Mideast violence drives isle gas jitters

Some industry experts fear prices could soar when resources peak

With crude oil prices at record highs approaching $80 a barrel, the big question locally is what will happen to island gas prices, which already are the highest in the country.

In September, when crude oil peaked at just over $70 a barrel following hurricanes in the Gulf Coast, Hawaii's statewide average for regular reached $3.68 a gallon.

But that was under the wholesale gas price cap, which tied Hawaii's prices to three mainland markets, including the storm-ravaged Gulf Coast.

Gas cap critics said Hawaii's prices might not have spiked so dramatically had they not been tied to mainland prices.

Current trends in oil prices are likely to test that theory.

"I'm sure you've begun to feel the pressure of the higher petroleum prices," said Rinaldo Brutoco, an Ojai, Calif.-based energy planning analyst. "You can imagine, as it keeps going higher, what that's going to do to you and everybody else in Hawaii."

Since Gov. Linda Lingle signed legislation May 5 to suspend the caps, prices have consistently hovered around $3.40 a gallon, on average fluctuating by only 1 or 2 cents either way. The national average during that same time has been around $2.88 a gallon, with price swings of 4 to 5 cents, according to AAA's Fuel Gauge Report.

While crude oil prices were setting records Friday, Hawaii's statewide average for regular was $3.38 a gallon, 43 cents above the AAA national average.

Crude prices soared as high as $78.40 a barrel Friday before settling at a record $77.03 in trading on the New York Mercantile Exchange. Prices are 4 percent higher for the week after Israeli attacks against militants in Lebanon stoked fears of a wider Middle East conflict and possible oil-supply disruption.

While Israel and Lebanon are not major oil suppliers, the fear is that the conflict could expand in the region, which produces nearly a third the world's oil and has almost two-thirds of its untapped reserves.

Analysts debated whether the increases are here to stay.

"I don't think we're done on the upside," said BNP Paribas Commodity Futures broker Tom Bentz, referring to the rise in oil prices.

But James Cordier, president of Liberty Trading in Tampa, Fla., argued that while fuel demand in the United States remains strong, rising energy costs appear to be dampening consumer spending in other areas and that could eventually slow the economy enough to help cool energy prices.

The Organization of Petroleum Exporting Countries issued a statement in which it blamed geopolitical factors beyond its control for the recent price volatility. The group emphasized that the market is "well-supplied with crude."

In the United States, predictions of $3 a gallon gas nationwide come as the summer driving season is under way and forecasters keep a close eye out for hurricanes that could again cause disruptions.

The recent run-up in prices prompted some executives from major oil companies to hit the road to try and calm fears and explain the situation to communities.

Those executives included Bruce Smith, president of Tesoro Corp., which operates one of Hawaii's two oil refineries. Smith was in Hawaii last week to meet with some of the company's 600 employees and unveil new promotional materials aimed at explaining high gasoline costs.

"It really starts and stops with crude oil," Smith said, noting that crude oil costs make up about 65 percent of the cost in a gallon of gasoline. He also cited Hawaii's high taxes and the costs for importing ethanol as other reasons for the high prices.

Ethanol blending, which began in April, was expected to reduce prices because of generous tax credits for blending and exemptions from the state excise tax for the new fuel.

Critics of big oil argue that refiners are eating up the savings and not passing them along to consumers. Oil companies note that ethanol prices also are at all-time highs due to demand on the mainland. Importing ethanol to Hawaii, because none is being made locally right now, also adds to the costs, although no single factor is as big as global oil prices, the oil company executives said.

"It's driven primarily by crude," Smith said of the rising gas prices. "If crude goes to $100, gasoline is going to go up and I can't do anything about it."

Does Tesoro expect crude to push into the triple digits?

"We don't, but that doesn't mean it's not going to happen," Smith said. "I think if people feel good, it probably goes down a little bit. I don't know that people could feel a lot worse."

Observers like Matthew Simmons disagree.

Simmons, a Houston-based investment banker, industry analyst and former energy adviser to President Bush's 2000 campaign, is among the leading voices expressing concern over the issue of peak oil -- the situation where the world has depleted the majority of available fossil fuels and production begins to decline dramatically.

To Simmons, $100 crude is probably closer than most people think.

"I think as soon as we have another hiccup," Simmons said. "Right now, the hiccup could be almost anything."

Whether it is the current Middle East violence, another uprising in Nigeria or a choking of oil from a nation such as Venezuela, "all of these things are unpredictable, but they're all things that could happen tomorrow morning," he said.

Brutoco, who will be in Honolulu this week to brief business and political leaders on the global energy situation and its impact on Hawaii, also subscribes to the peak oil theory.

Global unrest and its impact on oil prices should serve as a warning that a state like Hawaii -- which relies on imported so-called fossil fuels for about 90 percent of its energy needs -- must take greater steps toward energy independence through conservation and development of alternative fuel sources.

"It appears that we've probably already consumed at least half of all the economically available recoverable reserves," he said. "Because we're there, we can anticipate there will be even greater geopolitical tension as more and more people are fighting for a scarcer resource that is going up in value."

Oil companies contend the peak is still decades away, and note that the high price of oil now helps drive research, development and exploration that could yield resources lasting 20 to 50 years.

"It's good news and bad news," said Tesoro's Smith. "The good news is that we've got $70 crude and for $70 you can go find a lot of crude -- you can drill very expensive wells.

"The bad news is we've got $70 crude."

Tesoro is only a refining company, but Smith said he supports efforts by larger companies in exploration and excavating.

"I think they're doing everything they can," he said. "I think there is a sense of urgency to try to get a solution to take some of the political pressure off."

Shell Oil Co. President John Hofmeister says the company has put $19 billion into capital improvement projects worldwide, with an additional $21 million already planned for next year.

"We do believe that there will come a time when we reach something called peak oil, but it won't be because of the lack of resources," Hofmeister said during a recent visit to Hawaii. "It'll be because we've chosen new technologies and different ways forward and so we will probably see oil in the ground forever."

Critics like Simmons say such logic is based on flawed assumptions about how much oil is yet to be discovered. His biggest target is Saudi Arabia, which he contends has never provided the data to support claims that it can easily ramp up production to meet predicted increases in demand worldwide.

"I still think that every time we get through another peak use of energy and don't have a shortage were lucky," he added. "I think if we get through Labor Day and we haven't had ... some sort of shortage we should basically say, 'God, we were lucky.'"