Oil prices may go down in 2008

Larger supplies, more energy alternatives, and a slowing economy could be factors.

from the December 26, 2007 edition

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Some of the new supply will come from Saudi Arabia, which is opening up another oil field, says Antoine Halff, an energy analyst at Fimat USA, an energy trading company in New York. "We see more production coming onstream next year, more rebuilding of spare capacity that will put some flexibility into the system," he says.

Spare capacity will also come from non-OPEC sources, says Mueller. "There are a number of big projects coming onstream in the US Gulf of Mexico, Brazil, Russia, and Kazakhstan," he says.

Energy supplies will be further augmented by an increase in biofuels. In 2007, EIA estimates, ethanol has been equal to 4.3 percent of the total gasoline pool. "We should be ramping up to 9 billion gallons of biofuels, up from 6 [billion] to 7 billion gallons right now," says Mr. Felmy.

In the past, US gasoline prices have climbed in the spring because of shortages in refining capacity. Mr. Halff worries about another spike this coming spring, since many US refineries are due for maintenance. "This past summer, there was a shortage of gasoline because of refinery problems, and that might repeat itself," he cautions.

But next year, some new, large refineries will come onstream overseas, and some of their product will be shipped to the US, predicts Mueller. A new refinery in Saudi Arabia will produce more than 1 million barrels of gasoline per day, and a new refinery in India will produce 600,000 barrels per day. "Most of the new production is export-targeted, mainly to the US and Europe," he says.

Yet gasoline exports from China could slow considerably, estimates Paul Ting of Paul Ting Energy Vision in Short Hills, N.J. "China had domestic problems in terms of mispricing the product this year," he explains. "So, since prices in China remained dormant but increased around the world, refiners held back refinery runs and increased exports since it was more profitable."

In 2008, however, he thinks the Chinese will allow product prices to rise so refiners are more willing to meet domestic demand. He estimates that China's thirst for energy will grow by 6 to 7 percent next year as long as the US economy does not go into a recession.

"If the US is crashing and burning, there could be a domino effect on the Chinese economy," Mr. Ting says.

Energy analysts warn that oil prices can be greatly affected by what happens to the US economy. In 1998, for example, the US slumped and the price of oil fell by 50 percent, recalls Mueller.

If the price of oil cools, the Chinese government might become a major buyer to fill its strategic petroleum reserves (SPR), which are under construction. "It is no secret they want to accumulate oil for their SPR for energy security," Ting says. "They didn't do much this year because of the high prices, but next year that may change if prices come down and they complete the construction of the SPRs."

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