Balancing Price Point

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He told AP a $3 price would balance supply and demand, allow oil companies to fund further research and satisfy drivers weary of high prices.

After the luncheon, Mulva discussed why he thought gas prices have been [image-nocss] so volatile and explained his $3-per-gallon prediction:

AP: You say people don't understand why gas prices are so volatile. How do you explain what's been happening?

Jim Mulva: Really, 70 to 80% of the cost to the consumer at the pump is oil price. Several months ago oil was up near $147 a barrel. And that price was hard to explain because it went up so high so quickly, and we really didn't think it was sustainable. Now we find ourselves two months later, we're back down to oil prices near the low 60s. So prices at the pump fell from $4 a gallon down to $2.50.

AP: So why is the price of oil so volatile?

JM: That goes back to expectations. Do we have enough supply to meet demand? And there were issues and concerns several months ago whether we would have enough supply to meet the world's requirements for demand. The economies of India and China were using more and more oil all the time. Could the industry add capacity?

Then there were political issues of whether there would be some downtime as a result of political things that could happen in the Middle East or Africa or the Caribbean. Then there's also the issue and concern about hurricanes.

Well, the result of all this, along with all the serious issues of the financial marketplace, why, we're now not looking at growth, we're looking at a recession. And that has quite an issue now on demand. Demand's going to be less. And with less demand you're going to see that there's more supply.

So that's why oil prices have been going down, that's why the American public has seen the gasoline prices go from $4 a gallon down to $2.50.

AP: So what do you see happening in the next three months, six months, 12 months?

JM: Difficult to tell.... I think the oil price went up too quickly, too high, and now I think it's come down, you know, too quickly and too low. Late last year...I said oil prices around $80 to $90 seemed to make sense. I still think that makes a lot of sense in terms of making sure we continue our investment and capacity, make sure the supply's there, make sure the investment's there.

It's also a price the world could live with.

AP: So $80 to $90 a barrel--what would that translate to at the pump?

JM: Well, I think it would translate to between $2.50 and $3, maybe closer to $3 per gallon.

AP: Is that the price you think it should be, or that it will be?

JM: That's what I think about if I look out longer-term, that would be a good price for balancing supply and demand and the cost of energy to the public.

AP: How would you assess the energy policies of senators Barack Obama and John McCain?

JM: The energy policies are in some respects rather similar, but what's really important is that...the last thing we need to do is to add increased taxes on the oil industry. Because we need to continue to make our investments to add supply and upgrade our refineries, improve our infrastructure, we need to do that even in these down cycles.

Increased taxes is really not consistent or appropriate to continue that investment. And the other thing is, if we're not making the investment or increasing investment, it's going to impact jobs, there's going to be less jobs. So increased taxation leads to less supply, ultimately higher cost of energy and fewer jobs.

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