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Oil Prices Back At 2003 Levels Part Two
China's expanding economy has been cranking up oil demand and that trend doesn't seem about to stop, analysts agreed.
A big spurt of new oil output also could cause prices to turn downward. Russia has produced additional oil in the past year, but its impressive production gains are not expected to continue in 2004. So far it is unclear when security conditions might permit Iraq to resume its place as a major oil exporter.
The Organization of Petroleum Exporting Countries has played its part in keeping oil prices above historic levels. On Feb. 10, OPEC members said they planned a production cutback of 1 million barrels a day, or nearly 10 percent, beginning in April, to keep prices from slipping in midyear if global economic growth does decline.
The decision signals OPEC's intent to target oil prices at around $30 a barrel this year and next, said James Burkhard, a director of Cambridge Energy Research Associates.
Whether OPEC members will follow that script remains to be seen, Wardell said. Some cartel members have long histories of cheating on their quotas. "They'll have problems implementing those cuts this time too," he said.
Industry experts are watching closely to see whether oil companies will be able to bring on enough new supply to replace current oil production. They now seem to be struggling to do so, said Sieminski.
One of what the industry calls "super-major" producers, Royal Dutch/Shell Group, stunned investors last month by reducing the size of its proven oil reserves by 20 percent, or 3.9 billion barrels. The company said last week that the Securities and Exchange Commission plans a formal investigation into the change. Two other giants, ExxonMobil and ChevronTexaco, are standing by their reserve figures, but several smaller independent producers are following Shell's suit, lowering their reserve figures.
The decline in proven reserve figures does not threaten an immediate hit to companies' production or profits because it applies to oil and gas finds that are considered by the oil companies to be "reasonably certain" to be produced in future. In Shell's case, the fields it shifted from proven to probable were not expected to begin flowing until the end of this decade.
But the lowered production estimates add to the market's anticipation of tighter supplies and higher oil prices, analysts said. They reflect a reality of declining oil production in many of the major mature oil fields that have fueled the world's economies for decades, said Arthur L. Smith, chairman of the John S. Herold Inc. research firm in Houston.
"In the midst of plenty -- with very strong energy prices -- companies are having difficulty growing reserves in the mature [oil and gas] area of the world," he said.
The largest oil companies are aiming their exploration and production budgets at potential major finds in frontier areas like Russia, the Caspian Sea region and West Africa. But they are spending cautiously, Sieminski said.
"Company spending to find oil has gone up, but not as rapidly as in the past," he said. "You might argue it's possible they're not spending enough," Sieminski said. They want to make sure they can increase dividends and have something left to buttress their stock prices by buying shares when the time is right, he added.
Smith's firm recently estimated that Shell and four other giant oil companies generated $27.3 billion in cash from U.S. operations last year but will reinvest just $10.9 billion in new exploration and production projects in this country this year.
U.S. oil production peaked in the mid-1970s, putting the nation on a steadily growing regimen of foreign oil imports. Natural gas production from conventional, lower-cost fields also has crested, many experts say, and U.S. gas consumers will be increasingly dependent on imports of liquefied natural gas. Gasoline imports now are a crucial part of the supply for American motorists.
Buyers and sellers of oil must calculate whether future political disruptions in Venezuela, Nigeria, Russia or the Middle East could take an unexpected bite out of global supplies or whether China's unfathomed economy will produce big surprises in oil demand. Uncertainty is imposing a cost on oil consumers, too.
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