JEFFREY BROWN: It was just last summer that oil prices reached an all-time high, topping $145 a barrel, and Americans were feeling it at the pump with gas prices above $4 a gallon.
Soon after, the bottom fell out of the economy and oil prices plunged as well, by more than $100 a barrel. Now, rather suddenly, they’re back on the rise, reaching $61 a barrel.
And so the new question as we head into another summer travel season: What’s going on?
Here with some answers, Amy Jaffe, director of the Baker Institute Energy Forum at Rice University in Houston, and Robert Lieber, professor of government and international affairs at Georgetown University. He follows oil issues and the Mideast and is author of “The Oil Decade.”
Well, Amy Jaffe, does the rise in oil prices mean that traders think the global economy might be on the rebound?
AMY JAFFE, Rice University: Well, there’s definitely some optimism in the trading community, especially about the Chinese stimulus package, which is seen as bringing back up oil demand in China. It might be a little less optimistic about our economy, in the sense that some people are buying oil in a bet against the dollar, feeling that the Fed is going to have too loose a policy and print money.
JEFFREY BROWN: Well, Robert Lieber, demand for oil is still falling, right?
ROBERT LIEBER, Georgetown University: Way down.
JEFFREY BROWN: So prices in theory should be…
ROBERT LIEBER: Yes, they should. The reason is, there is a cartel, OPEC. OPEC since September has cut production three different times. All together, they’ve cut oil production by about 4 million barrels a day. If the market mechanism were really operating, if OPEC hadn’t gotten those production cuts, oil would be a lot cheaper than it is today.
JEFFREY BROWN: And they’re doing that because they want the price up?
ROBERT LIEBER: Because a lot of those governments are in trouble because they assumed that prices would stay high, that they were going to collect so- called rents forever. And they find, as in the case of Iran or Nigeria or Venezuela or even the Saudis, that they can do a lot better if oil is at $60-plus a barrel than if it’s at $30 or $40. They would prefer $100-plus, but by cutting production they are deliberately keeping prices up.
JEFFREY BROWN: Now, Amy Jaffe, not so very long ago, $60 a gallon was thought...
ROBERT LIEBER: A barrel. A barrel.
JEFFREY BROWN: ... a barrel, excuse me -- was thought frighteningly high, that would have a big impact on our economy. Then, of course, it went much higher. How do we think about it now?
AMY JAFFE: Well, I think that people feel that $60 might be a price our economy can bear. But I do think that, when OPEC thinks about what's a good price, they're going to find that $60 is too high, that it's going to bring a lot more conservation, a lot more energy-efficient technologies even at $60.
And there are some members of OPEC, particularly in the Arab gulf, that feel that's too high a price and were thinking maybe $40 or $45 would more serve their long-term interests.
JEFFREY BROWN: Are there -- Amy, staying with you, every time we have this discussion, we talk about various geopolitical issues. And Professor Lieber has raised some. What else do you see when you look out there? There's instability in oil wells in Nigeria. We always talk about Russia here. What strikes you right now, Amy?
AMY JAFFE: Well, you know, there are a lot of different factors, and some of them are up factors, and some of them are down factors. I think the Iranian nuclear issue is one that hangs over the market and maybe, in a surprising way, could actually be bearish for the market.
If Saudi Arabia and its allies in the gulf were to decide that Iran is not having a positive diplomatic stance towards negotiations and they see lack of cooperation from Russia, if Russia is seen as being aggressive in its supply of missile technology to Iran, then one option that the gulf countries have is to do what they did in 1986, which is to dump the price of oil very low, to put exactly the regimes that Professor Lieber mentioned under terrible pressure. It would be Russia, Iran, Venezuela, but especially Iran and Russia.
Gas prices creeping up
JEFFREY BROWN: What would you like to add to that, Robert Lieber?
ROBERT LIEBER: Well, when prices were up at $147 a barrel, Russia, which is not an OPEC member, Venezuela, Iran, and some others were really throwing their weight around, in the case of some of those countries, really leaning on their neighbors in some fairly insidious ways.
The drop in oil prices, which was $115 from the peak to the trough at the end of last year, hurt those countries a lot. The Russians, for instance, found this cushion they had built being drawn down rapidly. So the drop in prices has helped in geopolitical terms somewhat.
Saudi Arabia is really the key to the OPEC and the world oil picture. They produce just under 8 million barrels a day. They could go as high as 12.5 million. So they certainly have the possibility of squeezing the Iranians by producing a lot of oil and watching prices drop.
But the Iranians have ways of getting at them through covert measures and others. So I'm not, shall I say, optimistic that other countries will flex their oil muscle in a way to try to influence Iran. I don't see that.
JEFFREY BROWN: All right, let me bring it back from geopolitics to the gas pump here, Amy Jaffe, because all of us have noticed gas prices creeping up recently. And here we are at the beginning of the summer travel season. Should we expect that prices will continue on their way up? Is there any way of knowing?
AMY JAFFE: Well, typically, this weekend is the weekend we see the very highest prices. And we don't have a shortage of refining capacity anymore because oil demand is down so generally in this country.
But to give people sort of a rule of thumb, if the geopolitics and the speculative forces pushed the price up to $70 a barrel, that would be about a $2.75 retail gasoline price. But if we go back down to $40, I think we could see ourselves back in the $2 range.
So I'm hoping, for myself and the rest of us, that we've seen the highest gasoline prices now for the rest of the season.
Incentives to conserve
JEFFREY BROWN: What do you see, Professor Lieber?
ROBERT LIEBER: Well, you know, when you talk about oil prices, you can quickly get into mind-numbing detail. The reality is that America's great dependence and vulnerability on imported oil is a threat to our national security and our economy.
And having gasoline prices at the pump higher through some sort of taxes, which are then recycled into the economy for other purposes -- energy conservation, helping lower-paid workers, what have you -- would be a major investment in our security.
The effort to improve fuel efficiency standards, President Obama's new program...
JEFFREY BROWN: Last week announced.
ROBERT LIEBER: ... yes, announced last week, is very important, but it won't work unless the price signals are right. Someone has said that, unless you get the prices right, you're not talking about a revolution, but a hobby. Unless car-buyers and the public and producers generally understand where prices are going to be, the incentives to conserve aren't going to be there in the long term.
JEFFREY BROWN: All right, but can you give me a quick prediction for what you see this summer?
ROBERT LIEBER: I love it that you ask for predictions. A while back, we did this segment and I was asked where I thought prices were going to go, and I said that, over the following year or so, they could be higher by $50 bucks or lower by $50 bucks. At the time, they were somewhere in the $90 to $100 range. And over the following year, they went in both directions.
JEFFREY BROWN: You were right both ways.
ROBERT LIEBER: Thank you.
JEFFREY BROWN: All right, we'll leave it there. Robert Lieber...
ROBERT LIEBER: My pleasure.
JEFFREY BROWN: ... Amy Jaffe, thanks again.