The Oil Crunch
Source Jim Devine
Date 04/05/07/14:42

OP-ED COLUMNIST/New York TIMES/May 7, 2004
The Oil Crunch

Before the start of the Iraq war his media empire did so much to
promote, Rupert Murdoch explained the payoff: "The greatest thing to
come out of this for the world economy, if you could put it that way,
would be $20 a barrel for oil." Crude oil prices in New York rose to
almost $40 a barrel yesterday, a 13-year high.

Those who expected big economic benefits from the war were, of course,
utterly wrong about how things would go in Iraq. But the disastrous
occupation is only part of the reason that oil is getting more
expensive; the other, which will last even if we somehow find a way out
of the quagmire, is the intensifying competition for a limited world oil

Thanks to the mess in Iraq - including a continuing campaign of sabotage
against oil pipelines - oil exports have yet to recover to their prewar
level, let alone supply the millions of extra barrels each day the
optimists imagined. And the fallout from the war has spooked the
markets, which now fear terrorist attacks on oil installations in Saudi
Arabia, and are starting to worry about radicalization throughout the
Middle East. (It has been interesting to watch people who lauded George
Bush's leadership in the war on terror come to the belated realization
that Mr. Bush has given Osama bin Laden exactly what he wanted.)

Even if things had gone well, however, Iraq couldn't have given us cheap
oil for more than a couple of years at most, because the United States
and other advanced countries are now competing for oil with the surging
economies of Asia.

Oil is a resource in finite supply; no major oil fields have been found
since 1976, and experts suspect that there are no more to find. Some
analysts argue that world production is already at or near its peak,
although most say that technological progress, which allows the further
exploitation of known sources like the Canadian tar sands, will allow
output to rise for another decade or two. But the date of the physical
peak in production isn't the really crucial question.

The question, instead, is when the trend in oil prices will turn
decisively upward. That upward turn is inevitable as a growing world
economy confronts a resource in limited supply. But when will it happen?
Maybe it already has.

I know, of course, that such predictions have been made before, during
the energy crisis of the 1970's. But the end of that crisis has been
widely misunderstood: prices went down not because the world found new
sources of oil, but because it found ways to make do with less.

During the 1980's, oil consumption dropped around the world as the
delayed effects of the energy crisis led to the use of more
fuel-efficient cars, better insulation in homes and so on. Although
economic growth led to a gradual recovery, as late as 1993 world oil
consumption was only slightly higher than it had been in 1979. In the
United States, oil consumption didn't regain its 1979 level until 1997.

Since then, however, world demand has grown rapidly: the daily world
consumption of oil is 12 million barrels higher than it was a decade
ago, roughly equal to the combined production of Saudi Arabia and Iran.
It turns out that America's love affair with gas guzzlers, shortsighted
as it is, is not the main culprit: the big increases in demand have come
from booming developing countries. China, in particular, still consumes
only 8 percent of the world's oil - but it accounted for 37 percent of
the growth in world oil consumption over the last four years.

The collision between rapidly growing world demand and a limited world
supply is the reason why the oil market is so vulnerable to jitters.
Maybe we'll get through this bad patch, and oil will fall back toward
$30 a barrel. But if that happens, it will be only a temporary respite.

In a way it's ironic. Lately we've been hearing a lot about competition
from Chinese manufacturing and Indian call centers. But a different kind
of competition - the scramble for oil and other resources - poses a much
bigger threat to our prosperity.

So what should we be doing? Here's a hint: We can neither drill nor
conquer our way out of the problem. Whatever we do, oil prices are going
up. What we have to do is adapt.  

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