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Oil Prices Ease Slightly After Hitting Record Highs

August 11, 2004 at 12:00 AM EST
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TRANSCRIPT

JEFFREY BROWN: You can think about oil prices in terms of pieces in a global puzzle: Pipelines sabotaged in Iraq, an embattled company in Russia, an election in Venezuela, Chinese driving millions of cars, and Americans driving millions of big cars. These are some of the factors driving the price of oil in recent days to record highs. And it’s having an impact.

Yesterday the Federal Reserve cited “the substantial rise in energy prices” as the main cause of the recent slow growth of the U.S. economy.

Here to explain the cause and effect of high oil prices is Robert Lieber, author of several books on energy and policy, including “The Oil Decade,” he is a professor of government and foreign service at Georgetown University. Welcome to you.

Let’s start with an overview. What’s driving high the price of oil?

ROBERT LIEBER: At its most basic, the problem is that there has been a sustained steady increase in demand, especially here in the United States and in Asia with China standing out, against a situation where most oil producing countries are running up against the limits of what they can produce at the present time.

So in very simple terms — lots of demand, limited supply, and you have very high prices. In dollar terms, the prices are at a record. When you adjust for inflation, however, they’re only a little bit more than half of what they were back in 1979-80 at the time of the second oil shock.

JEFFREY BROWN: So a lot of this is classic supply and demand.

ROBERT LIEBER: Absolutely.

JEFFREY BROWN: So let’s parse it though: demand from China, from U.S.

ROBERT LIEBER: Well, in Asia in particular, everybody talks about the Chinese economic miracle in which more people have been lifted out of poverty in the last quarter century than at any time in human history. But as the Chinese become wealthier, they’re buying and driving a lot of cars. Oil demand in China and in Asia as a whole is up more than ten million barrels a day in the last 17 years or so.

JEFFREY BROWN: This is a long-term phenomenon.

ROBERT LIEBER: It’s a long-term phenomena, and ten billion barrels a day is a lot of oil against world oil consumption, which is now about 82 million barrels. In the United States over the last three years, given a pretty sustained recovery, which is what we are having and the growth in the use of sport utility vehicles and minivans, our consumption is up as well.

So you put North America and Asia together, increase in world oil demand, OPEC is now producing close to the limit of their present capacity. Other non-OPEC suppliers are close to their limits. There isn’t a lot of slack in the system.

JEFFREY BROWN: So you put this demand, this increased demand against the other flip side, you said, is the supply problem. Now, here we are talking about various kinds of global instability?

ROBERT LIEBER: Yes, clichés like globalization, a unified world, and the rest often are superficial statements about how the world works. But in the area of oil, there really is a unified world system. Anything that involves the consumption of oil on the one hand, that is demand for oil, or anything that involves the supply of oil ultimately affects the net balance.

And what you’ve got now is a system that’s running exceptionally tight. It is thought to be the case that the OPEC countries today, mainly Saudi Arabia, do have the ability to produce maybe another million barrels a day. The Saudis have just brought on line two brand-new oil fields and they’re believed to be putting that production out there in the very near future. That will help a bit. But for the moment, you’ve got this pressure.

Now having said that, military matters, conflict, fears of insecurity matter also. Markets tend to overshoot and concerns about what is going on in Iraq, whether there are threats to the southern pipelines, concerns about Saudi Arabia and terrorism, a kind of security premium probably adds about $5 a barrel to world oil prices.

JEFFREY BROWN: I’ve heard this term, security premium. That means the fear of security getting in the way of oil supply.

ROBERT LIEBER: Say security in terms of terrorism, political instability the unknown. In Russia, for instance, the problem with the Yukos Company in which the government has intervened is basically taking steps that are likely to drive that company out of business and result in its takeover — have produced fears about what may happen with Russian oil production. Russian oil production has been rejuvenated in recent years. It surged in the last three years. Yukos, alone, that one Russian firm that has been in the headlines, produces 1.7 million barrels a day. That’s more than Libya produces.

If that firm is temporarily unable to get access to money in its accounts or even for a few weeks is unable to produce oil, that would have an impact. And so some of the buyers of oil and some of the speculators are, you might say, paying more than they might otherwise do because they expect the price may go up or at least not recede. But you also have Iraq, Saudi Arabia, terrorism in recent months and so forth.

JEFFREY BROWN: Now, you said earlier that adjusted for inflation, the price is less than it was at the height of the oil crisis of the 70′s?

ROBERT LIEBER: Three decades ago.

JEFFREY BROWN: But it’s still quite high enough to have an impact on the U.S. economy as the Federal Reserve said yesterday. Explain to us how that works? How does that filter into the economy and have an impact?

ROBERT LIEBER: Absolutely. It is no exaggeration to say that things happening halfway around the world can have an immediate impact on us here at home. The impact of increased gasoline prices at the pump, most of your listeners – or viewers would have been paying over $2 a gallon and then some; that takes money out of the pockets of consumers.

Just as over last couple of years consumers had more money in their pockets, thanks to the Bush tax cuts, now, in effect, the increase in gasoline prices at the pump is taking money out of their pockets just the way a tax increase would have done. And they have less money to spend on consumer goods. That’s what the Federal Reserve pointed to the other day, although they did say they think it is dampening the recovery a bit but they still believe the overall trajectory is positive. And, nonetheless, it is having an effect.

JEFFREY BROWN: It affects American businesses as well?

ROBERT LIEBER: Absolutely. The airlines are being hit hard, especially the majors who had been recovering with air travel back to its pre-9/11 levels, but the prices for aviation fuel are in effect a fixed cost, which is now increasing. It remains to be seen whether the auto industry will be affected.

Up until now, most of us haven’t paid a lot of attention to gasoline prices. Compared to Europe or Japan, gas in the United States is still dirt cheap. But if the price of gas really begins to bite, especially if you have a gas-guzzling SUV, you’ve got more reason to feel the impact of that in your pocketbook.

JEFFREY BROWN: Well, you know, in fact, I was one of those millions of Americans on the road on vacation last week. The price of gas is high but I didn’t see a spike as I might have expected from the kind of news we are talking about where oil prices are so high, and record highs.

ROBERT LIEBER: Yeah. That’s because at the gasoline pump, there are several things that come into play. Less than half of the price at the pump is due to crude oil. About a quarter of the price or a little less is due to taxes. The remainder is due to the cost of refining and distributing the oil and profit for the gas stations, the oil companies and so forth. Moreover, there is a six-week lag from the time a ship load supertanker leaves Ras Tanura or Yanboo in Saudi Arabia and makes it to New Jersey, say.

JEFFREY BROWN: So these prices may be passed through?

ROBERT LIEBER: They are passed through after a time. But there are other factors involved as well. About a $1 a barrel increase in world oil prices translates into about 2 and 1/2 cents at the pump — but over a period of time. There are other more specific factors having to do with technicalities and how gasoline is marketed, refined and sold.

JEFFREY BROWN: Okay. Robert Lieber, thanks a lot.

ROBERT LIEBER: My pleasure.