Price Surge: High Oil Prices

MARGARET WARNER:

It was the highest level in 21 years of recorded oil prices, when U.S. light crude hit $41.56 a barrel today. One year ago, a barrel of light crude cost just $29.21. Gasoline is also pricier than ever. Today's national average for a gallon of unleaded gas hit a record $1.95. A year ago, it was $1.49. It's worth noting that these records don't take inflation into account, but the high prices are having an economic impact.

For more on all of this, I'm joined by: Yasser Elguindi, director of the oil and energy unit at Medley Global Advisors; and 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 both. Why, Mr. Elguindi, are we seeing these record oil prices?

YASSER ELGUINDI:

Well, it's a combination of things, really, but primarily it's a function of demand and supply. Demand has been far stronger this year than many anticipated, both in the United States and especially in china, and on the supply side we're seeing that non-OPEC countries are not providing the type of growth that we would have liked to have seen. Furthermore, we are slowly discovering that the oil world is not a safe a place as it used to be. There's political risks, concerns in the marketplace for in Nigeria, Iraq, Saudi Arabia, all of these are major producing countries. As such, it's led to a huge bull run in the last year.

MARGARET WARNER:

A lot of factors coming together?

ROBERT LIEBER:

Yeah.

MARGARET WARNER:

I'm sorry, I was going to turn to Mr. Lieber here.

ROBERT LIEBER:

This may not be the perfect storm, but when it comes to oil, it's the perfect squall. Four or five things have come together at once to produce this big run up in oil and gasoline prices. You have the increase in demand which your other participant has spoken of. You have especially the geopolitics of it, specifically the terrorism fears in Saudi Arabia, Iraq and elsewhere, and those two countries there have been attacks in the last two weeks or so. You have big increases in demand in China and the United States. You've got some problems with oil refinery, capacity and finally some speculation, but together you've got this very large run up in prices, both for oil and for gasoline at the pump.

MARGARET WARNER:

Yasser Elguindi, explain why particularly the attacks in Saudi Arabia have been so unsettling to the oil market, because of its special role.

YASSER ELGUINDI:

Right. Well, it's actually quite simple. We are running out of spare capacity around the world. The markets are pretty tight as they stand right now, and not just in overall crude production but in the types of crudes that are available, particularly for the United States. Refineries here, we haven't built a refinery in the United States since 1975 or so, and as such many of the refineries require a special sweeter type of crude where it has less sulfur content that's easier to refine.

There aren't very many deposits of this type of crude around the world. But the attacks in Saudi Arabia I think highlighted exactly what is every policy-makers nightmare, at least economic policy-maker's nightmare, and that is these places are vulnerable if they are targeted. Saudi officials are obviously doing their utmost to make sure that these areas are protected, and they have top-of-the-line security arrangements in place, but, obviously, if someone is determined to do it, you know, their chance of success could be quite high.

MARGARET WARNER:

Professor Lieber, Saudi Arabia has been described to me as sort of the Fed, the central bank of the oil market in that only it really has the capacity to ramp up production quickly if some other country goes offline. Is that right?

ROBERT LIEBER:

That's right. In the past, the Saudis have been there and have increased production, sometimes over at least, sometimes quietly in order to prevent the worst kind of disruptions on the markets. The problem today is two-fold though.

First there's excess production capacity, perhaps a million and a half barrels or so, maybe a little less. World production is all together 80 million barrels, together with two other gulf states all together two million barrels might still be available to add to world supplies, but there was an attack in the Saudi oil city of Yanbu a couple of weeks ago in which six people were killed, including five international experts who work in the oil industry. That sent a shudder through everyone concerned because if there were some other kind of terrorist attack on a major oil facility, then you could get a much bigger disruption at a time when world oil is very tight.

MARGARET WARNER:

Now also, Professor Lieber, let's talk about the rising demand. The U.S. economy is now in some sort of a recovery, expanding — also other places, China.

ROBERT LIEBER:

China is booming. All those Chinese are beginning to drive automobiles. Oil demand in China is up about an extra million barrels a day compared to last year. Asian demand is way up, about ten million barrels more than 15 years ago on a per day basis. American demand is up, not least because of the sport utility vehicles, and world demand as a whole is up in the greatest one-year jump since 1988. You add that to the other things we're talking about, especially the security anxieties, and it's not surprising that prices go up.

MARGARET WARNER:

So Mr. Elguindi, if production today is 80 million barrels but we see this growth going on in the demand, including in countries where they are really just getting started, is there any prospect of — prospect that demand is going to slacken, or in fact is that pressure just going to intensify?

YASSER ELGUINDI:

Well, that's one of the things that people have been sort of expecting with that with high prices there would be some demand destruction, but, in fact, we haven't seen that, especially in the United States where our voracious appetite for gasoline goes unabated. Part of that is because our disposable income is much greater today than it was 20, 30 years ago when we had the big price spikes in the '70s, and in other countries, like in China and in Asia in general, you've had some currency appreciation which has mitigated the impact of higher crude prices and product prices across the region, so it's hard to see how that's going to happen, unless you see the markets begin to adjust.

MARGARET WARNER:

I guess what I'm asking is, if the current rate of growth continues in demand, what will be the demand just say ten years from now, and can world's oil producers even meet that?

YASSER ELGUINDI:

Well, ten years is a long time to look out, but certainly you have to consider these calculations when you make your projections going forward. For most of the world we are looking at a situation where demand is continuing to grow, and we have to start wondering where the supplies are going to come from, especially if we have any kind of problems, especially in Saudi Arabia or other major producing areas. There's plenty of oil out there, and the question is how quickly can we provide it to the marketplace.

The question is not simply about crude production, but it's everything along the chain, from production, down to transportation to logistics and refining. The question we need to be asking is do we have a global infrastructure in place that can support 82 million barrels a day of demand? And I mean not just in terms of the production facilities but in terms of tankers to transport it, pipelines to send it downstream and refiners to actually make the stuff into what we consume on a daily basis.

MARGARET WARNER:

Before we run out of time, Professor Lieber, I'd like to talk about impact. How much impact is this having already on the American economy? The columnist, Paul Krugman, today said a $10 a barrel increase is like a $70 billion tax on the American consumers every year. Is that right?

ROBERT LIEBER:

That's probably a bit high, but it's believed to be the case that that kind of increase for a year would reduce net economic growth about half a percentage point and also increase inflation a bit. One thing to keep in mind though is compared to the oil shocks of a quarter century ago, the American economy is less energy-dependent and less oil-dependent. For every dollar of Gross Domestic Product we burn half the energy we did at that time, so we shouldn't minimize the economic impact, but there's less of it now than there would have been if this kind of thing were happening back then.

MARGARET WARNER:

Are there places where it's having a more serious economic impact, Mr. Elguindi, is had — do American consumers, perhaps because of the drop in value of the American dollar, feel it almost more than say the Europeans?

YASSER ELGUINDI:

Well, as you know, crude prices are dollar denominated, so the impact is felt in different ways. I think if you look at the transportation sectors, obviously consumer feels it in the sense that they are paying a higher price for gasoline, but as I mentioned before, because as a percentage of disposable income, we have more disposable income that we can spend, I think most people don't really look at how much they spend on gasoline on a weekly basis, so in that standpoint it's not having that direct an impact on the economy. However, I think if you talk to most U.S. economic policy-makers, their concern is one of more psychological.

The recovery right now has gained so much momentum in the United States that there's less concern that these prices are going to really retard it or pull it back, but you won't get as much growth as you might otherwise have gotten with these high energy prices, and the effect that high energy prices will have on corporates, whether they have to adjust their asset allocations in terms of productive capital outlays, for example, or on the consumer himself, if he's spending a little bit more on, you know, filling up that SUV every week, they might not be spending as much money as the electronics store or at Home Depot or whatever.

MARGARET WARNER:

Yasser Elguindi and Professor Lieber, thank you both.

ROBERT LIEBER:

Thank you.