White House Sets Long View on Oil - Administration Says Prices to Stay High; Growing Demand

WALL STREET JOURNAL
3/20/08
White House Sets Long View on Oil
Administration Says Prices to Stay High; Growing Demand

NEIL KING JR.

WASHINGTON -- With the debate raging over why oil has risen past $100 a barrel, the Bush administration has joined a growing camp that says an unusually tight market could keep prices high well into the future, with no easy fix in sight.

Big producers within the Organization of Petroleum Exporting Countries, along with some analysts, say oil is soaring largely because of financial speculators and a falling dollar. Implicit in that view: What goes up can just as easily come down.

Indeed, oil yesterday declined $4.94 a barrel -- its largest drop, in dollar terms, in 17 years -- to $104.48 a barrel as investors fled commodities in general.

But senior Bush officials have taken a longer-term, grimmer position, one that is increasingly prevalent within the industry. In their view, prices will remain buoyant well after speculative investors head elsewhere, as the cost of finding new sources of oil continues to soar and demand in Asia and the Middle East climbs.

As a result, Bush aides argue that only longer-term efforts will drive oil prices down significantly.

The administration's stance shows how much has changed since 2000, when skyrocketing crude prices had the Clinton administration jumping through political hoops during a similarly heated election year. When crude prices shot to the then-startling height of more than $34 a barrel in February 2000, President Clinton sent his energy secretary, Bill Richardson, on a six-nation tour through the oil patch, begging everyone to pump more oil. OPEC came through with an increase of 1.7 million barrels a day. Lawmakers then demanded Mr. Clinton tap the U.S. Strategic Petroleum Reserve -- salt caverns holding several months of supply -- which he did just weeks before the presidential election.

Bush aides counter that the Clinton efforts then were mainly theater -- and don't apply today. World-wide demand for oil has risen nearly 15% since then, to 87 million barrels a day. More critically, the world now has about two million barrels a day in excess capacity to tap in case of emergency, compared with about 3.1 million barrels in 2000.

"Fundamentally, if one looks at the oil market today or at the futures market six months or a year or more beyond, these prices...are being driven by underlying considerations of supply and demand," says Reuben Jeffery, the administration's new coordinator for international energy affairs within the State Department.

"We think about it the way most economists think about it," says Edward Lazear, chairman of the White House Council of Economic Advisers. "Commodity prices are driven over time by changes in supply and demand." Sustained demand growth for oil, he says, "is here to stay and will be around for a very long time to come until we find significant ways to conserve."

As oil has soared, President Bush has urged OPEC members to raise production, but he has done it with a streak of fatalism. When in Riyadh in January, he asked Saudi Arabia to consider boosting production, but while questioning its ability to do so.

The main goal, Mr. Bush said this month, is for the U.S. to "get off oil."

Bush aides contend that Saudi Arabia, with the world's only significant excess capacity, could help drive down prices if it put more oil on the market -- a move the Saudis aren't keen to make.

Significant relief, administration officials say, will take much longer. On the supply side, the White House puts big faith in breakthroughs in ethanol and other biofuels, an area that critics say is fraught with challenges. The administration is more pessimistic about putting a dent in demand, even with newly approved higher efficiency standards for cars.

"The new variable is alternative fuels," Mr. Lazear says. "It will take seven to 10 years to know whether it will really pan out."

Bush advisers say Democrats will have to budge at some point on opening up more of Alaska to oil exploration, as well as the U.S. continental shelf. "We could have been thinking about all of this 10 or 15 years ago when it comes to alternatives or new exploration, and we weren't," Mr. Lazear says.

Critics, though, say President Bush is overlooking small steps that could drive prices down swiftly and ease pressures on U.S. consumers. Heating-oil price increases in the U.S. have outpaced the record jumps in gasoline prices at the pump, prompting some to call for the government to release the two million barrels of heating oil it holds in reserve in the Northeast -- a stash the Clinton administration created in 2000.

There are also loud demands for the Department of Energy to stop siphoning off 70,000 barrels a day of oil to build up the Strategic Petroleum Reserve.

The DOE's czar for renewable energy, Assistant Energy Secretary Alexander Karsner, is stark in his view on why oil prices are soaring. "The places where oil can be found and extracted and brought to bear in the world are decreasing," he says. "It will get harder, and demand will outstrip supply for probably the rest of my lifetime."