What's Up with Oil? Prices, Supplies and Technology in Our Energy Future
O'Reilly, David J., Executive Speeches
When the Commonwealth Club first asked me to speak, I wasn't sure anyone would want to hear about an Old Economy issue like energy--especially not from an Old Economy company founded in the 19th century. The last time oil prices made really big headlines was way back in 1981, when they hit an all-time high. Nobody noticed when in early 1999--adjusted for inflation--they hit an all-time low!
All the latest business stories had been about Internet stocks, venture capital, initial public offerings (IPOs), and dot.com millionaires. Then suddenly, energy was back on the front page. Oil prices reached a peak of $30 a barrel just a few weeks ago, almost three times the price in early 1999. Gasoline and diesel prices rose 50 to 60 percent. Airlines tried to raise ticket prices. OPEC's every move has made the news. Truckers, farmers and politicians protested. And, in fact, in Washington today, the Senate is considering a repeal of the 18-cent-a-gallon federal excise tax on gasoline.
Has the "energy crisis" of the 1970s returned, with its odd-and-even gasoline lines, 55 mile-per-hour speed limits and lowered thermostats? Is this a case of deja vu all over again? Today, I hope to convince you it is not.
The world today is in much better shape from an energy standpoint than it was 20 years ago. Throughout the '90s, more countries have opened to outside investment in their energy sectors. Meanwhile, we've enjoyed enormous benefits from technology. We've seen major innovation within the energy industry, which has fully embraced the tools of the Information Economy. Investment and innovation have been keeping energy prices affordable and supplies reliable. And they are, in fact, the keys to global energy security in the future.
The world consumes about 77 million barrels of oil a day. About one-third of this is provided by the OPEC countries. In 1997, OPEC and some other oil producers decided to boost their output. They thought that demand was rising fast. But this was a major miscalculation. OPEC pushed oil production up, just as the Asian economies--and their energy demand--started going down. The result was a global oil surplus. Oil prices fell throughout 1998, and early last year, they hit a 70-year low of $11 a barrel. Gasoline in most states dipped below a dollar a gallon. OPEC countries were hit hard, losing about $50 billion in oil revenue compared with their normal annual levels. So, in March 1999, OPEC and two non-members, Mexico and Norway, agreed to reduce production--and within a couple of months, oil prices started rising again. Ironically, OPEC took production down just as the Asian economies--and their oil demand--started going back up. The surplus disappeared. World oil inventories fell to historic lows. And the oil market reacted with $30-a-barrel oil. So in just a year's time, we went from one extreme to the other.
This week, OPEC officially decided to raise production about 1.7 million barrels a day. Norway and Mexico also said they would increase output. The market saw that decision coming, and prices have now retreated to the $27-a-barrel range. We won't know the true impact of OPEC's decision for a while, partly because much of that new oil probably started entering the market earlier this year. But we do know that it took us a while to get into this situation, and history tells us it will probably take us a while to get out.
We also know that OPEC will remain important. They control four-fifths of the world's known oil reserves, as well as most of the world's excess production capacity. You might think OPEC is back in the driver's seat, just like 25 years ago. But let's look a little closer.
OPEC is a group of 11 very different countries--and they've had mixed success trying to control the oil market. In fact, it took the lowest oil prices since the Great Depression for them to agree on the production cuts of 1999. Consider all the factors that OPEC can't control. …