Oil Prices Hit Record High
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MARGARET WARNER: This week’s sharp hike in oil and gasoline prices capped a dramatic run-up over the past year. Since last August, the price of crude oil has jumped by nearly 50 percent, from $45 a barrel to today’s cost of $66.80. The same thing is happening at the pump. Last August, the average price for a gallon of regular unleaded was $1.89. Today it’s $2.40, an increase of 27 percent. The prices of other oil products– jet fuel, diesel and heating oil– have seen similar increases. So what’s going on globally and domestically that explains this?
For answers we turn to: Fadel Gheit, senior vice president for oil research at the investment firm of Oppenheimer & Company; and Robert Lieber, professor of government and international affairs at Georgetown University, and author of the book "The Oil Decade." Wedlcome to you both. Professor Lieber explain this. How could the price of crude oil have jumped 50 percent in one week?
ROBERT LIEBER: You’ve got the equivalent of a perfect storm in oil, energy, and the economy. You have first of all surging economy in the United States and in China with big increases in demand for oil, gasoline in particular. Second, you’ve got a run-up almost to the limit of the available world supply of crude oil. That’s extremely important. The word "globalization" is not just a cliché; it really matters in this realm. There’s a world market. Anything that affects demand or supply reverberates right across the world and at the moment the world’s demand for crude oil is at unprecedented levels, close to 84 million barrels a day, which is right up within a few hundred thousand barrels of what the capacity to produce oil in the world is all about at the moment.
MARGARET WARNER: Mr. Gheit, still, the demand as I looked at it has only gone up 2 percent from 2004 to what’s estimated for 2005. How else –I mean, how do you explain a 50 percent rise in the price of crude?
FADEL GHEIT: Well, it’s a combination of two things. The fundamentals are very strong but also there is tremendous speculation in the markets right now, basically fears of potential supply destruction. Now, we had the hurricane last year that took about half a million barrels of U.S. oil and gas production and that pushed oil prices to an all-time high then. Now, what the markets are looking at today is the uncertain situation in the Iranian nuclear facility and perception in the market that there will be a military action which could inflame the situation in the whole region and could possibly result in disruption.
MARGARET WARNER: Do you agree, professor, that geopolitical factors or geopolitical uncertainty is contributing a lot to this, the sort of psychology that it breeds?
ROBERT LIEBER: Not only do I agree but I would emphasize it. You recall that some weeks ago the American facilities in Saudi Arabia were shut down for a few days because of terrorist concerns. Saudi Arabia is the big story in energy and oil. If there were anything to happen there, it would have an enormous impact. Your other guest is quite right about concerns about Iran. It’s highly speculative, but there is a certain market psychology that takes place, a risk premium which could be — nobody really knows — but as much as $10 a barrel in the current $66 price.
MARGARET WARNER: So it didn’t surprise you when the embassy and consulates were closed just for a terror alert, there was no attack, that almost immediately we saw a hike in the price of crude?
ROBERT LIEBER: That’s exactly right. The thing you have to keep in mind, this only happens when the world oil supply balance is tight. If there were slack capacity, slack demand, I should say, so that there was extra oil available from various places, this kind of reaction wouldn’t happen. It’s a little bit like thinking of scalping for tickets to the Super Bowl or for a concert. If lots of people want tickets, more than the place will hold, the price at the margins skyrockets. If, on the other hand, you were say, the Washington Redskins having a bad year, you can’t give the tickets away except for face value.
MARGARET WARNER: And Mr. Gheit, that gets us back to your original point about speculation. Explain that a little more. What do you mean by speculation? Are traders just in there betting that the price will keep going up when, in fact, they’re not really fearful of a disruption of supply?
FADEL GHEIT: Well, basically, when the market is very tightly balanced, any disruption in supply, as we saw last year, push oil prices to an all-time high. If we have so the traders basically are factoring in the possibility of supply disruption, whether Saudi Arabia, Iran, Iraq, or elsewhere, and that will tip the balance in favor of demand exceeding supply and oil prices will go as high as $100.
MARGARET WARNER: But how is that any different from any time over the past ten years? We’ve had a couple wars in Iraq; we’ve had all kinds of unrest in the Middle East.
FADEL GHEIT: The difference here is that the spare capacity is very limited; it’s probably non-existent because I doubt it very much that there is oil out there that could reach the market and are not reaching the markets right now. We have $67 oil so everybody is obviously — would be pushing oil out as fast as they can. Now, the reason that we don’t have additional supply, because the spare capacity is not there and we are not seeing OPEC increasing its production at all. Capacity is very tight. We are not seeing oil companies doing much. They are holding cash; they are waiting for the price to come down. So in the meanwhile, demand continues to grow despite the record oil price. And unless or until demand slows down, I think oil prices will continue to be very high.
MARGARET WARNER: Before we get to demand, one other question for you, professor. I’ve read a lot of accounts that say there’s a problem with refining the crude oil when it gets here, that there’s a bottleneck there as well?
ROBERT LIEBER: Yeah. There have been no new oil refineries built in the United States in about a quarter century. It’s a "not in my backyard" problem. They’re all running just about at full capacity and at certain parts of the country and for certain products you have this factor pushing prices up at the gas pump regionally.
MARGARET WARNER: Mr. Gheit, let me ask you about something else, which is why — let’s say overnight or in one day the price of crude goes up a couple dollars a barrel. Many consumers have had the experience the very next day they go to their gas station on the corner and the price is already higher for gas even though that gas was purchased and put in those tanks weeks ago. Why does that happen?
FADEL GHEIT: Because the market is very tight, because the demand is very strong and the supply is very tight, and the capacity — we don’t have enough refining capacity to satisfy all the demand that we have here. In addition to that, the global economy is extremely strong. Demand for a foreign product is increasing not only in this country but elsewhere, in China, in India, in Europe, elsewhere. So that is creating global tightness. It’s not only in this country or in any region, it’s a global situation.
MARGARET WARNER: Professor, from all the accounts that I’ve read and people I’ve talked to, demand in the U.S. has not really slackened at all this summer despite everyone’s complaining about high prices. But people aren’t driving less, people aren’t flying less. Why? And is there a point — is there a recognized point at which higher prices do start to affect consumer behavior, whether they be individuals or businesses?
ROBERT LIEBER: Absolutely, yes, but the impact is long-term. In the short-term, if you, say, just bought yourself a gas guzzling SUV when oil prices were lower, say a year or two ago, you’re not going to turn around and get rid of your SUV. When it comes time to buy a new car or to do other things that economize or conserve, you’ll be more attentive if the prices are $2.50 a gallon for gas instead of $1.50. One other point I want to make, though. This process is often cyclical. The experts have usually gotten most of the major changes in the world oil scene wrong, war’s upheavals and the consequences. Over the next five years, there’s every reason to expect that between ten and fifteen million barrels a day of new capacity will come on line so that some years from now –
MARGARET WARNER: From where?
ROBERT LIEBER: Well, in all kinds of places– Canada, Brazil, the Caucuses region, Russia, Nigeria, Libya, just to name a few. But the real issue that it takes quite a while for those changes to occur. The law of supply and demand matters. Over the long term it works, technology changes and improves, but in the short-term prices can skyrocket, which is why we now have a perfect storm.
MARGARET WARNER: And, Mr. Gheit, what’s your fearless prediction for the prices in the short and medium term?
FADEL GHEIT: Well, the near term there is — there’s no reason for me to believe that oil prices will collapse. The market tends to be biased to the upside, which means any speculation is going to drive prices higher. And unless or until the speculation cools off because tension will ease somewhat in the Middle East, I don’t think that you are going to see tremendous decline in oil prices, but having said that, we are going to see consumer behavior starting to change over the long-term. Near-term, nothing is going to change much.
MARGARET WARNER: All right, Fadel Gheit, Bob Leiber, thank you very much.
ROBERT LIEBER: Thank you.