The price of oil has risen to over $130 per barrel. What is the cause of this rise? In the latest forecasting survey of the Wall Street Journal, we read that a majority of economists attribute rising food and oil prices to “fundamental market conditions.” It’s not an investment bubble. It would seem that demand is rising faster than the supply. Question: Is the Organization of Petroleum Exporting countries (OPEC) effectively limiting production? If this is true, then anger over U.S. policy in Iraq has far ranging consequences. When President Bush recently visited Saudi Arabia the Saudis refused to expand their oil production. Were they unhappy with the American president? Were they attempting to persuade him, or dissuade him, on a particular issue?
There is another theory, however, even more disturbing. It is possible we have reached a plateau in oil production as predicted by “peak oil” theorists. Thursday’s Wall Street Journal offered a curious report, titled Energy Watchdog Warns of Oil-Production Crunch, by Neil King Jr. and Peter Fritsch. It appears that future crude oil supplies may be “tighter than previously thought.” The chief economist of the International Energy Agency (IEA) in Paris told the Wall Street Journal: “This is a dangerous situation.”
It is interesting how little we know regarding the future price of oil, the future development of alternative energy sources, and the ultimate economic and political impact of both. Oil production may be approaching an irreversible decline. On the other hand, Russia and OPEC may have mustered the necessary discipline to limit the supply. How can we determine the operative cause in this instance? One has only to consider human nature and the history of OPEC to sniff out the truth.
There has always been a competition for market share within OPEC. While the Arab oil embargo of 1973 was effective, Saudi emotions were passionately engaged in supporting the Arab side in the war against Israel. For the first time the United States gave material assistance to Israel. When the embargo ended on 18 March 1974, Saudi Light (oil) had gone from $2.59 per barrel to $11.65 per barrel. That’s more than a fourfold increase.
In comparison, let us consider the situation of the last five years. Since September 2003 the price of oil has increased fourfold. There has been no oil embargo, though there has been a war in the Middle East. In fact, if you tracked the mood of the Arab World in response to America’s invasion of Iraq, you would find a correlation with the price of oil. We know that Arab displeasure with U.S. support for Israel in 1973 led to a quadrupling of oil prices. We know that the Iranian Revolution of 1979 had a similar impact.
Of course, this analysis doesn’t prove that OPEC is responsible for oil at $135 per barrel. There is the possibility (as the Wall Street Journal survey suggests) that the demand for oil is outstripping the supply. Those who could make money by increasing supply haven’t done so. Why not? The likely answer, at this point, is that global oil production is reaching a plateau.
And what does that mean?
It means that peak oil is here. We’ve arrived at maximum global oil production. It means that oil production is going to decline in a few years or months. It means that America’s global dominance is coming to an end, and another era is about to be born. Money is being siphoned from the oil importing countries to the oil exporting countries at an accelerating rate. Most significant of all, the power bled from one great power is bound to accrue to another. Russia is an oil exporting country, and Russia’s strategic position is rapidly improving. Beginning with 2003 (when the U.S. invaded Iraq), the balance of power has been shifting from West to East. Some weeks ago I spoke with Andrei Illarionov, a former Kremlin economic advisor. Possessing some knowledge of oil’s relationship to economic conditions, he told me that America’s invasion of Iraq is definitely related to higher oil prices.
Suppose oil production has reached a plateau. Even in that case, the Iraq situation means that an important country is not making its full contribution to global oil production, and the effect may be larger than previously imagined.
Consider, in this context, what an America air assault on Iran would do to the price of oil. It should be emphasized that the American economy cannot cope with oil prices above $120 per barrel. The American dollar is being damaged, the economic position of Asia and Europe is being damaged, and oil-importing countries in the Third World are gravely impacted.
The situation is very serious.
