• by Karl Greenberg , July 18, 2008

The International Motor Press Association's monthly lunch scrum usually gets a friendly speaker from the motor sports world, or from one of the OEMs: engineers, executives, or the stray marketer. But Thursday's speaker was John Felmy, chief economist for the American Petroleum Institute--a controversial but welcome choice. He was aware of the popularity issue, noting after the audience clapped before his speech: "That's the warmest welcome I've gotten. People usually clap when I'm finished."

The speech was timely, since Congress is voting on the DRILL (drill responsibility in leased lands) Act, which would promote domestic production of oil and natural gas, particularly in Alaska's National Petroleum Reserve.

Felmy explained that the global supply and demand drives gasoline prices, not Big Oil, which is just doing what it has to do to eke out slim per-barrel profits from gasoline refining.

"Crude closed at $145 [Wednesday], which is $3.20 per gallon," he said. "Adding tax, that means the base cost of the raw material before refining is getting close to $4. That's the real story."

Felmy said that crude oil costs are actually increasing faster than gasoline prices--$1.21 per gallon, versus 78 cents per gallon for gas. "So manufacturing cost has increased faster than the price of gasoline."

He said that gasoline prices are actually down a percent because consumers are responding to prices by driving less. By contrast, diesel demand is up 6 to 7%. "Because we are importing a million barrels a day of gasoline, we have lots of gasoline supply and weak demand. In diesel you may have had record production as well, but there is also strong demand and weaker imports because the entire world is moving toward diesel," he said.

As for crude oil, Felmy said the price is up for the simple reason that demand in markets like China and India is up, although U.S. demand is down 2%. "If you look this year, there's a struggle: a continued demand growth with supply challenges. Last year, demand was up a million barrels a day and supply was down because of OPEC."

The bad news, at least in the short term: Chinese demand will increase a lot prior to the Olympics. "They will want an adequate supply of everything, and we have seen their imports and demands going up," said Felmy, who added that Indian demand is also increasing as service-based economy growth is being augmented by new growth in heavy industry there.

By 2030, he says, demand will go up 50% because of strong economic growth in developing counties and population growth, expected to be 20% in the U.S. alone. Worldwide, he said, there will be 9% more demand for liquid fuels, and 18% more energy demand, with electricity demand growing 30%.

Felmy said Congress should be more helpful to the oil companies by not arguing for higher taxes, or for quicker exploration of leased lands. He says the latter is impossible because it is expensive and time-consuming to explore. "The argument is that the industry should focus on [property] that doesn't have drilling going on; well, oil leases don't come with Mapquest."