February 21, 2005
Conference Wrap-up: Experts Bullish on Oil Prices in Face of Expanding Global Demand
by Robert Bryce

These are fat times for the energy business. Oil companies—from giants like Exxon Mobil to smaller outfits like Denver-based Forest Oil—reported record profits for 2004.

But an industry that has suffered its share of booms and busts still faces a familiar question: How long will this boom last?

A range of experts tried to answer that question Feb. 17-18 in Houston at the 2005 Energy Finance Conference put on by The University of Texas at Austin’s McCombs School of Business and its Center for Energy Finance Education and Research.

While there was some disagreement about the future prices of oil and gas, the consensus was encouraging, particularly for those in the energy business. Prices are likely to stay strong for several reasons, experts said: the ongoing boom in Asia (China in particular); political unrest in oil producing countries like Nigeria, Venezuela and Iraq; the global economic recovery; and continuing questions about the ability of the industry to produce enough oil to meet demand.

Robert G. Phillips, CEO of Enterprise Products Partners L.P. and a McCombs BBA ’77, led off the conference with an overview of the impact of oil prices on midstream companies like Enterprise, which owns the pipes and tanks that sit between the wellhead and the burner tip. While midstream companies are not usually affected by price fluctuations, Phillips said that prices are leading to more oil and gas exploration, and that “means more throughput.” Increased throughput means more cash for Enterprise, which is paid to ship and store products in its facilities.

Phillips said that regardless of the sector — upstream (the drillers), midstream (the pipeliners) or downstream (the refiners) — “the past year or so the market has been outstanding for all of us.” Furthermore, Phillips expects that his company will prosper as increased offshore drilling adds to its potential throughput at a time when Enterprise is adding to its pipeline infrastructure in the Gulf of Mexico.

At the start of the Friday session Scott W. Tinker, director of the Bureau of Economic Geology at The University of Texas at Austin, said he expects demand for fossil fuels to remain strong. While he was coy about predicting prices, Tinker was bullish on the future of natural gas in both the U.S. and world economy.

“Natural gas is at the same point today that oil was in the 1950s and 1960s,” said Tinker, who predicts that gas “will become the dominant energy source.” Liquified natural gas (LNG) will be a key player in that dominance, said Tinker, who foresees the development of a “hemispheric market in LNG” as soon as the LNG terminals that are now going through the permitting process come on line.

Tinker used his time on the podium to remind students attending the conference that there are plenty of opportunities in the energy business. The industry is suffering a talent drain as increasing numbers of veterans retire. “It’s a buyer’s market now for students,” he told them.

Ehud Ronn, director of the Center for Energy Finance and Research and a professor of finance at the McCombs School, was one of the few presenters to voice doubt about the probability of strong prices in the future. Ronn used several mathematical formulas to examine the oil futures market. He concluded that the markets were “upward biased” with regard to price, attributing that bias to the fact that America’s economy is adversely affected by high oil prices. Those facts led Ronn to describe himself as “bearish” on future oil prices.

In contrast to Ronn, investment banker Matthew Simmons, the chairman and CEO of Simmons & Company International who has long been known as a bear when it comes to future oil and gas supplies, made the case that current oil prices are in fact too cheap and therefore unsustainable.

“Having abundant and reliable energy is better than having affordable energy,” Simmons said. He believes that increases in price are unlikely to dampen demand given the booming need for oil in China and other developing nations.

Furthermore, Simmons contends that higher prices are essential if the OPEC member countries are going to feed and educate their rapidly growing populations. “Is there equity,” he asked, “for OPEC to supply so much value and be so poor?” Simmons answered his own question by arguing that improving the overall economies of the OPEC countries (10 of 11 of which are predominantly Muslim) will be good for the world economy. Those countries want to “end the ‘oil curse’ and begin creating prosperous economies,” he said. And higher energy prices will be essential for countries like Saudi Arabia, Iraq, Iran and Nigeria to achieve that goal.

Simmons was followed by Timothy Murray, the executive vice president of Wells Fargo’s energy group. Like Simmons, Murray is expecting a boom in demand for energy in the developing world.

Wells Fargo is predicting that the weak dollar, combined with surging demand, will keep oil prices above $40 per barrel for the foreseeable future. Murray pointed out that the average Chinese citizen used about one barrel of oil per year in 2000. If that consumption rises to just five barrels of oil, then China’s overall consumption will exceed the total output of OPEC.

Those facts, combined with low interest rates and readily available capital from banks and other outlets, means that the oil business can flourish for some time to come.

“Energy banks,” said Murray, “are bullish on the industry.”

The bankers are not alone.