The IPAA's job of emphasizing the importance of the oil and gas industry to the nation isn't finished, according to Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA). Yergin addressed Independent Petroleum Association of America (IPAA) members at the organization's recent 75th anniversary meeting in Colorado Springs. When the IPAA was founded in 1929, so-called experts said the nation had only 10 years of oil and gas left to produce, and pundits have repeated that message ever since. Industry has responded by opening new areas and developing new technology, he said. In 1929, Mexico provided a fifth of the oil used in the U.S., and Venezuela was ramping up production. Several state executives at the time believed the myth about the scarcity of oil and were determined to save U.S. oil reserves while allowing imports to flow freely across the border. The IPAA was formed to protest that erroneous stand and "was able to play a larger role in the political process," said Yergin, the author of the Pulitzer Prize-winning history of the oil industry, The Prize. Independents acquired an authentic voice, and proved their value during World War II when the U.S. provided 6 billion of the 7 billion barrels of oil used to win the war. Worldwide, crude oil prices now herald a demographic change in China, India and the Middle East. Only five years ago, prices hovered at $10 a barrel and economic gurus predicted a floor around $5 a barrel. Less than 15 months ago, people talked about a huge inflow of oil from Iraq. It won't happen without billions of dollars in development work, Yergin said. As little as six months ago, people didn't see the strength of the global economy or its effect on oil prices. From a projection of oil demand growth between 1.4- and 1.5 million barrels a day at the beginning of the year, forecasts have grown to between 2- and 2.4 million barrels per day of growth now. Now, people are concerned about high and volatile prices and their threat to the economy. They have seen demand shock as China climbed swiftly from self-sufficiency a decade ago to the world's second-largest consuming nation, after the U.S., today. During that period China has grown from a producer of cheap goods to the consumer engine that drove the Japanese gross domestic product to a 6% growth rate, he added. (For more on this, see "China's Economy and Oil Prices" in this issue.) Chinese growth requires energy, and the current growth in oil demand is double the average rate in the past six years, he said. China accounted for 40% of the total global oil demand growth in the past four years. Meanwhile, security concerns have contributed as well to higher oil prices: the last time oil stocks were at this level, Yergin said, oil sold for $26 a barrel. Much of the difference is a security premium. CERA estimates the cost of that security premium between $6 and $10 a barrel. "There's no question that the risks have gone up," Yergin said. The solution requires adaptation to a new worldwide supply-demand profile, globalizing the liquefied natural gas (LNG) industry, adjusting current market psychology, promoting international cooperation, maintaining a strong domestic industry, and more realistically appraising energy reserves, environmental goals, technological potential and geopolitical limitations, he added Those factors, and more, indicate the nation is at a critical juncture in energy, a point at which a focused effort by independents, majors, energy-users and lawmakers will have to make the right moves to assure energy security with environmentally sound economic growth, he said. Key factors include the following: the human infrastructure of the industry is weakening; Iraq faces major challenges that will increase with the transfer of power; and markets are tight with little spare capacity. Looking ahead, he said experts forecast a world consumption rate of 115 million barrels of oil a day in 2025, up from around 81 million barrels a day now. Much of that new capacity will come from Russia, the Caspian and the Middle East. That fact infers that geopolitics will play a larger part in energy supply than geology, Yergin said. In the short term, oil prices, now at some $36 a barrel, should average $34.75 next year. On the gas side, LNG has grown on the global scene as production and delivery costs have dropped 30%. The addition of 200,000 megawatts of electrical power fueled by gas in the U.S.-approximately a fourth of total capacity-effectively destroyed the gas bubble. Last year, the Rockies produced as much gas as the Gulf of Mexico, yet without more access to public land, that production level will decline, he added. As gas demand grows, North America will need new supplies of gas and increased LNG imports. Globally, LNG will increase capacity as much in the next eight years as it has in the past 40 years. "There is potential for a crisis in natural gas in North America," he said. Many people are concerned that long-term high prices and volatility will destroy demand, driving energy-intensive industries to other countries to remain competitive. That already has started to happen in the petrochemicals industry. If that trend grows, it will generate a political backlash. "We need a national consensus on the role of natural gas, including the access question." A consensus policy on natural gas could open access to areas now off-limits and streamline the ponderous federal permitting process. "If there is no policy, we will have real problems with natural gas in North America. The IPAA will have a very big and important role to play in delivering fuels for growth in an environmentally satisfactory way." -Don Lyle