Transcript 7/09/00 World oil guru says petrol prices will stay high for years KERRY O'BRIEN: And compounding the Government's currency headache today, a surge in the world price of oil to US$35 a barrel -- the highest price in 10 years. And with the price of petrol at the bowser in Australia hovering around the dollar mark in the cities and significantly higher elsewhere, the Howard Government had been looking hopefully to a meeting of the OPEC oil cartel this weekend for some relief. OPEC produces 40 per cent of the world's oil, but one of the world's oil experts says whatever the cartel decides, it will have little bearing on the price. Michael Economides, Professor of Petroleum Engineering at the University of Houston, has an impressive track record in predicting trends in the oil market. When the world oil price slumped to US$11 a barrel in the wake of the Asia crisis in '98-'99, he accurately predicted it would soar to US$30 a barrel within a year. I spoke with Professor Economides in Houston earlier today. Michael Economides, what do you expect the OPEC meeting at the weekend to decide? PROFESSOR MICHAEL ECONOMIDES, UNIVERSITY OF HOUSTON: Well, I expect them to actually increase their output by perhaps 500,000 barrels a day, but this increase has already been registered in their production, so, personally, I don't really think there's going to be much of any major significance that will come out of the OPEC meeting next week. KERRY O'BRIEN: Particularly, I imagine, given the fact that the price of oil per barrel still seems to be rising -- overnight, it's hit a 10-year high at around US$35 a barrel. Do you expect that, in fact, possibly even to continue? PROFESSOR MICHAEL ECONOMIDES: I think that the price of oil is going to continue to escalate, the price of gas is going to continue to escalate and essentially we are in what stockbrokers would call a bull market for all energy commodities and I think it's going to last at least two to three years from now. KERRY O'BRIEN: You also talk about a problem with tankers so that even if the OPEC countries are able to increase their oil production, there is a problem with the tankers. Now, what exactly is that problem and how would that impact? PROFESSOR MICHAEL ECONOMIDES: A lot of the tankers are going to undergo mandatory retirement. It takes at least 24 months for new tankers to come on line. In the US and elsewhere in the world we have problems of income in natural gas. Our liquid natural gas income capacity in the US is pitiful, so we're actually going through some major, major growing pains and, essentially, we're paying the price of energy abundance over the last, let's say, 20 years since, let's say, the last energy crisis. KERRY O'BRIEN: Just going back to that OPEC meeting, though, even though you say that it's not the real issue, it's a fact, isn't it, that no matter how much OPEC says it wants to increase production, is it true that outside of Saudi Arabia, none of the members have actually got the capacity to significantly increase their production, anyway, at the moment? PROFESSOR MICHAEL ECONOMIDES: I really believe that the excess capacity of OPEC, which was 20 million barrels a day just 15 years ago, has essentially evaporated, is now an issue where there is zero or two million barrels a day, so, essentially, zero. We have grown really very thin and the excess capacity of petroleum products throughout the world. KERRY O'BRIEN: A recent report from Merril Lynch which raised the issue of infrastructure investment, pointed out that the big three oil companies had reduced their infrastructure investment in oil by 23 per cent just this year. Now, what kind of a threat does that pose? PROFESSOR MICHAEL ECONOMIDES: With US$30-plus oil they have actually reduced their reinvestment by something like 23 per cent, the same sentiment, incidentally, happens in practically every OPEC country, so we see significant problems in reinvestment and, therefore, additions to production throughout the world. KERRY O'BRIEN: So what you're saying is that this OPEC meeting at the weekend, the OPEC summit later in the month, these things are not going to have any real impact on prices, and I'm talking now particularly about Australia. Can we not expect to see any significant reduction in petrol at the bowser over the next short to medium term? PROFESSOR MICHAEL ECONOMIDES: In Australia in particular I anticipate the prices will continue to go higher and it's going to be perhaps not shocking, but certainly significantly higher than what it is today, actually. I believe that you are having A$1 per litre of gasoline, of petrol, in the cars. I anticipate that not to go down for the foreseeable future. KERRY O'BRIEN: It sounds on your prognosis that there is not much of a buffer if something untoward or unpredictable happens if there's a slightly colder European winter, a slightly colder American winter or some crisis. Is that correct? PROFESSOR MICHAEL ECONOMIDES: Yes, actually the situation with the oil business right now is so tight that any little event can actually result in significant overrun in prices. For instance, a military coup in one of the OPEC countries, a few cold days in the north-east of the US, a hurricane in the Gulf of Mexico. Any one of these issues can actually result in, really, prices of petroleum that were unheard of even in the entire history of petroleum prices. I can easily see the prices spike into significantly over US$40 a barrel, perhaps as high as US$50. KERRY O'BRIEN: So, in summary, regardless of what OPEC does this weekend or at any time in the short to medium term, because of the rundown in investment in oil infrastructure, because of tanker problems, we will continue to have prices at least at these levels for some time to come? PROFESSOR MICHAEL ECONOMIDES: Yes, that's a reasonable assumption and with a possibility of spiking -- I really emphasise the word "spiking" -- to much higher levels, but certainly we anticipate to see far higher than equilibrium prices of hydro carbons for the next two to three years. Equilibrium, incidentally, we have calculated in the University of Houston something of the order of US$25 dollars per barrel. That will be the equilibrium price. We're certainly not in equilibrium outlook today and certainly over the next two to three years. KERRY O'BRIEN: Michael Economides, thank you very much for talking to us. PROFESSOR MICHAEL ECONOMIDES: Thank you so much. ====================== The Environmental quandary: We need the Oil, yet the Tankers that are used to haul the Oil are environmental hazards. We therefore shorten the tanker's lifespans and retire them early. However, most western nations will not dispose of them properly, so they end up in third world nations where there are few or no environmental laws. Strict laws also inhibit the construction of new tankers. This mention of an Oil Tanker Shortage reminded me of an excellent article written in the August Issue of Atlantic Monthly magazine. I read it a couple of months ago and found it very interesting. It can be read and seen at the following Atlantic Monthly Website URL: Marshall Part One: http://www.theatlantic.com/issues/2000/08/langewiesche.htm Part Two: http://www.theatlantic.com/issues/2000/08/langewiesche2.htm Part Three: http://www.theatlantic.com/issues/2000/08/langewiesche3.htm Part Four: http://www.theatlantic.com/issues/2000/08/langewiesche3.htm