Chevron CEO sees high oil demand, thin spare capacity
Oil prices have been among the few wild cards in this economic recovery. With gasoline at high levels, economists worry that any further rise in prices could zap people’s disposable income and put a crimp in the economic recovery just as it is gaining traction. I caught up with one of the leading CEOS in the oil business. Chevron’s John Watson says the reasons prices are high are not likely to go away anytime soon. Our interview follows, edited for clarity and length.
Q: Gas prices have been rising, following the price of oil. What’s causing high oil prices?
A: About 75% of the price of gas is really dictated by crude oil. At the heart of the issue is increasing demand over a period of many years around the world. World crude oil consumption now is close to 90 million barrels a day. Most of the growth in demand is coming from China and the developing world. On top of that, we’re seeing little spare capacity, and we’re seeing tensions and pressures, primarily in the Middle East, where most of our oil is produced, and we’re seeing restrictions in supply. The sanctions that are being applied against Iran are curtailing supply from that country. We have unrest in North Africa. Spare capacity that we might have had before is very thin today, and that’s putting pressure on prices.
Q: Meanwhile, natural gas prices are falling.
A: Natural gas is much cheaper than oil because of the dramatic expansion in supply that we’ve seen. The industry has invested rapidly to increase natural gas production, and that’s been great for consumers and industrial demand, as we have a surplus. Over time, I expect prices to rise, because as we deplete wells, we’ll need to drill new ones.
Q: Heading into the summer driving season, could gas prices go down?
A: It will be dictated by some of the tensions in the Middle East. If we see an easing in some of those tensions and more supply come on the market, we could see oil prices, and in turn gas prices, recede somewhat. But I’m not very good at predicting those things. What I can tell you is there are some things that we can do in this country to put more supply on world markets. People forget we’re the third-largest oil producer in the world. If we have policies that are prodevelopment, we can affect world supplies if we used the resources that we have. For example, 85% of our continental shelf is off limits to development. If we made public lands on shore available more rapidly, we could see more oil produced. If we saw the permits being issued in the Gulf of Mexico and elsewhere at a more rapid pace, we could see more oil produced.
Q: What should U.S. energy policy look like?
A: We have to be grounded in the reality that it will take all forms of energy for us to meet our needs. We have an energy system that’s been built up over the last 100 years, and the principle behind it has been affordable energy. And we’ve seen oil, gas, coal, nuclear and renewables contribute to that energy mix. The idea that we can force energy into the system that’s not economic before its time is not the policy that I think this country needs. What we need is open markets, consistent tax and regulatory policy, and to be clear about our priorities. We’ve seen an emphasis on environmental issues. Those are important. We also have national security objectives. But overriding all of these is the need to have affordable energy. And right now, we’re seeing the emphasis in other areas, and we’re getting a predictable outcome, which is higher prices, whether it’s utility costs or gas at the pump.
Q: Your company is investing in the U.S. and has two major liquefied natural gas projects in Australia. What are your investing plans?
A: Chevron this year will spend $33 billion on energy projects around the world, and about a quarter of that will be in the U.S. We have to spend money where we have the access and the proper geology. We spend money in the Gulf of Mexico, we have new shale gas developments in Pennsylvania, and we have our big flagship projects in Australia that are liquefied natural gas. We invest where we have the incentive to do so.
Q: Are you confident you can gain access to the product safely? After the Gulf of Mexico disaster, many Americans are asking if this be can done without hurting the environment.
A: I do have confidence. The public has every right to have high expectations for our industry. We shouldn’t put oil in the water, and we should run our business safely. We live in the same communities as every other American, and we want to see our resources developed responsibly. We’ve learned from the Macondo incident and others and have steadily improved our practices as an industry. We’re in a much
Q: Does big oil need to improve its image?
A: The industry has made mistakes, and those get highlighted. But over time, the industry has a very good track record of delivering affordable energy. If we don’t have affordable energy, it’s not going to create the growth that we need in our economy, and it will cause higher costs, whether it’s utility bills or at the pump for gasoline. If those costs rise, it’s ultimately going to hit consumers and businesses and make it tougher to create jobs.
Q: What is the most viable alternative to oil when it comes to transportation?
A: Liquid fuels will be the transportation fuel for the foreseeable future. Many have talked about the prospect of natural gas. That’s possible. It’s used to some degree today. But we don't have the infrastructure in place that will make that easy or cost-effective to do. Bartiromo is anchor of CNBC'S Closing Bell and anchor and managing editor of the nationally syndicated Wall Street Journal Report with Maria Bartiromo. On Twitter: @mariabartiromo. To see previous columns; go to Bartiromo .usatoday.com.