ENERGY: ENERGY ECONOMICS
Global Supply and Demand: Q&A with John Felmy
Plus! The top energy news stories of 2006
Despite lower gasoline prices this fall, prices of oil, natural gas and gasoline once again topped the energy debate this year, leading to questions of price-gouging and renewed calls for both conservation and further exploration. But as has been the case in recent years, this year’s prices of fossil fuels are due to simple economics. Prices are high when global supplies are tight and global demand high — driven in large part by ever-increasing demand from developing countries such as China and India — and prices are lower when supply is higher or demand is lower, as it was this fall. In September, Geotimes reporter Megan Sever talked with John Felmy, chief economist at the American Petroleum Institute, about the energy market over the last year.
BP executives testified before Congress last fall, following a shutdown of oil production on Alaska’s North Slope. Earlier in the year, executives of several other major oil companies also testified before Congress over their record profits, and the question of whether or not they were fixing prices of gasoline and oil. Photograph is by Christine McCarty with the House Energy and Commerce Committee.
MS: What do you think is the most significant energy story of the year?
We have also seen really complicated changes in the gasoline and diesel fuel situation. That’s on top of the damage that we suffered from the hurricanes last year, when both offshore production and refineries were offline. All of these things came together to cause really high gasoline prices, record crude prices at least in nominal terms and a clear message that markets are tight.
Interestingly, this year, we have seen consumers begin to respond to high prices. [The response] has not been to the degree that we saw back in the early 1980s when consumers dramatically changed their usage patterns by switching to small cars and so on, but we’ve seen demand go down on some points.
MS: Could you elaborate on the consumer changes?
We have seen evidence of sport utility vehicle (SUV) sales declining noticeably, though not necessarily for the real expensive ones, but sales dropped considerably for the middle-range SUVs. On balance, what you saw was marginal demand change, but not as dramatic as we’ve seen in the past.
MS: What do you see going forward? Will we continue to see prices fall or remain low?
MS: What is the situation in Nigeria, Iraq and other countries?
The Nigeria situation is one of civil unrest. What needs to happen is to get all the parties there to agree on what needs to be done to develop the resource and share the revenue. It remains an unknown.
In Venezuela, [President Hugo] Chavez has laid down the gauntlet about what he thinks of the United States and about some of the foreign companies operating [in Venezuela]. It’s a viewpoint that is very unfortunate because the country has a lot of resources that could be developed. … Without knowing the rules of the game, it’s unclear how many foreign companies might be interested in going in there.
The situation in Libya, of course, is more positive. … We’ve already seen companies bidding [for leases] and looking for major development there, so that looks to be promising.
MS: Early this fall, BP temporarily shut down its production at America’s
largest oil field at Prudhoe Bay on Alaska’s North Slope, following
an oil spill earlier in the year and corrosion problems. Have we seen
any impacts from the BP shutdown?
Initially, there were some short-term price fluctuations [in the oil market], when it looked like 400,000 barrels [per day] were going to be offline. That charged the markets a little bit, but they’ve since settled. And we’ve seen a decline in the price per barrel of oil.
MS: Early in the year, following announcements of oil companies’ record-high profits, Congress held hearings about price-gouging. How has that affected the market, prices and the public perception?
What’s more concerning to us is that some of this legislation that Congress is talking about could morph into price controls. … And that returns us to the bad old days of the 1970s, when price and allocation controls really quickly fouled up the marketplace and cost consumers a lot. We would hope going forward that Congress thinks very cautiously about what they’re trying to do. … They need to just let the markets work.
MS: I have heard that the United States has ramped up its oil and gas production this year. Is that true?
MS: What sort of message would you want to give to the American public and politicians regarding the current energy market?