NYTimes.com Article: The Oil Crunch
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The Oil Crunch
May 7, 2004
By PAUL KRUGMAN
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
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.��
Bob Herbert is on vacation.
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