Published: June 16, 2008 12:16 am            

Q&A: Reid CEO says more oil will drive down gas prices

The price of gas is like the weather. Everybody’s talking about it.

Why is the price so high? Who’s at fault? Will it ever come down?

Paul Reid, CEO of Lockport-based Reid Petroleum and current president of the national Society of Independent Gas Marketers of America, loves fielding these questions.

Because, seriously, when’s the last time you considered a petro-guy’s side of this story?

From one who deals with oil for a living, and agrees completely that gas prices are way too high, here’s this week’s Q&A.

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Question: What’s driving gas prices right now?

Answer: I see three primary factors in play.

First and foremost, right now the world is experiencing a monetary phenomenon: Oil and other major commodities are priced in U.S. dollars. Because of our fragile credit markets, the difficulties being experienced in the housing industry, our Federal Reserve bank made a conscious decision to significantly reduce interest rates, at a time when other major economies in the world were holding interest rates or considering increasing rates. They reduced the Fed funds rate from 5.25 percent last summer to, recently, in the last three to four weeks, 2 percent, and it created a downdraft in the value of the U.S. dollar on world currency exchanges.

Because oil and gold, in particular, are priced in U.S. dollars, it takes more U.S. dollars to buy a given unit of that product. ... All things being the same, if euros and dollars were worth the same amount of money as they were last summer, the price of oil might be 85 or 90 dollars a barrel ... .

A second major contributor is fundamental economic forces: Supply and demand. At this juncture, we have a tightening supply situation and a very robust demand situation. We understand demand is being driven by increases from developing economies — China and India — and you’ve also got other economies that are continuing to come into the modern age; eastern Europe, Russia. At the same time, up until recently, demand in developed countries was chugging right along.

Now, on the supply side, everybody likes to point to companies like Exxon and so forth, but Exxon really controls precious little of the overall global reserves of crude oil, 2 to 3 percent. Far and away, the lion’s share of global crude reserves are controlled by state-owned oil companies. If those companies are well-managed and looking forward, then they’re planning for the future, planning for increased production levels. Unfortunately, in recent years that hasn’t been the case with a couple of major producers, notably Russia and Venezuela. ...

And in the United States, the public policy is not to develop its own hydrocarbon resources. The wells that we’ve been producing, we continue to produce, but new areas by and large are not opened for development.

Canadians, fortunately, have a little bit more open-minded attitude about developing resources. In recent years, they opened up the tar sands in Alberta to production. They’re now producing 2 (million) to 3 million barrels a day of oil equivalents out of tar sands. That’s expected to rise to as much as 5 (million) to 6 million barrels a day in the next decade, so thank goodness for that. ...

Despite what you hear about Mideast oil, most of our energy resources come from Canada, Mexico and Venezuela, historically. So supply and demand is a big issue.

The third major piece is, our industry believes there is a significant speculative frenzy that’s taken hold in commodity markets, particularly oil and energy. People are laying down money bets that the costs are just going to keep going up. In the business, we call that “going along” as opposed to being short. It’s a very bullish sentiment. ... If more people vote that the price is going to go up, the price goes up; if more people are voting that the price will go down, the price goes down that day. ... It isn’t manipulation — nobody’s really “cornering” the energy market — but you’ve got investment-based traders pouring money into this stuff thinking it’s going to go up. It’s a speculative fury.

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Q: Critique the debate in Congress about taxing “excess” oil profits.

A: The Republicans put forth a proposal to open some areas for development, notably the “holy grail” of the environmental movement, this 1,000-acre tract of the 6 million-acre Arctic National Wildlife Refuge (in Alaska), and some other areas in the outer continental shelf, 150 to 1,500 miles offshore. ... Of course this isn’t going to help us tomorrow, or even next year, but it will start to lay the foundation for us being a little more self sufficient by producing more of our own resources. And, of course, the Republican proposal was D.O.A.

The Democratic proposal was focused on implementing a new price-gouging law, which would go after “bad” companies .... and setting aside more money for alternative energy. This may or may not be a bad thing, but it’s not going to pull us out of the current crisis. ... And if you tax something, you get less of it. So if you want the oil companies to do even less than they’re doing now, tax ’em so they have less capital to invest, and they’ll do less. Go have at it. Move some more jobs offshore.

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Q: So what’s the answer?

A: There are no silver bullets on this other than, in the immediate term, dampening consumer demand and, in the near term, opening up restrictions to provide greater supplies.

If the Canadians can ramp up from zero to 6 million barrels a day in a decade, there’s no reason why U.S. can’t do it either. Experts know we can recover as much as 1 trillion barrels out of these tar sands; we have a very similar resource in the United States, in shale oil, oil trapped in shale rock. It’s a more extensive process, but it can be done if we want to do it. But our public policy inhibits that undertaking.

A trillion barrels of oil, just to give you an idea how much that is, is as much oil as has been produced from the beginning of time until now; that’s a lot of oil. ... And that’s just North America. Who knows what else is out there? But we haven’t even been allowed to explore, let alone produce in (protected) areas.

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Q: What about the “dirty” nature of oil?

A: The good news about today, versus 50 years ago, and companies like Exxon, Chevron, BP, Shell? These are very large, very technologically sophisticated companies, and the people who work there are just like you and me. They’re people who are interested in being responsible environmental stewards. They really are. The Valdez, that was an accident, and accidents happen. Ever since, as a company, Exxon is so safety conscious, so environmentally conscious, it drives you up a tree; they’re total digits about this stuff. They’re not about to go out and “trash” the environment. That’s total fantasy.

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Q: What can individuals do to help drive down gas prices?

A: People can do two things: One, contact your Congressional representatives and ask the question, “What are you doing to help the United States increase its oil supplies?”

You can talk about windmills and solar panels and all this good stuff until you’re blue in the face, but the reality is that oil is the energy driver for our economy; like it or not, that’s the way it is and everything else is just politics. You can only lay the foundation for doing other things in the future. ...

In the immediate term, people can cut back gasoline use. Lower demand. Nothing gets the price down faster in the immediate term. Now, I hesitate to say this, because it’s what we sell — but the truth is, if enough people lower demand enough, it takes the bloom off the rose, and the price will start moving downward.

        

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