Oil prices have US scrounging for supplies

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FRIDAY, OCTOBER 20, 2000

USA Oil prices have US scrounging for supplies

Almost every drilling rig in the nation is in use as industry redoubles exploration.

By Ron Scherer (ron@csmonitor.com) Staff writer of The Christian Science Monitor

NEW YORK

As the price of oil moved to over $30 a barrel, Steve Layton started thinking about ways he could increase the production at Equinox Oil Co., a small oil and gas company based in The Woodlands, Texas.

So, he's now in the process of repairing some Great Bend, Kan., wells, which were not worth fixing when the price of oil collapsed three years ago. "We have a number of projects we'll do at this price," says Mr. Layton.

Layton is not the only oilman heading back into the fields. Almost every available drilling rig in the nation is in use - an increase of almost 99 percent over last year - as oil companies try to take advantage of the high price of oil and natural gas.

Now, as the US heads into a winter of unusually high energy prices, one of the major questions facing the nation is how much oil, gas, and clean-burning coal can actually be produced within its own borders.

This question has become part of the presidential debate. Gov. George W. Bush, a former oilman, is convinced the US can increase reserves if it opens up land environmentalists consider sensitive to development. Vice President Al Gore wants to "reduce the nation's dependence on unreliable imported oil" in part by using more coal and giving tax breaks to drivers of fuel-efficient cars. Only yesterday, Federal Reserve Chairman Alan Greenspan said he's concerned rising energy prices could harm the economy.

Experts believe neither candidate is exactly right on the issue.

Although higher prices are stimulating more drilling, the US is likely to depend on imported oil in coming decades. "If pushed, we might be able to get another 1 to 2 million barrels per day out of the ground, but we will still import 7 to 8 million barrels per day," says Mike Lynch, vice president for global oil at WEFA, an economic forecasting service.

Drilling in ANWR

To get to the extra oil would not be easy. A significant amount is thought to be in environmentally sensitive areas, such as the Arctic National Wildlife Refuge (ANWR) in Alaska. Early estimates place the potential there at between 3 billion and 11 billion barrels of oil.

President Clinton has vetoed legislation allowing drilling in the area, which hosts polar bears and a large caribou herd.

"Opening up this refuge is one of the defining issues - every day we hear why we ought to open it up to drilling," says Melinda Pierce, a Washington lobbyist for the Sierra Club. "But our argument is that full-scale development - roads, waste pits, pipelines, and gravel pads - is incompatible with the wilderness."

One of the major proponents of drilling at ANWR, Sen. Frank Murkowski (R) of Alaska, counters that, out of an area the size of South Carolina, the drilling footprint would only cover 2,000 acres. "We've learned from Prudhoe Bay how to do this so we don't leave a mark on the environment," he says.

The Department of Energy is currently updating its forecasts of US gas and oil reserves, and most experts expect those estimates to go up. In the past five years, the US exploration of the deep waters of the Gulf of Mexico has increased significantly.

But part of the land under reassessment is off-limits to drilling. Geologists think there may be oil and gas on the eastern side of the Gulf of Mexico and off both coasts. But even Republicans like Governor Bush oppose development.

There are also large parts of the Rocky Mountain region on federal land that companies would like to look at. "Unfortunately, it's an area that is becoming increasingly restricted" to development, says Ed Porter of the American Petroleum Institute.

Environmentalists don't believe US reserves, which make up about 5 percent of the world's supply, will ever be enough to make it worth the risk of drilling.

"Oil is a finite resource. Our reserves in the Lower 48 peaked in 1970 and have been declining ever since," says Jim MacKenzie of the World Resources Institute.

Plenty of coal, but ...

And they are not much more enthusiastic about coal, which supplies about two-thirds of the nation's electricity. Although there are vast supplies, burning it results in more greenhouse gases, even with cleaner technologies.

But the US may not have too many choices in the future. Oil and gas producers complain that new discoveries are getting increasingly expensive. David Banko, a Denver-based petroleum consultant, recounts how it took more than three years to get an environmental-impact statement approved to drill a field in southwest Wyoming. And "at the end of the day nothing changed - they drilled as they had planned."

Also the industry is wary of risk, now that it's gone through tough times. "When the price was at the bottom, we literally could not pay the electric bill on some of our wells," says Layton.

But that was yesterday. Today, he's excited about his plans to explore for oil south of Houston.

http://www.csmonitor.com/durable/2000/10/20/fp2s1-csm.shtml



-- Martin Thompson (mthom1927@aol.com), October 20, 2000

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Thursday October 19 8:12 PM ET Top Fed Officials Warn of Oil Price Risks

By Knut Engelmann

WASHINGTON (Reuters) - Federal Reserve policymakers warned on Thursday that rising oil prices could yet undermine the U.S. economy, signaling they remain ready to raise interest rates should that be necessary to keep the expansion alive.

Fed Chairman Alan Greenspan (news - web sites), in his first detailed remarks on the economy since July, told an audience in Washington that the central bank was closely watching the effects of higher oil prices but noted that at least so far, these had been modest.

``Policymakers will need to be on the alert for oil-driven, indeed energy-driven, risks to our expansion,'' he said in his most detailed remarks yet on the subject.

Addressing the Cato Institute, a conservative think-tank, the U.S. central bank chief also sounded an upbeat note on the beneficial economic impact of rising productivity and years of fiscal discipline. But he cautioned that neither factor would last forever, which could add to potential inflation threats.

His remarks came less than a month ahead of the Fed's next rate-setting meeting, at which it is widely expected to keep short-term interest rates on hold but warn once more of inflation risks to the U.S. economy's record expansion.

Greenspan's speech had little effect on financial markets, as investors read his remarks as confirming expectations of unchanged rates at least in the short run. Stock prices rallied after sharp falls on Wednesday, while inflation-sensitive bond prices edged higher.

``Another Fed-on-hold speech,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

The Fed has kept borrowing costs unchanged at its three most recent rate meetings, after bumping them up six times between June 1999 and May. However, it has warned that it still regards inflation as the main threat to the U.S. economy.

Twin Threats

Meanwhile, Fed governor Laurence Meyer, speaking in St. Louis, Mo., said the U.S. economy may finally have entered a period of slower growth but still faced inflation threats from higher oil prices and possible weaker productivity growth.

``I believe the economy will ultimately be confronted by a transition and that we may already be in this transition, specifically to slower growth and perhaps also higher core inflation,'' he said.

Still, Meyer -- one of the Fed's leading inflation hawks -- said he hoped the economy was on track for a ``soft landing'', in which growth slows enough to curb inflation without pushing the economy into recession.

His remarks came just before the Philadelphia Fed said its so-called business conditions index dropped sharply in October, indicating the manufacturing sector in the U.S. mid-Atlantic region contracted for the first time in nearly two years.

Greenspan noted that rising oil prices -- supply worries and political tensions in the Middle East have driven them to 10-year highs -- so far had affected neither inflation expectations nor consumer spending, the economy's main engine.

``To date, the spillover from the surge in oil prices has been modest,'' he said, noting consumer spending was ``firm''.

Greenspan said oil shocks were posing less of a threat to the U.S. economy than in previous years, such as the 1970s, because it had become less energy-dependent and oil producers had significantly lowered the cost of additional supplies.

But against lingering worries over tensions in the Middle East, rising oil prices still had ``potential implications for economic stability and for monetary policy'', he said.

``Even though the intensity of oil consumption is markedly below where it was thirty years ago, it still has the potential to alter the forces governing economic growth in the United States,'' Greenspan added.

But he also said rising inventories and a decision by oil producing nations to raise production could soon help push oil prices down by a ``significant'' amount.

Dallas Fed President Robert McTeer, speaking at the same conference, warned that the central bank should not set interest rates solely because of changes in oil prices. ``Policy should be based on measures of inflation,'' he said.

His remarks were echoed by San Francisco Fed President Robert Parry, who told an audience in Los Angeles: ``I don't think we should base monetary policy on oil.''

Rising energy prices have helped push up consumer prices, which last month rose at their fastest rate since June. The U.S. Labor Department said Wednesday consumer prices rose 0.5 percent in September, after a drop of 0.1 percent in August.

Save The Surplus

Greenspan also warned that ``some of those favorable factors that I discussed earlier -- in particular, growing fiscal surpluses and accelerating productivity -- remain in place, but presumably will not persist indefinitely''.

He said a tapering off of productivity acceleration, one of the key forces in keeping inflation under wraps so far, was inevitable ``at some point in the future''. That could be a problem particularly against the backdrop of the tight U.S. jobs market, which has heightened the Fed's inflation worries.

But Greenspan reiterated that there still was no evidence productivity growth was peaking.

Meyer agreed there were limits to how long productivity gains could last. ``It is quite likely that productivity growth, after reaching a peak, will then diminish,'' he said, which could raise both unemployment and inflation. But for now at least, he said productivity still appeared to be rising.

Greenspan, in an apparent barb aimed at both Democratic and Republican presidential candidates, said he also had doubts ''whether the dynamics of the political process, some of which have been on display in the current budgetary deliberations, will allow the surpluses to grow''.

Both Democratic candidate Vice President Al Gore (news - web sites) and his Republican rival George W. Bush (news - web sites) have proposed to use large and growing budget surpluses to cut taxes and increase spending in some areas. Greenspan has repeatedly urged politicians to save the surplus to pay down the national debt.

-- Rachel Gibson (rgibson@hotmail.com), October 20, 2000.


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