World Demand and OPEC’s cuts Mean High Gas Prices for 2005

The price of oil in 2005 will be volatile, says a University of Alabama engineering professor. The Organization of the Petroleum Exporting Countries, known as OPEC, recently announced a one-million barrel a day cutback in production, which, if enforced, should keep the price above the old target price of about $25 a barrel, according to Dr. Peter Clark, associate professor of chemical and biological engineering at UA.

OPEC has also announced its intention to increase the target price. Again, if OPEC is successful, this will raise the cost of energy, Clark says. World demand is also growing, so there will be increased competition for existing oil supplies.

“This means that gasoline prices should remain high. There will not be a return to prices around $1 per gallon in 2005,” predicted Clark.

“In addition, there is some pressure to change the pricing of oil in dollars to a price that is based on a market basket of currencies to help insulate producers from currency swings,” said Clark. “This will increase the cost to the American consumer because the dollar is currently weak and getting weaker.”

The price of natural gas will also remain high. Supplies are tight, and the infrastructure is not in place to import large quantities of liquefied natural gas to alleviate the problem, the UA engineering professor said. New drilling activity will help, but it takes time to bring gas from new discoveries to the market.

“Consumers should expect to pay more for heating this winter,” said Clark. “Utilities that have not made adequate efforts to dampen price swings by entering into long term contracts will have to raise their prices more drastically than those utilities that have planned for price volatility.

“Energy prices should remain high throughout 2005. These higher prices will eventually have an impact on the economy in the form of higher prices for goods and services and inflation,” said Clark.