Calling 2008 a "most interesting year," John Spears, president of Spears and Associates, pointed out that despite the record high prices of oil and gas this year, drilling operators have responded with only a 6% increase in planned drilling activities.

Oil prices will have risen about 60% by the end of this year, from $80/barrel to as high as $145/barrel (averaging about $115). Gas prices were somewhat less volatile but will have risen 40% for the year from between $6 and $7 up to $9.50. While these rises were unexpected at year-end 2007, prices were on track with predictions.

"What that tells me is we tend to forecast what's most recently experienced," Spears said, so "as we see increases [in prices], we expect increases in drilling activity," he said.

Meanwhile, the demand for oil continues to slow in pace (up about 3% to 4% for the first half of this year)-a trend that began a few years ago. However, the rate of slowdown has lessened, which will continue into 2009. Spears said the reason the pace has slackened is that developing countries are in industrialization mode-their demand has risen from zero. And in countries such as China, Iran and Venezuela, end users are protected from price increases by government subsidies.

"Only in the last few months are they [countries with subsidized prices] starting to pass along prices. As this takes place, higher prices will affect these countries as well," Spears said.

The market, with just 2% surplus global capacity, "is as tight as the market has ever been," Spears told the audience. Because of that, everyone bid up the price of oil. However, the situation is expected to reverse rapidly going forward, he said. OPEC production Valves will fall and spare capacity will double as the year 2009 progresses while non-OPEC production will grow somewhat. This will result in rising spare capacity for the world-from 1.5 million to 3 million/barrels a day. "While that sounds like a lot, it's not much by historical standards where it's typically been more like 5 million," Spears said.

Meanwhile, gas consumption looks robust (about 2% growth in the U.S.) with a large part of the growth in demand going forward coming from the power generation sector, Spears said. Onshore gas production will rise an unforeseen 8% for this year pushed forward by new pipelines and unconventional gas field development while other types of production will fall for the year.

Drilling for both oil and gas will rise for 2009. Construction of large-diameter pipelines will rise from 2008 to 2009 because of new sources found in the Rockies, the mid-continent and in east Texas.