May 7, 2004
OP-ED COLUMNIST
The Oil Crunch
By PAUL KRUGMAN
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.