Thursday, February 24, 2011

Rising Oil Prices May Just Stay Up

The civil war in Libya, as strongman Moammar Gaddafi attempts to retake control of at least the capital city, saw Libya’s oil and natural gas production fall by at least one fourth on Tuesday and at least three fourths by yesterday. Some insiders believe Gaddafi will be able to sabotage oil fields. This puts world oil production down by 2 percent for several days or weeks, or in the worst case, for a year or longer. That is a possibility that has already sent world oil prices above $100 for the first time since 2008. Oil prices were going to pass $100 this year anyway because of economic expansion in Asia, Europe, and South America. It may have happened early because of the war in Libya, but prices may simply stay up even if Libya’s problems are resolved quickly. The northern temperate zone planting season, with its prodigious use of diesel fuel, is coming in just a few weeks, and then the summer driving season which annually drives up U.S. demand for motor fuel.

We knew all along that the recession’s retreat in energy prices was temporary, and that we would have to climb out of the recession with oil prices at least as high as they were before. World oil consumption is higher than it was when prices were at $120. Production has been able to keep up with the increasing demand until this year because of the global economic recession, but from here forward, with economies expanding, production increases will fall farther and farther behind the increase in demand, resulting in higher prices not just for oil and gasoline, but for all energy sources.

In the United States in the short term, gasoline prices will be going up to about $3.45, perhaps as soon as next week. In a matter of a few years, we will pass $6 a gallon for gasoline, a point at which the cost of fuel for transportation and heat will put millions of people into poverty. U.S. policy on this issue for the last two years appears to have been based on the hope that oil prices would stay artificially low for several more years. The window of opportunity that low oil prices have provided is closing already, and it is hard to say that we have made much use of it.