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Predicting oil’s future

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MARK AUSTIN THOMAS: 2006 made it clear how much the price of oil drives the global economy. Right now it’s hovering around $61 a barrel, but five months ago that price shot up to more than $78 a barrel. Severin Borenstein is the Director of the University of California’s Energy Institute. I asked him where oil prices are headed now.

SEVERIN BORENSTEIN: The best forecast that we have out there is the futures market for oil where there area a lot of traders with their own money on the line betting on increases or decreases. And what the futures market is saying is that we’re likely to see $60 a barrel oil increasing gradually over the next couple years a bit and then coming down a bit. But $60 is probably the number we’re likely to be around for many years to come.

THOMAS: What’s keeping oil prices up?

BORENSTEIN: Well demand has grown very strongly, not just in the developing countries, in China as we keep hearing about, but also in the United States. In fact the United States’ demand in terms of absolute levels is growing just as fast as China’s. And what that does is that pushes up against the limited capacity to produce oil because even though there is still a lot of oil out there, the ability to pull it out of the ground rapidly is limited.

THOMAS: Everyone always wants to know this: Can you explain the connection between the cost of oil and the price we pay at the pump?

BORENSTEIN: It’s very direct. Every time the price of oil goes up $1 per barrel, that shows up at the pump as about two and a half cents a gallon and it usually only takes a couple weeks to show up?

THOMAS: Why does it seem to vary so much then from station to station when you go to fill your car up? One place it’s $2.49, across the street it’s $2.79.

BORENSTEIN: Yeah there is a lot of variation even within cities and that is basically because consumers don’t flock to the cheaper station. If they did, then the more expensive stations would be forced to lower their price. But there are a lot people who, despite the fact that gasoline is always in the news, don’t really pay much attention to the price and just go to the station they’re always going to. And if that station can maintain a 10 or 20 cent higher price, they will.

THOMAS: Let’s talk about alternative fuels. With oil prices rising, has this given a kickstart to ethanol, hydrogen cells, hybrids, things like that?

BORENSTEIN: Well there are some technologies that are in the realm of economics now and some that might be in the future. Hydrogen is just not even close. The high price of oil has increased the interest in research on hydrogen, but that’s not something we’re going to see in the next 5 or 10 years. Ethanol is a fuel that’s being sold right now. Certainly when the price of oil goes up, it makes ethanol more attractive. Part of the problem ethanol faces though is producing ethanol actually requires a lot of oil. And so the cost of producing ethanol also goes up. But as these prices go up, it has made interest in alternative fuels greater. It has increased interest in diesel fuel. Diesel actually generates about 30 percent better mileage than gasoline does. Now in the past it’s created a lot of pollution problems, but we’re getting a handle on those and in fact cleaner diesel cars are going to be coming on the market over the next couple years and I expect them to do quite well.

THOMAS: Severin Borenstein directs the University of California Energy Institute. And in Los Angeles, I’m Mark Austin Thomas. Thanks for joining us. Have a great day.

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