New York Times, Business Times 10 Nov 07;
For the first time, oil price surge is led by demand; and supply may not keep up
(NEW YORK) With oil prices approaching the symbolic threshold of US$100 a barrel, the world is headed towards its third energy shock in a generation. But today's surge is fundamentally different from the previous oil crises, with broad and longer-lasting global implications.
Just as in the energy crises of the 1970s and 80s, today's high prices are causing anxiety and pain for consumers, and igniting wider fears about the impact on the economy.
Unlike past oil shocks, which were caused by sudden interruptions in exports from the Middle East, this time, prices have been rising steadily as demand for petrol grows in developed countries.
'This is the world's first demand-led energy shock,' said Lawrence Goldstein, an economist at the Energy Policy Research Foundation, of Washington.
Forecasts of future oil prices range widely. Some analysts see them falling next year to US$75, or even lower, while a few project US$120 oil.
Virtually no one foresees a return to the US$20 oil of a decade ago, meaning that consumers should brace for an era of significantly higher fuel costs.
At the root of the stunning rise in the price of oil, up 56 per cent this year and more than four-fold in a decade, is a positive development: an unprecedented boom in the world economy.
Demand from China and India alone is expected to double in the next two decades as their economies continue to expand, with people there buying more cars and moving to cities to seek a way of life long taken for granted in the West.
But as prices rise, the global economy is entering uncharted territory. The increase so far does not appear to be hurting economic growth, but many economists wonder how long that would last. 'These prices are too high and will end up hurting everybody, producers and consumers alike,' said Fatih Birol, chief economist at the International Energy Agency.
Oil futures closed at US$95.46 on the New York Mercantile Exchange on Thursday, down nearly one per cent from the day before. But the price has become volatile, and many analysts expect the psychologically important US$100-a-barrel threshold to be breached sometime in the next few weeks.
'Today's markets feel like the crowds standing up in the final minutes of a football game shouting: 'Go! Go! Go!',' said Daniel Yergin, an oil historian and the chairman of Cambridge Energy Research Associates, a consulting firm. 'People seem almost more relaxed about US$100 than they were about US$60 or US$70 oil.'
Oil is not far from its historic, inflation-adjusted high, reached in April 1980 in the aftermath of the Iranian revolution. At the time, oil jumped to the equivalent of US$101.70 a barrel in today's money.
For most of the 20th century, as it transformed the modern world, oil was cheap and abundant. Throughout the 1990s, for example, oil prices averaged US$20 a barrel.
'The concern today is over how will the energy sector meet the anticipated growth in demand over the longer term,' said Linda Z Cook, a board member of Royal Dutch Shell, the big oil company. 'Energy demand is increasing at a rate we've not seen before. On the supply side, we're seeing it is struggling to keep up. That's the energy challenge.'
More than any other country, China represents the scope of that challenge. Its economy has grown at a furious pace of about 10 per cent a year since the 1990s, lifting nearly 300 million people out of poverty.
But rapid industrialisation has come at a price - oil demand has more than tripled since 1980, turning a country that was once self-sufficient into a net oil importer. People there are demanding access to electricity, cars and consumer goods and can afford to compete with the West for these resources.
Today, China consumes only a third as much oil as the United States, which burns a quarter of the world's oil each day. By 2030, India and China together will import as much oil as the United States and Japan do today.
While demand is growing fastest abroad, Americans' appetite for big cars and large houses has pushed up oil demand steadily in the US, too. Europe has managed to rein in oil consumption through a combination of high petrol taxes, small cars and efficient public transportation, but Americans have not. Oil consumption in the United States, where petrol is far cheaper than in Europe, has jumped to 21 million barrels a day this year, from about 17 million barrels in the early 1990s.
If the Chinese and Indians consumed as much oil for each person as Americans do, the world's oil consumption would be more than 200 million barrels a day, instead of the 85 million barrels it is today.
No expert regards that level of production as conceivable. -- NYT
This article was also carried in the Straits Times, 11 Nov 07
