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Amid Slump, Energy Firms Eye Future Warily
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Amid Slump, Energy Firms Eye Future Warily

Business

Amid Slump, Energy Firms Eye Future Warily

Amid Slump, Energy Firms Eye Future Warily
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Some of the most powerful oil executives in the world are meeting in Houston this week to discuss the lamentable condition of their industry, and to look to better days ahead.

Demand for crude and, subsequently, the price of oil have plummeted. But there's a resolute belief that what goes down must come up again.

Unsustainable Rise

The crowd inside a swanky Houston hotel exuded affluence, but the topic of the day was gloom and doom.

Saudi energy minister Ali al-Naimi summed it up. He said that a year ago, the price of oil and other commodities seemed unstoppable.

"Today, as we ponder the horrific consequences of the terrible swiftness and scope of the collapse, we know now that what we saw then was not unstoppable, but rather unsustainable," Naimi said.

A year ago, the talk in Houston was all about how to find and produce more oil and gas for the seemingly insatiable global appetite. Today, there is so much excess crude on the world market that it is being storing in supertankers — like floating tank farms — waiting for prices to rebound.

Future Oil Demand

Low oil prices have led to gasoline less than $2 a gallon in many places, but oil executives want the world to know that while consumers may be happy, oil this cheap will not — over the long term — pay for the expensive development projects necessary to produce adequate oil and gas for future demand.

"The decisions that are made today are the ones that are really going to determine what our oil-supply picture looks like in 5 or 6 or 7 years," says Daniel Yergin, chairman of Cambridge Energy Research Associates, the industry-forecasting service that hosts this annual get-together.

When oil hit $145 a barrel last summer, drilling and production costs skyrocketed. Now that the price has dropped below $40 a barrel, production costs have not come down accordingly.

"The challenge for all of us is not to allow this cyclical fall pitch us into a structural loss in capacity," BP CEO Tony Hayward says.

In oil-speak, that means companies should not let the plunge in oil prices put too many important projects on hold.

"Energy demand is increasing, and despite the rapid growth of alternatives and renewables, fossil fuels will continue to play a major role in future energy mix," Hayward says.

Many of the world's major oil companies, such as BP and Exxon Mobil, have said they are going ahead with their capital spending despite the recession. But The Wall Street Journal reported Tuesday that members of the Organization of Petroleum Exporting Countries, the oil cartel that produces much of the world's supply, are postponing 35 oil-drilling projects.

The concern is that the world is projected to need 40 percent more energy in 2030 than it uses now; when the economy recovers and demand surges again, oil prices will spike again if there is not enough capacity.

New Emphasis In Washington

The landscape of the oil business has also changed politically. For eight years, the administration in Washington was friendly to fossil fuels. But the winds of national energy policy are shifting dramatically.

Last week, the Obama administration cancelled oil-drilling leases on 130,000 acres of protected areas in Utah. And on Tuesday, it put off plans to open new coastal areas to offshore drilling.

Nariman Behravesh, chief economist at IHS Global Insight, says people in the oil business feel a little bit out in the cold.

"The emphasis is so much on what the administration is saying on the nonconventional renewables — solar, wind power and so on," Behravesh says.

He says there is a sense in today's oil industry that the gravy train has ended.

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