Hiro says that this shock is different because it is not related to a
war of some other event. That is just not true. Here is what Joe
Stiglitz had to say about the War in Iraq and oil prices when he was
interviewed in February 2008. At that time oil was only about $100 per
barrel.
*JOSEPH STIGLITZ: *Well, we were very conservative in our book. When we
say $3 trillion, that’s really an underestimate. We attributed, in our
book, only $5 to $10 to the war itself. But if you look back, in 2003,
futures markets, which take into account increases in demand, increases
in supply—they knew that China was going to have increased demand, but
they thought there would be increases in supply from the Middle
East—they thought the price would remain at $25 for the next ten years
or more. What changed that equation was the Iraq war. They couldn’t
elicit the increase of supply in the Middle East because of the turmoil
that we brought there. So we think, actually, the true numbers, not the
$5 or $10 that we used, because we didn’t want to get in a quibble, but
really a much larger fraction of the difference between $25 that it was
at the time in 2003 and the $100 we face today.
Rudy
Louis Proyect wrote:
The Current Oil Shock
No Relief in Sight
By Dilip Hiro
When will it end, this crushing rise in the price of gasoline, now
averaging $4.10 a gallon at the pump? The question is uppermost in the
minds of American motorists as they plan vacations or simply review
their daily journeys. The short answer is simple as well: "Not soon."
As yet there is no sign of a reversal in oil's upward price thrust,
which has more than doubled in a year, cresting recently above $146 a
barrel. The current oil shock, the fourth of its kind in the past
three-and-a-half decades, and the deadliest so far, shows every sign
of continuing for a long, long stretch.
The previous oil shocks -- in 1973-74, 1980, and 1990-91 -- stemmed
from specific interruptions of energy supplies from the Middle East
due, respectively, to an Arab-Israeli war, the Iranian revolution, and
Iraq's invasion of Kuwait. Once peace was restored, a
post-revolutionary order established, or the invader expelled, vital
Middle Eastern energy supplies returned to normal. The fourth oil
shock, however, belongs in a different category altogether.
Nothing Like It Before
Unlike in the past, the present price spurt has been caused mainly by
global demand for energy outstripping available supply. Alarmingly,
there is no short-term prospect that supply will match demand. For a
commodity like petroleum that underwrites and permeates every aspect
of modern life -- from fuel to fertilizers, paints to plastics, resins
to rubber -- "balance" requires a 5% safety factor on the supply side.
At present, however, spare capacity in the oil industry is less than
2%, down from more than 6% in 2002. As a result, the price of oil
responds instantly to negative news of any sort: a threat against Iran
by an Israeli cabinet minister, a fire on a Norwegian offshore
drilling rig, or an attack on an oil facility by armed rebels in Nigeria.
Behind the present price surge, other factors are also at work. Take
the sub-prime mortgage crisis in the U.S. It flared almost a year ago,
drastically lowering the market value of the stocks of banks and
allied companies. The concomitant downturn in other equities led
investment fund managers and speculators to direct their cash into
more productive markets, especially commodities such as gold and oil,
driving up their prices. The continued weakening of the U.S. dollar --
the denomination used in oil trading -- has also encouraged investment
in commodities as a hedge against this depreciating currency.
The earlier oil shocks led non-OPEC (Organization of the Petroleum
Exporting Countries) nations to accelerate oil exploration and
extraction to increase supplies. Their collective reserves, however,
represent but a third of OPEC's 75% of the global total. By the turn
of the century, these countries had pumped so much crude oil that
their collective output went into an irreversible decline.
A mere glance at the oil production table of the authoritative BP
Statistical Review of World Energy -- published annually -- shows
declines in such non-OPEC countries as Britain, Brunei, Denmark,
Mexico, Norway, Oman, Trinidad, and Yemen. Over the past decade, oil
output in the U.S. has declined from 8.27 million barrels per day
(bpd) to 6.88 million bpd.
The exploitation of the much-vaunted tar sands of Canada -- expected
to cover the global shortfall -- only helped to raise that country's
output from 3.04 million bpd in 2005 to 3.31 million bpd in 2007, a
mere 10% in two years.
In the 1990s, overflowing supplies and cheap oil had led to an overall
decline in oil exploration as well as under-investment in refineries.
These two factors constitute a major hurdle to hiking the supply of
petroleum products in the near future.
In addition, new hydrocarbon fields are increasingly found in
deep-water regions that are arduous to exploit. The paucity of the
specialized equipment needed to extract oil from such new reserves has
created a bottleneck in future offshore production. The world's
current fleet of specialized drill ships is booked until 2013. The
price of building such a vessel has taken a five-fold jump to $500
million in the last year. The cost of crucial materials -- such as
steel for rigs and pipelines -- has risen sharply. So, too, have
salaries for skilled manpower in the industry. Little wonder then that
while, in 2002, it cost $150,000 a day to hire a deep-water rig, it
now costs four times as much.
full:
http://www.tomdispatch.com/post/174955/dilip_hiro_the_energy_reality_we_face
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Rudy Fichtenbaum
Professor of Economics
Chief Negotiator AAUP-WSU
Wright State University
Dayton, OH 45435-0001
937-775-3085
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