[Allan Topol / AllanTopol.Com]
Lightning paced thriller writer
of International Intrigue
National Bestselling Author

How High Will it Go?
by Allan Topol, [IMAGE]2004


Photo Courtesy: Julie Zitin
[Allan Topol / AllanTopol.Com] Last week, the price of low sulfur crude, the most widely watched oil price, closed at a record high level of $46.58 a barrel. To place this number in perspective, in 1998 the price was approximately $9 a barrel. In the coming months and years we can expect the price of oil to continue to rise with devastating impacts for both the American and world economies.

There are a number of critical factors contributing to this situation. At the root of them is the simple economic principle of supply and demand.

It's easy to sit back and blame OPEC, and particularly Saudi Arabia. "If only those people would increase their production, oil prices would fall." That was the case several years ago when OPEC and the Saudis particularly had control over the market. The situation now is much more complex.

On the supply side, oil is a depleteable resource that exists in different parts of the world in finite quantity. Following the last Saudi production increase a month ago, the OPEC nations are now pumping at or very close to maximum or optimal capacity. There is nowhere to go but down in pumping capacity as available supplies in the ground continue to decrease. The chances of finding totally new deposits in meaningful quantities are small.

Equally important on the supply side is that many of the countries with huge oil deposits are in the throes of political turmoil, which is interrupting their ability to pump oil. Examples are Venezuela where political opponents of President Chavez have shutdown much of production. Russia, where Putin's government's legal and tax assault on Yukos is disrupting supply. In Iraq, insurgents are taking aim, literally and figuratively, on oil production facilities. In Saudi Arabia, the House of Saud is reeling from terrorist attacks. In Nigeria, Africa's largest oil producer, violence and ethnic strife have shut down almost half of productive capacity. These conflicts in oil producing nations are likely to continue or escalate.

The picture is bleak. Oil supply will move downward, both because of physical pumping limitations and political conflicts.

On the demand side, the oil market, like many other commodity markets, has been thrown out of kilter by the sudden emergence of China as a huge new importer. In a couple of years, China has moved from being an insignificant oil purchaser to the second largest importer of oil next to the United States.

The China factor has had major impacts on other markets such as steel and cement as well. In those situations, too, China is suddenly vying to purchase huge supplies. Steel is no longer available to many large American industrial consumers except at much larger prices than they had budgeted for or even contracted for. Refusal to pay a larger price means a cut-off in supply. The surge in Chinese demand has upset all previous projections for oil consumption.

Added to the China factor is a general increase in global demand for oil caused by a partial economic recovery. The good news is that the economies in the United States, Japan and elsewhere may be coming out of recession. The bad news is that they will need more oil to fuel their economies. Meantime, other countries, such as India, have been increasing their industrial bases in the new global economy. They, too, have become increased oil consumers.

Then there is the impact on individual consumers. Americans at all income levels must buy gasoline for their cars, which are often a necessity to get to work. Most Americans must heat their homes, and electric power is usually generated by fossil fuels. People already stretched to their financial limit with debt now have unforeseen increased costs which must be paid. Bankruptcies will increase. The misery level will expand.

What is truly troublesome is that for more than thirty years since the oil embargo of 1973, it has been clear that we have a major oil problem. Yet, no American administration, Democratic or Republican, has even tried to deal with it in any responsible manner. There are ways to avoid the impact of higher oil prices. For example, a "Manhattan Project" type research effort for new energy technologies. Or a massive building program for nuclear power plants. But during this election year, no one in either party running for the presidency or congress even discusses the issue. When will our leaders wake up and realize that our quality of life is at risk?

What will it take? Oil at $60 a barrel? $80? $100?