Valuation of the Oil

Valuation of the OilThe Energy Information Administration's Annual Energy Outlook report for 2004 predicts that the United States will likely will become more dependent on liquefied natural gas (LNG) imports and other unconventional sources over the next few years in order to meet accelerating gas demand. The US demand for gas is expected to increase by at least 50 percent by 2025. The report also projects that coal will play a more significant role in the longer term because of rising gas prices.

Increasing gas prices were caused largely by increased demand. The EIA predicts that demand will continue to increase, driving further rises in price. Between 2002 and 2025, total gas demand is expected to increase at an average annual rate of 1.4 percent. Nearly 70 percent of the increase projected for this period will be driven by the increasing use of LNG for electricity generation and industrial applications.

The price of gas will not rise steadily, however. The EIA report predicts definite dips in prices. The availability of new import sources and increased drilling activity triggered by higher gas prices is expected to increase supply and thus lead to a decline in prices in 2010, according to the report. A price decrease is also predicted for around 2020 as the result of an Alaska pipeline projected to go online by 2018.

The United States has four existing liquefied natural gas terminals - Everett, Massachusetts; Cove Point, Maryland; Elba Island, Georgia; and Lake Charles, Louisiana - all of which are expected to expand by 2007. The EIA report predicts four additional terminals will become operational along Atlantic and Gulf Coasts from 2007 to 2010 to meet the projected 58 percent increase in LNG imports.

Oil and gas exploration and production is a global enterprise. The shifting sands of international politics can impact the industry in unpredictable ways. One recent example is the change in US relations with Libya. Late in 2003, Colonel Qaddafi had admitted that his country tried to develop nuclear and other unconventional weapons, and promised to dismantle them and submit to international inspections. This created the possibility that the United States could lift its economic sanctions against the country. Several American oil companies once had extensive operations in Libya, including Amerada Hess and Occidental Petroleum. A lifting of sanctions imposed in 1986 would make a return to those operations feasible.

Seeking to limit dependence on foreign sources, the US government is pushing to speed up the nation's energy development. The Rockies, believed to have huge gas reserves, are a likely place to for domestic production to increase. In the Rockies, gas production increased 162 percent from 1980 to 2001, according to the National Petroleum Council and the nonpartisan U.S. Potential Gas Committee research group.

The development in the Rockies has been controversial. Drilling brings employment and tax revenues to the local economy, but threatens a tourist industry based on the natural beauty of the area. A group of over 100 economists also expressed concern in a letter to the President about allowing local economies to be heavily based in a single industry, noting that an energy bust in the mid-1980s forced communities from Montana to New Mexico to diversify their business bases.

Another method of reducing US dependence on oil and gas imports is being explored: alternative fuels. In an effort to promote greater use of alternative- fuel automobiles, President Bush has called for investing $1.2 billion in developing hydrogen and fuel-cell technology. Rep. Christopher Cox and Sen. Ron Wyden sponsored a bill in 2003 to provide incentives to speed to market the fueling stations and infrastructure necessary to support drivers of hydrogen vehicles. The European Union also plans to spend billions of dollars on these technologies.

The International Finance Corporation, a unit of the World Bank, is analyzing a report that recommends that the bank phase out its investments in oil projects by 2008. The report is the result of a study initiated by the World Bank in July 2001. The report recommends that the bank devote its limited resources to the development of renewable-energy sources and environmentally clean energy technologies. If the World Bank chooses to follow the recommendations of the report, it will limit oil production investment to "poor countries with few alternatives."

The impact of widely adopting alternative fuel technologies remains to be seen. It will clearly impact the increasing demand for gasoline and the industries that demand supports. Gasoline taxes currently support much of the nation's transportation infrastructure. A decrease in traditional fuel consumption will also decrease that tax revenue.

While predictions of increasing demand look good for producers of oil and gas, those predictions must be considered in the light of other factors that impact the industry. Environmental concerns, shifting political alliances, and alternative fuels are just some of the factors that make the future of the industry difficult to foresee.

Sources: Inside Energy, Inside FERC's Gas Market Report, Los Angles Times, Oil & Gas Journal