John Rapley - FOREIGN FOCUS HISTORY WAS made this week when the price for a barrel of oil on the New York Mercantile Exchange crossed US$50 for the first time ever. With that milestone passed, some oil traders are suggesting that the sky's the limit. In any event, many of them suggest that US$60 is well within reach.
In many respects, the first decade of the twenty-first century mirrors the last decade of the twentieth. As America girds for its election, nostalgic Democrats are remembering the heady days of the Clinton years, when employment was booming, the stock market soared and oil prices indeed, just about any consumer prices were at fire-sale levels.
And yet, the economic woes of this decade are sometimes the price-tags on the delights of the last one. Just as the stock market bubble had to burst, dragging down economic growth, so too would cheap oil come back to haunt all of us. US$18 per barrel oil made the world into a profligate consumer of energy (just look at the number of SUVs on the roads and you get the drift). But it also meant that it did not pay to go into the oil business. As a result, investment in oil production fell. The result is that when demand finally outran supply, producers would be unable to restore production fast enough to prevent a new bubble this time in energy prices inflating.
Oil prices in the 1990s were kept low largely because the neutralisation of Iraq in the Gulf War had left the Middle East relatively peaceable. But the underlying conditions were bound to worsen. Low commodity prices in the 1990s may have been great for the US economy, but they contributed to a worsening of life in many Third World suppliers. Not only in the Middle East, but in places like Venezuela and Nigeria, the economic squeeze brought social tensions to the fore.
VOLATILITY
It is those same tensions which are today contributing to volatility in some exporting countries. Add to those supply uncertainties the inability of producers to respond quickly to price increases due to years of underinvestment. To top it all off, factor in a huge increase in demand coming from the booming Chinese economy. The result of this blend is a world oil market that is stretched taut. Prices respond sharply to even minor threats to supply, like a low-level rebellion in Nigeria or storms in the Gulf of Mexico.
So, just as the stock-market slump today is the downside of the 1990s boom, the soaring price of energy is not a sign that things were better managed in the 1990s. It is rather that what appeared to be a free ride was just a buy now-pay later scheme. Sooner or later, prices on oil, which most scholars agreed were kept absurdly low, were going to swing back up. The surge has been proportionate to the slump (just as the stock-market slump was proportionate to its own surge).
Where will prices go from here? The word that best captures the state of the world oil market is volatility. A sudden improvement in Iraq or Nigeria could send prices down to $35 a barrel. A new shock elsewhere could just as easily send them up to $60. What does seem to be emerging as a new reality, though, is that insecurity in supplying countries is now more or less the norm. Individual crises come and go, but taken together, there appears to be enough instability to keep supplies uncertain for now.
Should prices remain at these levels for a while, of course, new investment will kick in, supplies will pick up and prices will drop again. But there are a couple of problems. First, suppliers, unsure whether this is a price spike or a permanent rise, have been slow to resume investment. Second, some analysts suggest there are only so many fields left to bring on stream. Unless China's appetite for oil slows there is no evidence of that happening the planet's supply of the 'black gold' will be quickly mopped up. If prices remain high, either inflation will enter the world economy, or growth will slow down somewhat. Either way, new challenges may loom on the horizon.
John Rapley is a Senior Lecturer in the Department of Government, UWI, Mona.
