Marketplace, May 26, 2004
It's not a crisis yet. Americans are using half as much oil as a percentage of our total economy as we did in the last oil crunch back in 1980. That's largely due to a shift in the economy from energy-intensive manufacturing to less energy-demanding services. Adjusted for inflation, gas prices at the pump still are not as high as they were in 1980. But make no mistake, we're heading toward big trouble.
Who's to blame? Not the usual suspects. This time oil producers are doing everything they can. OPEC, the Organization of Petroleum Exporting Companies, is exceeding its quotas. Saudi Arabia just announced it would increase production to use its spare capacity and would even increase capacity, yet oil prices continue to rise. Part of the problem is that China's booming economy is demanding more oil and America's current recovery is also putting the squeeze on energy supplies. But the real culprit is increasing unrest in the Middle East.
You see, oil prices are rising because speculators are betting on shortages to come. They see increasing instability in the Middle East including terrorism aimed at oil pipelines across the region. And they translate that into less oil to meet world market demand.
Consider the two attacks in recent weeks on oil facilities in Saudi Arabia, the world's largest oil producer. Such attacks in Saudi Arabia are unprecedented.
Put simply, the unrest in Iraq is spreading outward. There's less spare capacity right now than at any point in the past 30 years. So any oil capacity lost to terrorism is bound to raise prices. Trading of crude oil futures on the New York Mercantile Exchange is at near record highs. Call it the terrorist price premium, now estimated to be between $6 and $8 a barrel. If the Iraqi war continues to generate more and more anger on the Arab street against America and the West, resulting in more attacks on oil fields and pipelines across the region, the terrorist price premium is likely to rise.
Listen to the White House and you'd think the Iraqi war was more or less on track, but every time images like the horrors of Abu Ghraib or of civilian casualties are broadcast to the Arab world, more unrest follows. Markets don't lie. The futures market in oil is reflecting the market's rational concern about the direction America's war against terror is taking.
