U.S. Officials See Increasing Gasoline, Natural Gas Prices

WASHINGTON, DC, March 5, 2004 (ENS) - Americans are likely to face record high gasoline prices this month and should not expect relief any time soon, the Bush administration told Congress on Thursday. The public should also not expect prices for natural gas to fall much in the short term, according the head of the Energy Information Administration (EIA), despite the administration's aggressive policies to open more of the nation's coasts and public lands to natural gas development.

Testifying before the Senate Committee on Energy and Natural Resources, EIA Administrator Guy Caruso told Senators that tight supply and demand is behind the high prices for both oil and natural gas.

Both markets are "very vulnerable to surprises," Caruso said and could face further disruptions or price spikes from seemingly minor production or distribution hiccups, severe weather or terrorist activity.

"We are facing high and volatile oil and natural gas prices in the short run," said Caruso, who added that the situation dictates "continued and increasing dependence" on imports of both fuels.

Caruso said the EIA will increase its forecast for average nationwide retail regular unleaded gasoline prices of $1.69 a gallon, but did not specify how much.

The current nationwide average price is $1.72 per gallon - the record price of $1.75 was set last August.

EIA Administrator Guy Caruso. (Photo courtesy EIA)

Caruso said the tightness of the world oil market is reflected by an excess daily capacity of only 2.5 percent - about 2.5 million barrels of oil.

The majority of that excess capacity is in Saudi Arabia, Caruso told the committee, adding that "there is very little flexibility in the system."

The United States consumes some 20 million barrels of oil daily - more than 60 percent of that amount is imported.

Senator Ron Wyden, an Oregon Democrat, said the Bush administration is making the situation worse for U.S. gasoline consumers by continuing to divert oil from the open market to fill the Strategic Petroleum Reserve.

The administration is currently allowing the oil industry to send 120,000 barrels a day into the reserve.

Wyden said he is "baffled" by a policy of awarding these long term contracts at high prices to fill the reserve while consumers struggle with record prices at the pumps.

Caruso denied that the policy is harming consumers. "Our view is that this does not reduce the oil supply," he said.

OPEC adapts its production to that figure, Caruso said, and that additional oil "is being produced by OPEC."

"It is not a net loss … it is a net zero," Caruso said.

Oil companies appear to be further driving up gasoline prices, Wyden said, by cutting refinery capacity and increasing refinery margins. He noted in particular a recent decision by Shell Oil to close a refinery in Bakersfield, California that has a daily capacity of 70,000 barrels.

"This Bakersfield closure does not smell right and it does not add up," he told colleagues.

"The federal government is sitting on its hands," said Wyden, who called for the Federal Trade Commission (FTC) to investigate Shell's closure of its Bakersfield plant.

Caruso declined to comment on whether the FTC should investigate but acknowledged that the gap in the market from the closed refinery is unlikely to be closed.

"There is no evidence that other refineries are going to come in," he told the committee.

The EIA administrator said natural gas prices are not expected to drop much for at least two years despite attempts to boost domestic production.

The United States is the world's largest consumer and producer of natural gas - some 84 percent of natural gas consumed in the United States is produced domestically.

About 15 percent is imported from Canada and one percent is obtained via imports of liquefied natural gas (LNG).

But in recent years severe weather and declining productivity have drawn down reserves of natural gas - factors heightened by increasing demand.

Importing liquefied natural gas is seen as a good longterm solution by some to the natural gas price crunch, but it is an expensive proposition that will take years to develop. (Photo courtesy Energy Department)

The EIA predicts prices for natural gas will remain near this level for the next two years, but should drop by the end of the decade as new domestic production is brought on line and more LNG is imported.

But the agency's natural gas projections may be "overly optimistic," according to Richard Sharples, senior vice president, Anadarko Petroleum Corporation.

"The early indication of 2003 production is of a production decrease of two to three percent," Sharples said, adding that the EIA may be underestimating the both the productivity of new wells and the declining productivity of existing wells.

"We feel we are going to struggle to grow as an industry with our domestic resources," Sharples said. "It is how fast we are going to decline."

That decline will occur against a backdrop of increasing demand.

Today natural gas provides one-fifth of all the energy used in the United States - the EIA estimates natural gas consumption will increase 60 percent by 2020.

"The rising demand will exceed our ability to produce domestically," Sharples said.

This means the nation will have to look overseas for LNG to quench its growing thirst for natural gas - a scenario similar to what the United Sates already faces with oil.

"It seems like we are getting out of the frying pan and into the fire," said Senator Mary Landrieu, a Louisiana Democrat.