and American imports from Saudi Arabia climbed to record highs.

"Saudi Arabia is the central bank of oil," said Roger Diwan, a managing director at PFC Energy, a consulting group. "When things go wrong, they deliver. They always do things that are good for oil markets, and they know that extreme prices and disruptions are not good."

Prospects and Technology

The West, though, is uncomfortable relying on the kindness of Saudi Arabia and on other big producers, like Russia and Mexico, that also guard their oil resources jealously.

Big oil companies complain that because they cannot work in many of the world's richest fields, production is growing at a far slower pace than they had forecast just a year ago.

Many American and British companies have core projects in the North Sea, Alaska and the shallow waters of the Gulf of Mexico, all areas where oil production is declining. Earlier this year, BP, Royal Dutch/Shell and ChevronTexaco announced that they had missed their production growth targets for 2002 and would no longer offer forecasts.

The prospects are not all bleak. Competitors are closely watching BP's plans, announced in February, to plow $6.75 billion into a development partnership in Russia.

And as the Bush administration fashions a plan to govern Iraq after the war, it hopes to foster institutions that make the country a model of peaceful, democratic governance for oil-exporting states. The raw material is promising, regional experts say, including a domestic oil bureaucracy whose managers and scientists are widely respected for their professionalism and lack of venality.

Much closer to home, the United States already has a large, stable supplier of oil in Canada, with proven oil reserves second only to Saudi Arabia's.

Canada supplies 17 percent of American oil imports, more than Saudi Arabia or Venezuela. Conventional oil reserves in western Canada are gradually declining, but they are being replaced by new oil fields off the coast of Newfoundland and Nova Scotia and deposits of tarlike oil sands in northern Alberta.

The drawback of the Canadian oil sands is the high cost of production. "Instead of 50 cents a barrel in the Middle East, it's more like $6 or $7," said Brian Prokop, an energy analyst at Peters & Company in Calgary, Alberta. The oil sands are either mined or extracted by injecting huge amounts of hot water underground, after which the tar is processed into crude oil.

Such technology is the main reason production has remained viable. Another example is deep-water production in the Gulf of Mexico, which would not be possible or economically feasible without the great strides made in seismic technology and drilling methods.

In testimony before Congress recently, Mr. Yergin predicted that new oil technology could expand world oil reserves by 125 billion barrels — more than the proven reserves of Iraq.

"We're in one of those periods when a technological revolution is changing the economics and capabilities of the oil industry," he said in an interview. "What technology does is lower the costs and expand the horizons. And it keeps pushing the day of shortage and depletion out into the future."