HACKENSACK, N.J. – “I defy anyone to give a reasoned and rational idea of what the energy markets are going to do.”
That challenge from Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey, sums up forecasts from many industry insiders.
A year after crude oil prices rose 34 percent, smashing through the $50-a-barrel barrier for the first time, the outlook for 2005 is uncertain. Reliability of supplies remains unpredictable even as demand continues strong.
“The only thing I’d guarantee is that (oil prices) could go up a lot, down a lot, or both,” DeGesero said. “That’s the new normal now in energy forecasts.”
More of same
To Tom Knight, director of trading for Truman Arnold Cos. in Texarkana, Texas, a wholesale supplier and storage company, 2005 should see more of the same volatility that defined 2004.
“Demand is strong, and we still have a host of geopolitical threats, potential supply disruptions,” Knight said. “We expect that to continue into the year ahead.”
For consumers, that means a continuation of high prices – at the pump, for home heating oil, for air conditioning, for shipping. A year after gasoline and home heating oil topped $2 a gallon, industry experts say the era of relatively low prices appears over.
With oil prices so high, many large industrial users switched to natural gas, and that has helped push gas prices up 58 percent above their five-year average, even with a modest increase of less than 2 percent last year.
Supply and demand
Part of the reason for the price surge is basic economics: the law of supply and demand. But that is magnified by overreaction to world events on commodities markets by speculators and big-risk, big-money hedge fund investors.
U.S. reliance on production from Third World areas adds to the uncertainty, Knight said. In addition to the fear of interruptions in the Persian Gulf, oil prices were affected by an extended strike in Venezuela, production disruptions in Nigeria and financial problems in Russia.
At the same time, the increase in global demand was the biggest since 1976, the International Energy Agency estimated. Fueling demand was a double-digit increase in China’s consumption and America’s continuing love affair with gas-guzzling vehicles.
Demand for gasoline is rising faster than U.S. oil refiners can increase production, leading the U.S. Energy Department to project that by July, the average retail price will top last year’s all-time high of $2.06 a gallon set in May.
That’s why, even with oil prices moving back near the $40-a-barrel range at the end of the year, “$50 is absolutely a possibility,” Knight said. “A whole rash of issues could affect the supply side.”
Almost any event can cause a quick run-up in prices among commodity traders.
Consider what happened the last week in December in reaction to two explosions and a gunfight in Riyadh, Saudi Arabia. The incidents had no effect on oil production or supplies, but fear that they might signal an upsurge of violence in the biggest oil exporter sent crude oil surging 4.5 percent on the Merc in a single day.
“There’s a car bomb in Riyadh, and the price went up 6 cents in three hours,” DeGesero said. “How do you make projections when you live in that kind of environment?”
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