World supply is so precious that more price spikes are inevitable
By Marianne Lavelle
If you gasped at the spiraling price of gasoline last year, your dismay might have been still more acute if the true cost had also been posted on the pump. America's 21 million-barrel-a-day petroleum habit reverberates far beyond the gas tank, from lackluster holiday sales at discount superstores to airlines ending the year awash in red ink despite robust travel and manufacturers in booming industries shutting their doors. Although as of last week crude oil had slid to $43 per barrel from its peak of $56 in mid-October, its price was still 32 percent higher than a year ago and 67 percent more than the day President Bush declared major combat operations over in Iraq. An immeasurable damper remains on the economy; just as hurricanes and pre-election jitters sparked the autumn run-up, the market knows that any new round of terrorism, political strife, or even a blast of cold weather could send the price skyward again.
"I can't tell you we won't see $20 oil again, but I also wouldn't be surprised to see $70 oil," says analyst Bill O'Grady of A. G. Edwards & Sons. It's nearly impossible to forecast, he says, "because the structure of the market has profoundly changed."
A few pessimistic observers say the world is simply running out of oil and is paying the price for its dependence on a finite resource. But most analysts see a more complicated reality: The supply is still there, but it is increasingly difficult to access and deliver to ever more oil-hungry consumers around the globe. It is a world where new demand for oil, led by China and India, is growing at a record clip, while threatened or unreliable regimes like Saudi Arabia and Iran control the largest share of petroleum reserves. Meanwhile, investors have entered the oil futures market in a big way, causing rapid price spikes as they seek out hefty returns. "We're not running out of oil in the ground," says James Burkhard, director of market research for consulting firm Cambridge Energy Research Associates. "But aboveground political, environmental, and economic trends will shape the future of oil prices."
In the view of the Bush administration, terrorism and political risks have conspired--with the help of speculators--to create a "terror premium," jacking up prices $10 to $12 above what they would be otherwise. "It is a rare coincidence that you have volatility in so many diverse places," reasons one administration official involved in energy issues. "At any moment, we're just one labor strike away from a price hike" (story, Page 50).
But far more is at work in the market than a temporary imbalance produced by the Iraq war or terrorism. A few dire forecasters say the world is nearing "Hubbert's Peak," named for the late geologist M. King Hubbert, who accurately predicted that oil production in the United States would reach its apex around 1970 and decline ever afterward. Although Hubbert's call that worldwide production would peak between 1995 and 2000 has not panned out, a cadre of "peak-oil theorists" maintain that his calculation was essentially sound. The day of reckoning has simply been delayed, they say, and may be at hand.