Government leaders so rarely speak directly that when they do embrace clarity it’s a striking pose. And a sign of the times.
So it was last Thursday when U.S. Energy Secretary Samuel Bodman spoke his mind, or so it sounded when discussing the global economy’s thirst for oil and the implications. To be sure, there was nothing earth shattering in his observations, at least not for any one who’s been following the soap opera of the crude market. Nonetheless, when the Energy Secretary of the world’s largest oil-consuming nation decides to speak without pulling punches the least we can do is sit up and take notice.
“The demand for oil in the world seems to be pressing the suppliers to the point of their having difficulty meeting the demand,” Bodman declared last week, reports Dow Jones News Service via Rigzone.com. “It’s hard for me to believe there will be a change in demand for oil. The demand for oil is created by economic growth, and the Chinese economy is already growing at a pretty good clip.”
By “fair clip” he’s referring to the 9.5% inflation-adjusted year-over-year advance in China’s economy in the second quarter. That’s impressive by almost any stretch of the economic imagination, considering that the Middle Kingdom’s economy, at roughly one-third the size of America’s, is growing three times as fast.
Ah, but won’t high oil prices stimulate additional production? Yes, but don’t hold your breath, Bodman advised. “The problem is, it will take a long time,” he warned of what to expect in the quest to slay the dragon a low spare-production capacity in a high demand-growth world. “We’re gonna be years if not decades getting out of it.”
The assumption that the United States, and the global economy will in fact get out of it, to use Bodman’s vernacular, is widely held. Whether it’s also soundly researched is something else. On the surface, however, there’s plenty of light and heat implying that a solution is coming, if not exactly tomorrow but vaguely sometime in the near future.
But even there there’s a wide-ranging debate. The latest installment of skepticism that we’ll be able to, once again, drill our way out of our current energy troubles by, say, Friday. was laid out by Christopher Edmonds, director of research at Pritchard Capital Partners, an energy investment firm in New Orleans. “Too few investors and pundits are mindful of the anemic supply response to the increase in drilling and exploration,” Edmonds writes in TheStreet.com. “Doubling the number of rigs drilling for natural gas in North America has barely moved the needle on production. And in Saudi Arabia, Saudi Aramco has made little progress in boosting production even after nearly doubling the rigs working its major oil fields.”
The solution? More of the same, namely, more drilling, more exploration, more of everything that is part and parcel of the energy business. “We just have to do what we have done for the last two decades faster and with more volume to keep up,” Edmonds concludes. No wonder that the oil-service sector, which includes the likes of Baker Hughes, Schlumberger, and other firms that supply drill the wells and provide related technical support are enjoying the spoils of the current bull market in energy. The Philadelphia Oil Service Index, for example, has posted an impressive 27% annualized annual return for the two years through the end of this year’s first half, or more than twice the return in the S&P 500.
But for all the drilling and exploring that’s supposed to save us in the long term, there’s the messy problem of keeping the SUV going through the weekend as well as ensuring that there’s sufficient heat come January.
In fact, just in case there’s, er, an event that temporarily derails the best-laid plans of mice, men and governments, the White House has taken the precaution of loading up the Strategic Petroleum Reserves to full capacity of 727 million barrels of oil, or about 35 days of U.S. consumption habits of late. But with the oil kitty approaching capacity for the first time, there are already calls for cashing in on the artificial crude bounty.
“American families have been pickpocketed by OPEC all year,” Sen. Charles Schumer, D-NY, says, reports Detroit Free Press. “Now that the summer high travel season has started and our Strategic Petroleum Reserve is filled to the brim, President Bush should tap the reserve to lower gasoline prices.”
As you might expect with oil prices near all-time highs, the Senator from New York has more than a few supporters for his recommendation. That includes several airline executives, who are trying to keep their planes in the friendly, and not-so-friendly skies amid escalating energy costs. There are some analysts who agree as well, such as John Kilduff of FIMAT USA. As he says in the article in the Free Press: release some SPR oil “would help drive down prices, at least in the short term. We’re in a position right now where we need every available barrel” of oil “but the administration has been steadfastly against using the reserve to affect that. At the very least, they should at least stop filling it while at these high price levels.”
Then there are those who argue the opposite, asserting that the SPR should be saved for true emergencies rather than short-term price relief. “The Bush administration promises not to succumb to the pressure to open the reserve, and that’s good,” writes The Birmingham News. “Using the nation’s emergency oil supply for a short-term break of a few dollars per barrel in oil prices is a reckless disregard for national security concerns.”
Perhaps, but whether the SPR is tapped or not, the fundamental problems that drove Washington to fill it up in the first place remain intact. And on that score, Bodman’s comments aren’t so easily dismissed, or even debated.