Friday, May 07, 2004

Gasoline at $10 per gallon? - You bet!

Paul Krugman discusses what is happening in the world oil markets and why oil is at $40/barrel.

I work in the oil industry, and I can tell you that within my (very large) company, there is a sense of growing concern, if not panic, as to where even the medium term replacement reserves are for the oil and gas we are producing today. I can tell you that there is a lot of wishful thinking about future opportunities and also a lot of faith being put on what I would call (using a couple of football metaphors) "trick plays" and "hail Mary passes".

Anyway, here are some exerpts from Krugman's article.

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.


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 our prosperity.

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.