production of crude oil and natural gas can also be subject to external factors beyond the company’s control. External factors include not only the general level of inflation but also prices charged by the industry’s product- and service-providers, which can be affected by the volatility of the industry’s own supply and demand conditions for such products and services. The oil and gas industry worldwide experienced significant price increases for these items during 2005 that are expected to continue into 2006. Capitalized costs and operating expenses can also be affected by uninsured damages to production facilities caused by severe weather or civil unrest.

     Industry price levels for crude oil continued an upward trend in 2005. The spot price for West Texas Intermediate (WTI) crude oil, one of the benchmark crudes, averaged $57 per barrel in 2005, an increase of approximately $16 per barrel from the 2004 average price. The WTI spot price for the first two months of 2006 averaged about $64 per barrel. The rise in crude oil prices reflects, among other things, increasing demand in growing economies, the heightened level of geopolitical uncertainty in some areas of the world and supply concerns in other key producing regions, including production in the Gulf of Mexico that partially was shut in following the hurricanes.

     As was the case in 2004, the differential in prices between high-quality, light-sweet crude oils, such as the U.S. benchmark WTI, and heavier crudes was unusually wide in 2005. Chevron produces heavy crude oil in California, Chad, Indonesia, the Partitioned Neutral Zone (between Saudi Arabia and Kuwait), Venezuela (including volumes produced under an operating service agreement) and certain fields in Angola, China and the United Kingdom North Sea. The price for the heavier crudes has been dampened because of ample supply, together with lower relative demand from the number of refineries that are able to process this lower-quality feedstock into light-product fuels (i.e., motor gasoline, jet fuel, aviation gasoline and diesel fuel). The demand for heavy crude was further reduced in late 2005 as refining capacity along the U.S. Gulf Coast was interrupted by hurricanes. The price for higher-quality light oil, on the other hand, has remained high, as the demand for light products, which can be manufactured by any refinery from light oil, has been robust worldwide.

     Natural gas prices, particularly in the United States, also trended upward in 2005. For the full year, U.S. benchmark prices at Henry Hub averaged about $8 per thousand cubic feet (MCF), compared with about $6 in 2004. Henry Hub spot prices peaked in December 2005 above $14, as supplies early in the winter heating season were reduced by production shut in following Hurricanes Katrina and Rita. By mid-February 2006, prices had moved downward to about $8 per MCF. Fluctuations in the price for natural gas in the United States are closely associated with the volumes produced in North America and the inventory in underground storage to meet customer demand.

     In contrast to the United States, certain other regions of the world in which the company operates