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US Energy Challenges

Source: 7/28/2006, Location: North America

The US economy continue to see sharp increases in the price of gasoline and diesel fuel. These increases are caused by the fundamental forces of supply and demand – tight world markets for high-priced crude oil, higher costs of refining and distributing gasoline, a switch to the more costly additive ethanol, costs associated with significant reductions in the sulfur content of diesel fuel, and international geopolitical concerns about future deliveries. Consumers are responding. API data indicate a decline in gasoline demand in the second quarter. Whether we see further demand reductions is problematic, because most consumers find it difficult to markedly alter their fuel usage in the near term. What is important is that consumer action can make a difference, and we should all use energy wisely.

While crude oil imports slipped, imports of refined products in the first six months of the year reached a level second only to the last half of 2005, when domestic refining capability was severely constrained by the hurricanes. Gasoline imports in the first half of the year rose to a record 1.3 million barrels per day. Offshore oil and natural gas production continues to recover from last year’s disruptions. Nevertheless, for the first six months, crude oil production was down nearly 6 percent compared to last year. Inventories, at mid-year, were generally ample. Levels of crude oil and most major products were at, or above, their historical 5-year averages for this time of year. Although gasoline inventories were slightly below the historical average, crude oil inventories were 10 percent above.

As the US approach the heart of hurricane season, our industry remains vigilant and continues to apply the lessons of last summer to better cope with the effects of future hurricanes, with a special emphasis on safety, environmental safeguards, and minimizing production losses. Hurricane season also reminds the US of the need to diversify our nation’s energy sources. The API support the constructive steps taken in both Houses to enable companies to better serve consumers by increasing access to America’s offshore oil and natural gas resources. Also, increased efficiency in permitting is expanding onshore access as well.

The release of company earnings reports covering the second quarter is underway, with early reports indicating our industry’s earnings continue to be in line with the average for all industries. In the first quarter of 2006, the most recent quarter for which complete data is available, the U.S. manufacturing sector earned, on average, 8.5 cents on every dollar of sales, while the U.S. oil and natural gas industry earned 8.3 cents. Oil and natural gas industry earnings are large in terms of actual dollars, but only average when viewed as earnings on dollars of sales or a return on investment. It is important to remember that these companies are huge by necessity. They must be so in order to compete on a global scale against even larger foreign, national oil companies.

Earnings drive the investment necessary for publicly-held oil and natural gas companies to maintain their competitive edge, and they are on track to invest nearly $125 billion this year alone, a 24 percent increase over 2004. This investment will flow into all aspects of industry operations, particularly exploration, production, and refining. Announced additional refinery capacity expansion plans through 2011 total some 1.6 million barrels per day, which would boost the US refining capacity to 19 million barrels per day – an all-time high. Industry has a responsibility—to shareholders and customers—to spend this money wisely, not just rapidly. It is a responsibility industry takes seriously.

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