In the wake of uprisings throughout the Middle East, the price of oil has spiked. Prices per barrel are hovering in the $100-level range, and consumers are having flashbacks to 2008, when the price of crude oil peaked at almost $150 a barrel. Libya has the largest proven oil reserves in Africa, but in the wake of the protests, production there has slowed considerably. On Sunday, White House Chief of Staff William Daley stated that the Obama administration would consider tapping the United States' oil reserves to alleviate some of the pressure, and many are worried it could harm the still-fragile American economy.
To weigh through the uncertainty, TAP talked to Robert Scott, senior international economist and director of international programs at the Economic Policy Institute, about how the oil markets are dealing with the political uncertainty in the Middle East.
So how does the unrest in Libya and the Middle East affect the oil prices?
Libya provides about 2 percent of the oil in the world. It has a disproportionately large effect, however, on energy prices, because it's a very high-quality oil that's particularly well suited for conversion into gasoline. Most of it ends up being directly used in Italy and the rest of Europe. The loss of supply there affects markets around the globe, and that's how it's affected the United States. So what we've seen since the first of the year is that the price of oil has moved up sharply. It's up about $7 a barrel in the last week, and about $23.50 in the last year.
It seems like the U.S. government is considering tapping into our oil reserves. What does that mean for consumers? American consumers, specifically?
That may help relieve some of the pressure on oil prices and buffer the short-term increase in the cost of crude and the cost of gasoline. I should mention that gasoline is also up about 50 cents a gallon since the first of the year. And that's really going to cut into consumer spending. It'll give consumers less money to spend on other goods and services and will exert a depressing effect on GDP. So if tapping into the oil reserve could help dampen the growth in those prices, that would be a good thing. But the reserve isn't that large. Overall, it's about a billion barrels, and I'm not sure how much of that they can use. So it really depends on how quickly they draw it down and how long this crisis lasts.
So when we're talking about who benefits from this, are oil companies the only ones, or are other parties benefiting from the spike in oil prices? And who's hurting?
Of course the oil companies benefit, and other oil producers around the world enjoy windfall gains. You know, every oil company, every oil-producing state in the world has enjoyed in the last week a $10-a-barrel gain or a $9-a-barrel gain on the oil that they sell. And over the last year, a $23.50 gain per barrel. That generates a huge change in profits. Every penny increase in the retail price of gas is equal to a $1 billion tax increase in terms of its effect on the economy. So as the pump price of gas goes from $3 to $4 over the year, that's like a $100 billion tax on the economy, which would cut half to 1 percent off of GDP growth. And we've already seen, as I said, about a 50 cent per-gallon increase in gasoline, so we're halfway there.
Can we expect to see a drop in oil prices at any point in the future?
Typically, these kinds of disruptions are short-lived, though it's extremely hard to predict what's going to happen in the Middle East. Just how long the unrest will last in Libya, and just how far it will spread. So far, it's gone from Tunisia to Egypt to Libya and elsewhere. If, for example, Iran should be pulled down into the unrest, or Saudi Arabia, it could have much larger impacts on oil supplies, and I think that's a long-run reason for concern here, and one reason why oil markets are jumpy.
This Q&A has been edited for clarity and length.
