The Oil Crisis
In the past 2 years, oil prices have continued to soar, hence causing record-breaking fuel and heating costs throughout the world. So, what is behind the rise in oil prices? According to OPEC President Purnomo Yusgiantoro, scarcity is not the issue. “OPEC already oversupplies, but oil prices are too high.... This is not a supply and demand balance problem. This is not because of fundamental factors.” (1) Is he right? Let’s explore further.
The issue appears to be that the markets are worried by a series of risks, in Iraq, Venezuela, Russia, Nigeria, and elsewhere, rather than focusing on whether or not there is truly an oil shortage. Are the markets right to be spooked? And if the real risks don't measure up to market expectations, why are they so concerned?
First it is worth noting that, despite the headlines, oil is not at historically high prices. The headlines are only justified by ignoring inflation; they are not justified. Record oil prices followed in the wake of the Iranian revolution - in 1981 the average price of oil was $31.77 a barrel, the equivalent of roughly $60 today. The peak price, in February 1981, was $39.00, or about $73.50 in today's money. This is substantially more than the $48 (or so) that oil actually costs us now.
Even so, set against reasonable expectations, today's prices are high and these high prices reflect broader worries in society about energy. The most immediate concern is instability in the Middle East, and Iraq in particular. There is a common view that reliance on Middle East oil imports is a big problem. President George W Bush, as well as his Democratic rival John
World Issues 3
Kerry, is offering a plan for American energy independence.
The Midd ...