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The Honolulu Advertiser

Posted on: Tuesday, April 5, 2005

High price validates oil's value

By Harold Brubaker
Knight Ridder News Service

PHILADELPHIA — At nearly $60 a barrel, crude oil is looking a lot more like a precious resource than a cheap commodity.

And that's just the way it should be, said Matthew R. Simmons, a Houston energy analyst. "Oil is a really, really scarce carbon resource."

Prices "were way too low for too long," he said in a telephone interview yesterday.

Now, they are catching up, prompting widespread debate about energy policy and the effect of the higher prices on supply, demand and the health of the economy.

Today, the House Energy and Commerce Committee is expected to begin working on the Energy Policy Act of 2005, and Federal Reserve Chairman Alan Greenspan is scheduled to speak about energy to the National Petrochemical & Refiners Association.

During the past two years, the price of crude oil on the New York Mercantile Exchange has more than doubled from $25.91 to $57.01 yesterday. That's still below the inflation-adjusted high of more than $90 a barrel reached during the energy crisis of 1980.

Yesterday's crude oil price fell from an intra-day high of $58.28 after the Organization of Petroleum Exporting Countries said it might boost oil production by 10 percent to keep high oil prices from hurting economic growth.

The federal Energy Information Agency reported yesterday that the national average price for gasoline was $2.26 per gallon, 11 percent higher than four weeks ago and 41 percent higher than a year ago.

In Hawai'i, the average price for a gallon of self-serve regular was $2.466 yesterday, up 16 percent from a year ago.

That means Americans are spending roughly $14 million more a week for gasoline this year than last year.

Even so, Simmons and other analysts said it is not clear that high oil prices will severely damage the economy. They said that at each new level — $30, $40 or $50 a barrel — worries abound, yet the economy keeps growing.

"It's a little different than the oil shocks we had before," said Thorsten Fischer, a senior economist at Economy.com, a consulting firm in West Chester, Pa.

The key is that strong global demand is the main factor driving prices higher, not the supply shocks that characterized the energy crises of the 1970s and early 1980s, Fischer said. Still, he said high oil prices could shave up to a percentage point off the growth in gross domestic product.

Another factor driving crude prices up is the flood of money into commodities markets caused by low interest rates around the globe, Fischer said.

Last year, the volume of crude oil futures contracts traded on the New York Mercantile Exchange reached 52.9 million, 16 percent more than the previous record of 45.7 million set in 2002.

No one knows how much of the spike in oil prices has been caused by pure speculation in commodities markets and how much by genuine concern about supply.

Jamal Kureshi, an analyst with PFC Energy, a Washington consulting firm, said prices have already reached the point at which it is attractive to explore alternative fuels, such as turning natural gas into liquid fuels for transportation.

Other fossil fuel alternatives, such as Canada's tar sands, have become economically viable at these price levels, but they are not expected to become a major supply source because they are so hard to process.

Kureshi expects demand — and prices — to fall sometime in the next few years.

But that might not be a good thing because it could reflect a declining economy.