Tuesday, December 30, 2008

Gas prices bottoming out?

For the most part I do not pay attention to gas prices. Yesterday I was running back home from downtown Freeport and noticed the Irving station was selling regular gas for $1.56 per gallon. I was shocked. I remember paying $4.20 back in July. I can not imagine the price of gas will go much lower or stay where it is much longer.

On this topic and posted in the Wall Street Journal today:


LONDON -- Members of the Organization of Petroleum Exporting Countries are experiencing their own form of oil shock from lower prices. In Angola, that means reassessing the rapid expansion of its oil sector that has formed the basis of its recovery from a civil war that ended in 2002.

Angola, home to OPEC's incoming president and one of its fast-rising, most recent members, was able to take advantage of high oil prices by ramping up production, becoming Africa's largest producer at one point this year.

Now that oil prices have plummeted from their July high above $145 a barrel, Angola faces a quandary. It needs higher prices to realize the potential of its still mostly untapped reserves. But applying the brakes on production would also further cut export revenues for its oil-driven economy.

"We will wait for the price to go up" before Angola ramps up production, José de Vasconcelos, Angola's oil minister, said as he prepared to head OPEC on Jan. 1. "We need this revenue [from a high price] to develop our industry. We need to maintain our production [in the future] and our reserves. We need to attract investment."

Much of Angola's oil wealth is more expensive to tap than reserves in the Middle East, where oil projects require a price of about $10 a barrel to be economically viable, according to the International Energy Agency. By contrast, a price of about $70 a barrel is needed for it to make economic sense to develop the fields located in the deep waters far off the coast of Angola, according to OPEC's departing president, Chakib Khelil, who is also Algeria's energy minister.

Projects up and running still turn a profit at that level, but Jim Campbell, vice president in charge of project execution at BP PLC's Angolan unit, said in November that oil prices of $50 would complicate its assessments of future projects in Angola.

In Monday trading, crude-oil futures were trading about $30 below that level. Intraday, prices rose as high as $42.20 a barrel amid the first signs of OPEC's production cut and the specter of wider Middle East tensions as Israel continued its airstrikes in Gaza for a third day. Light, sweet crude for February delivery settled up $2.31, or 6.1%, at $40.02 a barrel in thin trading on the New York Mercantile Exchange.

The lower oil price also may hurt Angola's state spending. Oil accounts for 90% of the country's exports, bringing in revenue needed to rebuild a country devastated by nearly three decades of civil war. According to state agency Angola Press, economy minister Manuel Junior suggested in mid-December that Angola might revise its budget next year if oil prices remain under the official assumption of $55 a barrel.

Production cuts under OPEC's quota system will compound the pain. At the end of 2006, when oil-rich nations were under pressure to produce more oil, Angola decided to enter OPEC. But as the financial crisis suddenly accelerated late this summer, oil prices -- and demand -- collapsed.

Angola faces one of the most difficult challenges among OPEC members in implementing its share of the 4.2 million barrels a day in cuts the cartel has announced since September. The country has agreed to reduce its output by 244,000 barrels from 1.9 million barrels a day. The cuts conflict with expansion plans drafted when prices were higher. Mr. de Vasconcelos said after the December OPEC cuts that Angola now plans to shave off an additional 145,000 barrels a day.

"We have some problems [with lower oil prices] just now but that's for the short term," Mr. de Vasconcelos said. "In our medium- to long-term planning, production must go up."

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