Allan Topol is a partner in a large Washington-based international law firm. He has a science and engineering degree from Carnegie Mellon, and a law degree from Yale University. For almost 40 years, he has been involved in issues at the height of the Washington power structure.
He is also a national bestselling novelist, using the thriller genre to explore international geopolitical and military issues. His 2001 novel, SPY DANCE, is about a former CIA agent on the run and Saudi Arabian oil. His 2003 novel, DARK AMBITION, deals with the corruption of power in Washington and China's threatening posture toward Taiwan. In January 2004, his new novel CONSPIRACY was released dealing with a foreign leader's attempt to influence an American presidential election and the possibility of renewed militarism in Japan.
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Americans are in pain these days when they pull into a station to fill up with gas. Even though the Saudi government has said that it will increase its oil production, this will not alleviate the problem.
Market forces are at work: simple supply and demand. Although some politicians would prefer pandering to voters by promising lower prices, they won't be able to deliver.
The root cause is that the benchmark price of crude oil has risen from $30 to $40 a barrel. On its face, this seems horrible, but not in context. Previous oil spikes were far worse. Adjusting for inflation, in today's prices, oil would have been $60 a barrel at the time of the first Gulf War and above $80 a barrel in the late 1970s.
That's the good news. The bad news is that those two rapid increases were very short-term, caused by a specific event, and gave way to much lower prices relatively quickly.
This time, while there may be some dips, high prices are here to stay. We can expect a continual upward movement. At this time next year, Americans will yearn for the prices they are now paying.
To be sure, there are some temporary market inefficiencies. No markets perform perfectly. But at the end of the day, price is a function of supply and demand. On the supply side, most oil producers, except for Saudi Arabia, are pumping at full capacity and elated to do so at $40 a barrel. The Saudis, with the largest reserves, are more cautious, although in response to American pressure they have agreed to increase pumping. This may offer some benefit on the short term. But at this point, not much has changed on the supply side.
Demand is the source of the problem. For starters, a major new player has entered the market. From being a miniscule oil consumer a few years ago, China has now surpassed Japan as the second largest consumer of oil for their factories and cars. Yes cars. Those bicycles are a thing of the past.
China still doesn't approach the United States, which consumes a quarter of the world's petroleum. Most of that goes into our cars, and thanks to low interest rates, Americans have been on a gas guzzling SUV buying binge in the last couple of years. Just count the SUVs on the road, many of them with one occupant, and you'll know I'm right. Now it's starting to be vacation time, and those greedy little piggies have to be fed and fed.
Add to this the sharp resurgence of the economy in the United States and elsewhere in the world. This means far more demand for oil to run factories and power plants.
Then there is the reappearance of inflation generally. That will drive up all prices, including oil. Indications are that we may be starting another vicious inflationary cycle. It's not just oil. Spurred on by increased Chinese demand, steel makers have begun raising prices sharply for the first time in years. That means higher can prices, which translates into higher prices at the supermarket, as well as higher prices in construction and throughout the economy.
There's a real wild card in this deck. Al Qaeda terrorists have targeted Saudi oil production in the recent past. If they manage to shut it down or even disrupt the flow from the most significant supplier, prices will shoot up another $10, $20 or even more per barrel.
Even if this doesn't happen, the pain we're feeling over higher gasoline prices will be magnified when we receive electric and gas bills at home. Energy costs continue to be the Achilles heel for the American economy.
In the short run, there's nothing our government can do. Some have suggested taking oil from our country's Strategic Petroleum Reserve and putting that into commerce to bring down prices. Fortunately, President Bush has dismissed this irresponsible idea out of hand. That reserve exists for a genuine emergency, which we may one day have with the uncertainties in the Middle East, and not so Americans can save a little money on their summer vacations.
In the long term, we could construct nuclear power plants, but environmentalists seem to have blocked that prospect under existing laws. Importation of LNG (liquefied natural gas) might help, but the NIMBY movement has a stranglehold at possible ports of entry.
In the meantime, we can buy cars that get better gas mileage, take subways and trains where they are available, and in the words of my father, "turn off the damn lights."
