Why We Won't See Relief from the Oil Shock Any Time Soon

By Dilip Hiro, Tomdispatch.com. Posted July 17, 2008.

Last week, after hitting $146 a barrel, the price of crude oil took a sudden, two-day, $9 plunge, based in part on comments by Iranian President Mahmoud Ahmadinejad that an attack on Iran was unlikely and on a mid-Atlantic turn north by Bertha, the season's first significant hurricane, away from the oil-rig- and refinery-rich Gulf of Mexico. It was just long enough for pundits to wonder, hesitantly and somewhat wistfully, whether the global economic bad weather had finally hit the oil market, and whether lowered demand meant that a new (downward) trend was on the way. That was, of course, before the Iranians started lobbing missiles, and traders got edgy about a promised weeklong strike at Brazil's state-run oil giant Petrobras, and the kidnapping of at least one foreign oil worker in the Niger Delta region of Nigeria. By Friday, the "trend" was toast, and the price of a barrel of crude had briefly crested above $147.

Get used to it. As Middle Eastern (which means "oil") expert Dilip Hiro indicates, we've definitively entered the era of "no relief in sight," and there's no turning back now. The author of a vivid history of oil in our world, Blood of the Earth: The Battle for the World's Vanishing Oil Resources, Hiro considers why the present oil shock can't be compared to the three shocks that preceded it and then explores just where the planet is likely to look in the medium term for energy (and global warming) relief.

Energy is obviously going to remain fiercely at the heart of our problems, locally and globally, indefinitely. TomDispatch plans to respond to this essential reality with a range of different perspectives on energy in the coming year.

-- Intro by TomDispatch editor Tom Engelhardt

The Current Oil Shock -- No Relief in Sight

By Dilip Hiro

When will it end, this crushing rise in the price of gasoline, now averaging $4.10 a gallon at the pump? The question is uppermost in the minds of American motorists as they plan vacations or simply review their daily journeys. The short answer is simple as well: "Not soon."

As yet there is no sign of a reversal in oil's upward price thrust, which has more than doubled in a year, cresting recently above $146 a barrel. The current oil shock, the fourth of its kind in the past 3½ decades and the deadliest so far, shows every sign of continuing for a long, long stretch.

The previous oil shocks -- in 1973-'74, 1980 and 1990-'91 -- stemmed from specific interruptions of energy supplies from the Middle East due, respectively, to an Arab-Israeli war, the Iranian revolution, and Iraq's invasion of Kuwait. Once peace was restored, a post-revolutionary order established, or the invader expelled, vital Middle Eastern energy supplies returned to normal. The fourth oil shock, however, belongs in a different category altogether.

Nothing Like It Before

Unlike in the past, the present price spurt has been caused mainly by global demand for energy outstripping available supply. Alarmingly, there is no short-term prospect that supply will match demand. For a commodity like petroleum that underwrites and permeates every aspect of modern life -- from fuel to fertilizers, paints to plastics, resins to rubber -- "balance" requires a 5 percent safety factor on the supply side.

At present, however, spare capacity in the oil industry is less than 2 percent, down from more than 6 percent in 2002. As a result, the price of oil responds instantly to negative news of any sort: a threat against Iran by an Israeli Cabinet minister, a fire on a Norwegian offshore drilling rig, or an attack on an oil facility by armed rebels in Nigeria.

Behind the present price surge, other factors are also at work. Take the subprime mortgage crisis in the United States. It flared almost a year ago, drastically lowering the market value of the stocks of banks and allied companies. The concomitant downturn in other equities led investment fund managers and speculators to direct their cash into more productive markets, especially commodities such as gold and oil, driving up their prices. The continued weakening of the U.S. dollar -- the denomination used in oil trading -- has also encouraged investment in commodities as a hedge against this depreciating currency.

The earlier oil shocks led non-OPEC (Organization of Petroleum Exporting Countries) nations to accelerate oil exploration and extraction to increase supplies. Their collective reserves, however, represent but a third of OPEC's 75 percent of the global total. By the turn of the century, these countries had pumped so much crude oil that their collective output went into an irreversible decline.

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Dilip Hiro's forthcoming book is The Iranian Labyrinth: Journeys Through Theocratic Iran and Its Furies. (Nation Books).

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