Oil may fall to $55-60/bbl on rising US supply – consultant

16 May 2013 23:23  [Source: ICIS news]

HOUSTON (ICIS)--Oil prices could fall as low as $55/bbl because US production could continue rising and fuel demand could continue falling, a consultant said on Thursday.

This could lead to the US becoming energy independent, causing the country to drastically cut its military presence in the Middle East, said Philip Verleger, president of PKVerleger.

"From a defensive expenditure point of view, we are going to leave the Gulf," Verleger said to the NABE Industry Conference, held by the National Association for Business Economics.

Verleger is also a visiting fellow at the Peterson Institute for International Economics. Before that, he served as the director of the office of energy policy at the US Treasury for President Jimmy Carter.

Verleger came to his conclusions about oil prices after questioning recent forecasts for US production and fuel consumption.

Unlike other predictions, Verleger's does not expect US consumption to remain flat. Instead it could fall to 14m-15m bbl in 2040 from an estimated 28m bbl/day for 2013, he said.

He attributes the drop to fuel substitution and improving efficiency in US automobiles.

US regulations require more efficient vehicles, and automakers are producing them, he said.

Moreover, the average age of a US automobile on the road exceeds the historical average. Drivers are ready to buy newer vehicles, and because these automobiles have better gasoline mileage, overall fuel consumption will drop, Verleger said.

Meanwhile, Verleger expects oil-production forecasts are too low, as they expect it to plateau.

Given the advancement in technology for shale-oil production, Verleger expects production to continue rising. "What we are seeing is massive success," he said.

With oil supplies rising and demand falling, Verleger said US imports should approach zero.

Prices, meanwhile, could fall to $55-60/bbl, he said.

"That's a price that will still work with the way productivity is improving in the shale business," Verleger said.

Already, a well in North Dakota covers its costs during the first seven months of operations, when oil prices are at about $30/bbl, Verleger said.

In addition to lower prices, rising oil production could also bring energy independence to the US.

If the US no longer needs to import large amounts of oil from the Middle East, then it may reduce its military forces in the region, Verleger said. At a time of budget stringency, the US does not have the luxury of maintaining such a large force in the Middle East.

"The US presence in the Gulf is going to become an economic burden," Verleger said. Policy makers will ask why the US is sending its navy to the Persian Gulf so it can defend the oil flow to China.

Future oil-price disruptions could be addressed by the US Strategic Petroleum Reserve, Verleger said. Essentially, the reserve could become a lender of last resort for the oil market, stabilising prices, Verleger said.

By: Al Greenwood
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