Energy Demand Likely to Keep Prices High

Energy prices continued to soar in 2007, with oil edging toward $100 a barrel. Economists are increasingly convinced that high prices are here to stay. Energy demand from the developed and developing world is outstripping new sources of oil.

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The price of crude oil set new records this year up to nearly $100 a barrel. Oil companies invested billions in the search for new oil reserves. But forecasters say supplies are likely to remain tight. Meanwhile, high prices energized Congress to put renewed emphasis on efficiency.

Here's NPR's Scott Horsley.

SCOTT HORSLEY: 2007 is likely to be remembered as the year when oil prices almost reached the triple digits. That would have been an all-time high, even adjusting for inflation. So it's easy to forget we began the year with a sharp drop in the price of crude.

(Soundbite of newscast)

Unidentified Woman: The price of crude oil has fallen sharply in the last two weeks. And usually, warm weather in parts of the country has given energy speculators cold feet.

HORSLEY: That was mid-January when the price of oil on the New York Mercantile Exchange dropped to about $50 a barrel. Gasoline prices at the time were down around two and a quarter. As winter gave way to spring, though, oil prices started climbing again. And they didn't stop until November, when they topped $99 a barrel, almost double the January lows. Oil prices have backed down since then, but only slightly.

Forecaster Neil Gamson, who works for the Energy Department, says on average, next year's oil prices are likely to be even higher.

Mr. NEIL GAMSON (Forecaster, Energy Information Administration): Given the economic growth in China and India and, to some extent, the United States, we're going to have a tight, tight market.

HORSLEY: Gamson says demand for oil is likely to grow by a million and a half barrels a day in 2008. And with Mexico and the North Sea pumping less oil, it will be up to OPEC to make up much of the difference. Higher crude oil and gasoline prices have forced some modest changes in Americans' driving habits.

Vice President Michael McNamara, of MasterCard Advisors, tracks purchases of gasoline. He knows when pump prices topped $3 a gallon this fall, people actually bought a little less.

Mr. MICHAEL McNAMARA (Vice President, MasterCard Advisors): It appears as though consumers do start to change their driving habits at least to some extent once prices do get up into that $3, $3.10, $3.20 on a national average. It looks like they do start to cut back on some driving.

HORSLEY: It's not clear whether that trend will continue now that gas prices have fallen a bit. Pump prices in the high $2 a gallon range that would've seemed extremely high a few years ago, now seem like a relative bargain.

Mr. McNAMARA: People could start to become acclimated to those higher prices and start working those prices into their budget.

HORSLEY: Energy still makes up a relatively small fraction of the typical household budget, but it's growing. The Alliance to Save Energy estimates the average family spent about $300 more on gasoline, heat and electricity in 2007 than they did the year before. And 2008's energy bills could be even higher.

Ms. KATERI CALLAHAN (President, Alliance to Save Energy): Consumers are spending more and more of their hard-earned dollars on energy.

HORSLEY: Alliance President Kateri Callahan says, on the positive side, Congress passed a sweeping bill to boost energy efficiency this year. Among other things, the measure raises fuel efficiency standards for cars and trucks for the first time since the 1970s, when energy prices were also on the rise.

Ms. CALLAHAN: I really believe that the high prices that we've seen, not just this year, but really over the past three years, that galvanized consumers' interests in energy cost and had them contacting their members of Congress, and the members of Congress responded. It's one of the few things that this Congress has been able to do on a bipartisan basis.

HORSLEY: In addition to making cars and trucks go farther on a gallon of gas, the new law will phase out old-fashioned, energy-wasting light bulbs beginning in 2012.

Ms. CALLAHAN: And one of the things that's so interesting and exciting, really, about this new standard is that those cheap light bulbs burn out very quickly. So we'll be able to change over the fleet rapidly.

HORSLEY: As consumers make the switch to fluorescent or LED lighting, the familiar incandescent bulb could be obsolete within just seven years. Today's high energy prices, on the other hand, may not disappear so quickly.

Scott Horsley, NPR News.

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