The 2004 campaign is nothing less than a national
referendum on the CREDIBILITY, COMPETENCE and
CHARACTER of the incredible shrinking _resident, and
his VICE _resident...The central issue is SECURITY:
not only NATIONAL SECURITY, but ECONOMIC SECURITY and
ENVIRONMENTAL SECURITY as well. Are you safer today
than you were four years ago?
Paul Krugman, New York Times: Let me put it a bit
differently: the last time oil prices were this high,
on the eve of the 1991 gulf war, there was a lot of
spare capacity in the world, so there was room to cope
with a major supply disruption if it happened. This
time there isn't.
The International Energy Agency estimates the world's
spare oil production capacity at about 2.5 million
barrels per day, almost all of it in the Persian Gulf
region. It also predicts that global oil demand in
2004 will be, on average, 2 million barrels per day
higher than in 2003. Now imagine what will happen if
there are more successful insurgent attacks on Iraqi
pipelines, or, perish the thought, instability in
Saudi Arabia. In fact, even without a supply
disruption, it's hard to see where the oil will come
from to meet the growing demand...
Still, if there is a major supply disruption, the
world will have to get by with less oil, and the only
way that can happen in the short run is if there is a
world economic slowdown. An oil-driven recession does
not look at all far-fetched.
It is, all in all, an awkward time to be pursuing a foreign policy that promises a radical transformation of the Middle East — let alone to be botching the job so completely.
Restore the Timeline, Show Up for Democracy in 2004:
Defeat Bush (again!)
http://www.commondreams.org/views04/0514-04.htm
Published on Friday, May 14, 2004 by the New York
Times
A Crude Shock
by Paul Krugman
So far, the current world oil crunch doesn't look at
all like the crises of 1973 or 1979. That's why it's
so scary.
The oil crises of the 1970's began with big supply
disruptions: the Arab oil embargo after the 1973
Israeli-Arab war and the 1979 Iranian revolution. This
time, despite the chaos in Iraq, nothing comparable
has happened — yet. Nonetheless, because of rising
demand that is led by soaring Chinese consumption, the
world oil market is already stretched tight as a drum,
and crude oil prices are $12 a barrel higher than they
were a year ago. What if something really does go
wrong?
Let me put it a bit differently: the last time oil
prices were this high, on the eve of the 1991 gulf
war, there was a lot of spare capacity in the world,
so there was room to cope with a major supply
disruption if it happened. This time there isn't.
The International Energy Agency estimates the world's
spare oil production capacity at about 2.5 million
barrels per day, almost all of it in the Persian Gulf
region. It also predicts that global oil demand in
2004 will be, on average, 2 million barrels per day
higher than in 2003. Now imagine what will happen if
there are more successful insurgent attacks on Iraqi
pipelines, or, perish the thought, instability in
Saudi Arabia. In fact, even without a supply
disruption, it's hard to see where the oil will come
from to meet the growing demand.
But wait: basic economics says that markets deal
handily with excesses of demand over supply. Prices
rise, producers have an incentive to produce more
while consumers have an incentive to consume less, and
the market comes back into balance. Won't that happen
with oil?
Yes, it will. The question is how long it will take,
and how high prices will go in the meantime.
To see the problem, think about gasoline. Sustained
high gasoline prices lead to more fuel-efficient cars:
by 1990 the average American vehicle got 40 percent
more miles per gallon than in 1973. But replacing old
cars with new takes years. In their initial response
to a shortfall in the gasoline supply, people must
save gas by driving less, something they do only in
the face of very, very high prices. So very, very high
prices are what we'll get.
Increasing production capacity takes even longer than
replacing old cars. Also, major new discoveries of oil
have become increasingly rare (although in my last
column on the subject, I forgot about two large fields
in Kazakhstan, one discovered in 1979, the second in
2000).
Petroleum engineers continue to squeeze more oil out
of known fields, but a repeat of the post-1973
experience, in which there was a big increase in
non-OPEC production, seems unlikely.
So oil prices will stay high, and may go higher even
in the absence of more bad news from the Middle East.
And with more bad news, we'll be looking at a real
crisis — one that could do a lot of economic damage.
Each $10 per barrel increase in crude prices is like a
$70 billion tax increase on American consumers, levied
through inflation. The spurt in producer prices last
month was a taste of what will happen if prices stay
high. By the way, after the 1979 Iranian revolution
world prices went to about $60 per barrel in today's
prices.
Could an oil shock actually lead to 1970's-style
stagflation — a combination of inflation and rising
unemployment? Well, there are several comfort factors,
reasons we're less vulnerable now than a generation
ago. Despite the rise of the S.U.V., the U.S. consumes
only about half as much oil per dollar of real G.D.P.
as it did in 1973. Also, in the 1970's the economy was
already primed for inflation: given the prevalence of
cost-of-living adjustments in labor contracts and the
experience of past inflation, oil price increases
rapidly fed into a wage-price spiral. That's less
likely to happen today.
Still, if there is a major supply disruption, the
world will have to get by with less oil, and the only
way that can happen in the short run is if there is a
world economic slowdown. An oil-driven recession does
not look at all far-fetched.
It is, all in all, an awkward time to be pursuing a
foreign policy that promises a radical transformation
of the Middle East — let alone to be botching the job
so completely.
©Copyright 2004 The New York Times Company
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