Today's Opinions, Tomorrow's Reality 

Short-Term Fluke
The Driving Force of Oil Prices

By David G. Young

Washington, DC, March 8, 2011 --  

The coming crisis in oil prices has nothing to do with Arab unrest, and everything to do with the end of the recession.

With oil prices spiking in response to unrest in Libya and Persian Gulf states, a sense of nervousness has returned to energy markets not seen in over two years. Europe's Brent Crude prices reached nearly $120 per barrel on February 24, still 17 percent lower than the $145 per barrel peak seen in 2008.1 But as world economies show a return to growth after two years of recession, prices are destined to surpass the 2008 record.

Many Americans, especially the jobless, remember fondly the summer of 2008, when the unemployment rate was only 5.6 percent in June, compared to this month's 8.9 percent.2,3 But even in these good old days, things weren't so great for everyone. Long-distance commuters and drivers of behemoth sport utility vehicles were chafing under record high gasoline prices that had reached $4.10 per gallon.4 There was lots of heady talk in the American presidential election about building a new economy based on clean energy, battery-powered electric vehicles, and high-speed rail.

The financial crisis and ensuing recession quickly changed all that. Factories slowed production, the unemployed stopped driving to work, and fewer people boarded airplanes. Texas oil prices plummeted from $145 per barrel in July 2008 to $30 in December. 5 Since then, the recession has given the oil industry some much needed breathing room to catch up with demand. Production edged up -- albeit slightly -- from 85.5 million barrels per day in 2008 to 86.1 million barrels per day for the first 10 months of 2010.6 Such dramatic changes in the supply, demand, and price curves is enough to make the painful prices of 2008 appear as nothing but a short-term fluke.

But appearances can be deceiving. The real fluke, was not the high prices of 2008, but the low prices of the two years that followed. The global recession merely gave a brief reprieve to the problem of rising oil prices. America's gain of 192,000 jobs last month7 indicates that the world's largest economy is ready to join the rest of the world in a return to expansion. As economies pick up steam, demand will once again outstrip the supply of oil, just as it did in 2008.

While there has been some progress on alternate energy sources in the last three years -- the electric Nissan Leaf and Chevy Volt are now in production -- there has yet to be any change in world energy use trends that can head off a crisis. Rising Asian prosperity continues to drive most of the growth in energy use. And it is difficult to conceive how high-minded conservation efforts in richer countries of Europe and the United States can offset the insatiable demand to purchase new vehicles by two billion up-and-coming Asians who yearn for a Western-style energy-intensive lifestyle.

Clearly, supply disruptions driven by Arab unrest will not last. But that will not change the relatively stagnant world production capacity in the face of an unrelenting rise in demand from Asian economies. The end result is simple -- much higher fuel prices as the new Asian consumers bid up the price of oil.

Since oil is largely used for gasoline-powered vehicles, this will mean a painful adjustment from a century of cheap gasoline. To countries like the United States -- with its relatively low gas taxes, sprawling suburbs, and oversized vehicles -- the pain will be acute.

The good news is that this pain won't get worse forever. Fuel prices will stabilize when alternate vehicle power sources like electricity (from other fossil fuels, nuclear, hydroelectric, wind or solar) and natural gas become competitive with gasoline on both price and convenience. The big question is the price point -- how much will gasoline cost by the time alternatives become competitive? The answer to that question will decide the sustainability of the American suburban dream, and how new cities will be designed for the next century.

Related Web Columns:

Higher Prices Now!
Weaning Consumers From Cheap Oil
, June 24, 2008

Tarnished Luster
The Decline of the Suburban Lifestyle
, May 27, 2008

The End of Oil, June 13, 2006


1. The Economist, The Price of Fear, March 5, 2011

2. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey -- Seasonally Adjusted Unemployment Rate, Extracted March 5, 2011

3. Los Angeles Times, Hopes Surge as Job Growth Rises Sharply, March 5, 2011

4. Energy Information Administration, Retail Gasoline Historical Prices, February 28, 2011

5. Ibid, Cushing, OK WTI Spot Price FOB (Dollars per Barrel), March 2, 2011

6. Ibid., December 2010 International Petroleum Monthly, January 12, 2011