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Global Growth Saps Oil Supply, Lifts Gas Prices

Posted on: Friday, 5 May 2006, 06:03 CDT

By Barbara Hagenbaugh

WASHINGTON -- High oil prices, which have led to soaring U.S. gasoline costs, are the direct result of the narrowing of the gap between worldwide supply and demand, experts told Congress Thursday.

Strong worldwide economic growth, notably in the USA, China and India, have led to large increases in demand for energy, Energy Information Administration head Guy Caruso said at a congressional hearing.

At the same time, supply has shown very little increase. U.S. production is still down after Hurricane Katrina, refining capacity worldwide has not expanded to meet demand, and some oil fields in use are maturing, meaning less oil is being produced.

Thus, the buffer between supply and demand has shrunk to a negligible amount, leading to higher prices and greater volatility.

"When oil markets are as tight as they are, relatively small changes in the actual or perceived supply-and-demand picture, which may result from seemingly innocuous news items, can have a magnified impact on oil prices," Caruso told members of the House Energy and Commerce Committee.

Oil prices posted a large drop for a second-consecutive day Thursday. The price of a barrel of crude oil trading in New York fell $2.34, or 3.2%, to $69.94, the lowest price since mid-April. The declines came after the government said U.S. gasoline supplies grew last week, news that helped ease some energy worries.

Oil accounts for about half of retail gasoline prices, so gas supplies can influence oil costs. Still, oil prices are up nearly $20 from a year ago. Prices will likely stay high for the next two years, Caruso said. Based on planned projects, the oil capacity cushion will be much more comfortable by 2010, he said.

The hearing came amid a frenzy among lawmakers to do something to alleviate the pain at the pump during an election year. The session opened with one hour of mostly partisan finger-pointing about who is to blame for the current high energy costs.

"This is the biggest issue we're getting calls on," Rep. Gene Green, D-Texas, said.

But it's important to think of oil markets in a more global context, Daniel Yergin, chairman of Cambridge Energy Research Associates and Pulitzer Prize-winning author of a book on the history of the oil industry.

"The American people clearly want to know why they are paying $3, or more, at the pump," Yergin said. "But we will not find the answer if we only look inside the United States."

Like Caruso, Yergin said a tight supply-demand balance worldwide is making the oil market more vulnerable. Concerns, such as about potential sanctions on Iran and unrest in Nigeria, are likely adding $10 to $15 to the cost of a barrel of oil, Yergin estimated.

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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