HONOLULU (July 8) -- While the handover of Iraqi sovereignty may have put a dent in the cost of oil, East-West Center energy specialists said worldwide terrorism, dramatically increased oil demand and much more expensive natural gas will prevent oil and gas prices from ever returning to the low levels of past years.
Fereidun Fesharaki, a senior research fellow at the East-West Center and a leading expert on Asia-Pacific oil and energy, said prices were expected to drop more after the Iraq war ended, but a number of developments have prevented that. Worldwide terrorism has grown in Iraq and beyond, with oil prices reflecting $3-$5 of "terrorism premium."
"Is the handover of Iraqi sovereignty going to reduce terrorism in Iraq?" Fesharaki asked. "God put oil in an unstable place. Geography cannot be changed by politics."
Hedge funds unloading 140 million barrels of open interest in oil futures will likely bring down the price of oil $6-8 per barrel, Fesharaki said, but overall, "prices will not go down to the levels of before."
Other factors that will keep oil and gas prices high:
-- Revived global economies will mean an increase of more than 100 percent in incremental oil demand this year over 2003, the biggest annual growth in a decade. The United States and China will make up more than half of that growth.
Kang Wu, an East-West Center research fellow in the Energy group, said China's 10 percent growth in energy demand paralleled a 10 percent growth in GDP in 2003. China accounted for 30 percent of worldwide growth in energy demand last year, and the U.S.-Asia Pacific region totaled more than half.
Japan's growth in demand in 2003 was abnormally high because safety concerns shut down nuclear plants, said Tomoko Hosoe, an East-West Center professional associate who also specializes in oil and energy issues. With an aging population and a growing services industry that requires less energy, Japan's oil demand will start to decline after 2005.
-- The price of natural gas, competing with fuel oil for use in the electricity sector, has tripled after remaining stable for 30 years. The U.S. has a shortage of natural gas at a time of increased demand, a situation that Fesharaki said has brought permanent changes.
-- Environmental standards will also keep U.S. gas prices high, Fesharaki said. Regardless of price, U.S. oil demand will remain high. "U.S. consumption is so huge," Fesharaki said. "The U.S. Diet Coke sales generate more revenue than Saudi Arabia does on oil."
Fereidun Fesharaki can be reached at ff@hawaii.rr.com
or (808) 944-7527.
Kang Wu can be reached at wuk@eastwestcenter.org
or (808) 944-7521.
Tomoko Hosoe can be reached at hosoet@eastwestcenter.org
or (808) 944-7340.