The Oil Crunch
By Paul Krugman
07 May, 2004
The New York Times
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 supply.
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 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.