An analysis by the U.S. Energy Information Administration found that several factors may keep crude oil prices high for the foreseeable future - with subtle changes levied by the recently passed energy bill potentially adding to the fuel woes of motorists by next spring.
First, the EIA said growth in worldwide petroleum demand is projected to remain robust during 2005 and 2006, although not as strong as in 2004, with growth expected to average about 1.8 million barrels per day - a 2.1% annual average increase compared with 3.2% in 2004. Though this represents a downward revision from the agency's previous projection of 2.5% growth, it's due largely to a re-assessment of Chinese demand down from 1 million barrels per day in 2004, to 500,000 barrels per day in 2005 and 2006.
What's really going to keep prices high is that oil production growth in countries outside of the Organization of Petroleum Exporting Countries (OPEC) is not expected to accommodate incremental worldwide demand, EIA said. Non-OPEC supply is projected to grow by an annual average of only 700,000 barrels per day during 2005 and 2006, below the annual average growth rate seen in the 2002 through 2004 period.
On top of that, excess oil production capacity is at its lowest level in three decades; only Saudi Arabia has any spare crude oil production capacity available, and the Saudis would need to steeply discount their heavy oil in order to market it effectively, said EIA. Downstream sectors, such as refining and shipping, are expected to remain tight and geo-political risks, such as the continued insurgency in Iraq and possible problems in Nigeria and Venezuela, are expected to keep the level of uncertainty in world oil markets high.
Finally, U.S. gasoline markets may be affected by industry reaction to provisions in the recently passed Energy Policy Act relating to the use of MTBE (methyl tertiary-butyl ether) to reduce vehicle exhaust emissions. Since 1992, MTBE has been used as a gasoline additive to fulfill clean air regulations, yet several companies are going to stop using MTBE over increasing liability concerns over the chemical's potential to contaminate groundwater - liability the energy bill offers no protection from as was expected.
Eliminating MTBE could reduce the amount of available gasoline by approximately 150,000 barrels per day, as the volume of MTBE currently used to make gasoline must be replaced, the EIA said.