This is Paul Krugmans take on what will happen to oil. I don't think that any crisis in ME is impending in terms of Iran, Libya joining Iraq. Short of Arafat being taken out or some untoward incident the scenerio of Paul is quite academic.. great heading but will not happen..
Fighting in the Mideast could set off a new oil crisis
Paul Krugman The New York Times Wednesday, April 10,
2002,, The global economy
NEW YORK In 1973 an Arab embargo sent oil prices soaring, and a global recession followed. In 1979 the Iranian revolution provoked a second surge in oil prices, and another global recession.
.
Are we now at risk of a third oil crisis? I wish I could say "no," but I can't.
.
Oil prices have risen about $10 per barrel since the situation in the Middle East began deteriorating. So even if they stay where they are, this represents a serious shock to the system - and there could be more to come.
.
True, political analysts assure us that despite Iraq's decision to stop oil exports for a month, no broader, 1973-style oil embargo is likely. Let's hope they're right. But the 1979 oil crisis wasn't a result of a deliberate embargo. Economists have never reached a consensus about what happened in 1979, but my interpretation is that it was similar to the recent California electricity crisis. In both cases the key was the combination of a tight market and demand that was not very responsive to price.
.
Under those circumstances, individual producers - power companies in California, oil-producing countries in 1979 - have a lot of market power. That is, it is in each producer's interest to cut back production to drive prices higher. One result is a price surge, even though there is no real capacity shortage.
.
Are world oil markets that tight? Not yet: the world still has the capacity to produce another 7 million barrels a day. So Iraq, by taking away its 2 million barrels a day, cannot create a crisis by itself. But the remaining excess capacity is just about equal to the combined production of Iran and Libya, which have also proposed an embargo. The point is that it would not take much worsening in the political situation to produce markets so tight that the logic of market power kicks in and countries decide that, quite aside from politics, their financial interest lies in reducing, not increasing, their output.
.
If an oil crisis can happen so easily, why haven't we had one since 1979? The answer is that we made ourselves crisis-proof for a while, then became complacent.
.
After the oil crises of the 1970s, Western economies sharply increased their energy efficiency: The U.S. economy was a third bigger in 1985 than it was in 1973, but it consumed less oil. The result was the marginalization of the danger zone - in 1985, the Persian Gulf produced only 18 percent of the world's oil, less than half of its share in 1973. But rapidly growing oil consumption in the sports utility vehicle era was met, inevitably, by increased Persian Gulf production. So oil prices are once again hostage to Middle Eastern politics.
.
If oil prices do surge, will this have the same disastrous effects as the price spike in 1979? No, but it may have different disastrous effects. In 1979 the clear and present danger from soaring oil prices was that they would send already inflation-prone Western economies into an out-of-control inflationary spiral. To fight that, all the leading economies raised interest rates - which controlled inflation, but also generated a nasty recession.
.
Today, after a decade of price stability, fears of inflation are more muted. Instead, the main concern is the drag of oil prices on purchasing power. Each $10-a-barrel increase in the price of oil is like a $70 billion tax increase, one that falls most heavily on middle- and lower-income families. And this is not a good time to slash purchasing power. Business investment, which plunged last year, has still not recovered; optimistic economic forecasts depend on the assumption that buoyant consumer spending will keep the economy afloat until businesses do decide to invest again. If consumers are made poorer by higher oil prices and cut back instead, that assumption goes out the window. And the Fed can't respond with another big round of interest rate cuts. Since it has already reduced rates from 6.5 to 1.75 percent, it doesn't have much ammunition left. So I'm sorry to say that under current conditions, a third oil crisis could indeed happen. It doesn't have to happen: A diplomatic breakthrough could calm oil markets, and even if oil prices rise the U.S. economy may be more robust than I fear. But the scary scenario remains a serious risk.
< < Back to Start of Article The global economy
NEW YORK In 1973 an Arab embargo sent oil prices soaring, and a global recession followed. In 1979 the Iranian revolution provoked a second surge in oil prices, and another global recession.
.
Are we now at risk of a third oil crisis? I wish I could say "no," but I can't.
.
Oil prices have risen about $10 per barrel since the situation in the Middle East began deteriorating. So even if they stay where they are, this represents a serious shock to the system - and there could be more to come.
.
True, political analysts assure us that despite Iraq's decision to stop oil exports for a month, no broader, 1973-style oil embargo is likely. Let's hope they're right. But the 1979 oil crisis wasn't a result of a deliberate embargo. Economists have never reached a consensus about what happened in 1979, but my interpretation is that it was similar to the recent California electricity crisis. In both cases the key was the combination of a tight market and demand that was not very responsive to price.
.
Under those circumstances, individual producers - power companies in California, oil-producing countries in 1979 - have a lot of market power. That is, it is in each producer's interest to cut back production to drive prices higher. One result is a price surge, even though there is no real capacity shortage.
.
Are world oil markets that tight? Not yet: the world still has the capacity to produce another 7 million barrels a day. So Iraq, by taking away its 2 million barrels a day, cannot create a crisis by itself. But the remaining excess capacity is just about equal to the combined production of Iran and Libya, which have also proposed an embargo. The point is that it would not take much worsening in the political situation to produce markets so tight that the logic of market power kicks in and countries decide that, quite aside from politics, their financial interest lies in reducing, not increasing, their output.
.
If an oil crisis can happen so easily, why haven't we had one since 1979? The answer is that we made ourselves crisis-proof for a while, then became complacent.
.
After the oil crises of the 1970s, Western economies sharply increased their energy efficiency: The U.S. economy was a third bigger in 1985 than it was in 1973, but it consumed less oil. The result was the marginalization of the danger zone - in 1985, the Persian Gulf produced only 18 percent of the world's oil, less than half of its share in 1973. But rapidly growing oil consumption in the sports utility vehicle era was met, inevitably, by increased Persian Gulf production. So oil prices are once again hostage to Middle Eastern politics.
.
If oil prices do surge, will this have the same disastrous effects as the price spike in 1979? No, but it may have different disastrous effects. In 1979 the clear and present danger from soaring oil prices was that they would send already inflation-prone Western economies into an out-of-control inflationary spiral. To fight that, all the leading economies raised interest rates - which controlled inflation, but also generated a nasty recession.
.
Today, after a decade of price stability, fears of inflation are more muted. Instead, the main concern is the drag of oil prices on purchasing power. Each $10-a-barrel increase in the price of oil is like a $70 billion tax increase, one that falls most heavily on middle- and lower-income families. And this is not a good time to slash purchasing power. Business investment, which plunged last year, has still not recovered; optimistic economic forecasts depend on the assumption that buoyant consumer spending will keep the economy afloat until businesses do decide to invest again. If consumers are made poorer by higher oil prices and cut back instead, that assumption goes out the window. And the Fed can't respond with another big round of interest rate cuts. Since it has already reduced rates from 6.5 to 1.75 percent, it doesn't have much ammunition left. So I'm sorry to say that under current conditions, a third oil crisis could indeed happen. It doesn't have to happen: A diplomatic breakthrough could calm oil markets, and even if oil prices rise the U.S. economy may be more robust than I fear. But the scary scenario remains a serious risk. The global economy
NEW YORK In 1973 an Arab embargo sent oil prices soaring, and a global recession followed. In 1979 the Iranian revolution provoked a second surge in oil prices, and another global recession.
.
Are we now at risk of a third oil crisis? I wish I could say "no," but I can't.
.
Oil prices have risen about $10 per barrel since the situation in the Middle East began deteriorating. So even if they stay where they are, this represents a serious shock to the system - and there could be more to come.
.
True, political analysts assure us that despite Iraq's decision to stop oil exports for a month, no broader, 1973-style oil embargo is likely. Let's hope they're right. But the 1979 oil crisis wasn't a result of a deliberate embargo. Economists have never reached a consensus about what happened in 1979, but my interpretation is that it was similar to the recent California electricity crisis. In both cases the key was the combination of a tight market and demand that was not very responsive to price.
.
Under those circumstances, individual producers - power companies in California, oil-producing countries in 1979 - have a lot of market power. That is, it is in each producer's interest to cut back production to drive prices higher. One result is a price surge, even though there is no real capacity shortage.
.
Are world oil markets that tight? Not yet: the world still has the capacity to produce another 7 million barrels a day. So Iraq, by taking away its 2 million barrels a day, cannot create a crisis by itself. But the remaining excess capacity is just about equal to the combined production of Iran and Libya, which have also proposed an embargo. The point is that it would not take much worsening in the political situation to produce markets so tight that the logic of market power kicks in and countries decide that, quite aside from politics, their financial interest lies in reducing, not increasing, their output.
.
If an oil crisis can happen so easily, why haven't we had one since 1979? The answer is that we made ourselves crisis-proof for a while, then became complacent.
.
After the oil crises of the 1970s, Western economies sharply increased their energy efficiency: The U.S. economy was a third bigger in 1985 than it was in 1973, but it consumed less oil. The result was the marginalization of the danger zone - in 1985, the Persian Gulf produced only 18 percent of the world's oil, less than half of its share in 1973. But rapidly growing oil consumption in the sports utility vehicle era was met, inevitably, by increased Persian Gulf production. So oil prices are once again hostage to Middle Eastern politics.
.
If oil prices do surge, will this have the same disastrous effects as the price spike in 1979? No, but it may have different disastrous effects. In 1979 the clear and present danger from soaring oil prices was that they would send already inflation-prone Western economies into an out-of-control inflationary spiral. To fight that, all the leading economies raised interest rates - which controlled inflation, but also generated a nasty recession.
.
Today, after a decade of price stability, fears of inflation are more muted. Instead, the main concern is the drag of oil prices on purchasing power. Each $10-a-barrel increase in the price of oil is like a $70 billion tax increase, one that falls most heavily on middle- and lower-income families. And this is not a good time to slash purchasing power. Business investment, which plunged last year, has still not recovered; optimistic economic forecasts depend on the assumption that buoyant consumer spending will keep the economy afloat until businesses do decide to invest again. If consumers are made poorer by higher oil prices and cut back instead, that assumption goes out the window. And the Fed can't respond with another big round of interest rate cuts. Since it has already reduced rates from 6.5 to 1.75 percent, it doesn't have much ammunition left. So I'm sorry to say that under current conditions, a third oil crisis could indeed happen. It doesn't have to happen: A diplomatic breakthrough could calm oil markets, and even if oil prices rise the U.S. economy may be more robust than I fear. But the scary scenario remains a serious risk. The global economy
NEW YORK In 1973 an Arab embargo sent oil prices soaring, and a global recession followed. In 1979 the Iranian revolution provoked a second surge in oil prices, and another global recession.
.
Are we now at risk of a third oil crisis? I wish I could say "no," but I can't.
.
Oil prices have risen about $10 per barrel since the situation in the Middle East began deteriorating. So even if they stay where they are, this represents a serious shock to the system - and there could be more to come.
.
True, political analysts assure us that despite Iraq's decision to stop oil exports for a month, no broader, 1973-style oil embargo is likely. Let's hope they're right. But the 1979 oil crisis wasn't a result of a deliberate embargo. Economists have never reached a consensus about what happened in 1979, but my interpretation is that it was similar to the recent California electricity crisis. In both cases the key was the combination of a tight market and demand that was not very responsive to price.
.
Under those circumstances, individual producers - power companies in California, oil-producing countries in 1979 - have a lot of market power. That is, it is in each producer's interest to cut back production to drive prices higher. One result is a price surge, even though there is no real capacity shortage.
.
Are world oil markets that tight? Not yet: the world still has the capacity to produce another 7 million barrels a day. So Iraq, by taking away its 2 million barrels a day, cannot create a crisis by itself. But the remaining excess capacity is just about equal to the combined production of Iran and Libya, which have also proposed an embargo. The point is that it would not take much worsening in the political situation to produce markets so tight that the logic of market power kicks in and countries decide that, quite aside from politics, their financial interest lies in reducing, not increasing, their output.
.
If an oil crisis can happen so easily, why haven't we had one since 1979? The answer is that we made ourselves crisis-proof for a while, then became complacent.
.
After the oil crises of the 1970s, Western economies sharply increased their energy efficiency: The U.S. economy was a third bigger in 1985 than it was in 1973, but it consumed less oil. The result was the marginalization of the danger zone - in 1985, the Persian Gulf produced only 18 percent of the world's oil, less than half of its share in 1973. But rapidly growing oil consumption in the sports utility vehicle era was met, inevitably, by increased Persian Gulf production. So oil prices are once again hostage to Middle Eastern politics.
.
If oil prices do surge, will this have the same disastrous effects as the price spike in 1979? No, but it may have different disastrous effects. In 1979 the clear and present danger from soaring oil prices was that they would send already inflation-prone Western economies into an out-of-control inflationary spiral. To fight that, all the leading economies raised interest rates - which controlled inflation, but also generated a nasty recession.
.
Today, after a decade of price stability, fears of inflation are more muted. Instead, the main concern is the drag of oil prices on purchasing power. Each $10-a-barrel increase in the price of oil is like a $70 billion tax increase, one that falls most heavily on middle- and lower-income families. And this is not a good time to slash purchasing power. Business investment, which plunged last year, has still not recovered; optimistic economic forecasts depend on the assumption that buoyant consumer spending will keep the economy afloat until businesses do decide to invest again. If consumers are made poorer by higher oil prices and cut back instead, that assumption goes out the window. And the Fed can't respond with another big round of interest rate cuts. Since it has already reduced rates from 6.5 to 1.75 percent, it doesn't have much ammunition left. So I'm sorry to say that under current conditions, a third oil crisis could indeed happen. It doesn't have to happen: A diplomatic breakthrough could calm oil markets, and even if oil prices rise the U.S. economy may be more robust than I fear. But the scary scenario remains a serious risk. |
