Oil price increases since 2003

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Further information: Gasoline usage and pricing and Price of petroleum

This article or section deals primarily with the Northern Hemisphere and does not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page.

From the mid 1980s to September 2003, the inflation adjusted price of a barrel of crude oil on NYMEX was generally under $25/barrel. During 2004 the price rose above $40, then $50. A series of events led the price to exceed $60 by August 11, 2005, briefly exceed $75 in the middle of 2006, fall back to $60/barrel by the early part of 2007, then rise steeply to $92/barrel by October 2007 and $97.29/barrel for December futures in New York on November 21, 2007^[1] Throughout the first half of 2008, oil regularly reached record high prices. On February 29, 2008, oil prices peaked at $103.05 per barrel,^[2] and reached $110.20 on March 12, 2008,^[3] the sixth record in seven trading days.^{[4] [5]} The most recent price per barrel maximum of $138.83 was reached on June 6, 2008.^[6]

Prices near $100 (2007 US dollars) are equal to the inflation adjusted maximum of 1980, which was $95–100 per barrel in mid 2007 dollars.^[7] This previous inflation adjusted record had been clearly exceeded by the first quarter of 2008. In terms of refined petroleum products, one now has to go right back to the 1920s to find similar prices in real terms.^[8] Sustained prices at these levels contribute to fears of an economic recession similar to that of the early 1980s.^[9] In the United States, gasoline consumption dropped by 0.5% in the first two months of 2008 in response to higher prices,^[10] compared to a drop of 0.4% total in 2007.^[11]

Commentators have attributed the price increases of this period to a confluence of factors, including reports from the U.S. Department of Energy and others showing a decline in petroleum reserves,^[12] worries over peak oil,^[13] Middle East tension, and oil price speculation.^{[citation needed]} Some events have had short term effects on oil prices, such as North Korean missile launches,^[14] the crisis between Israel and Lebanon,^[15] tensions over Iranian nuclear energy,^[16] and "a hundred factors."^[17]

Contents 1 Causes 1.1 Supply 1.2 Financial causes 1.2.1 Financial Speculation 1.2.2 Effect of US dollar value on oil prices 1.3 Other Causes 2 History 2.1 2003 2.2 2004 2.3 Mid 2005 increase 2.4 2005–2006 increases 2.5 Mid 2006 increase 2.6 September 2006 decreases 2.7 Mid 2007 increases 2.8 Late 2007 increases 2.9 Early 2008 increases 2.10 Mid 2008 increases 3 Forecasted prices and trends 4 Effects 4.1 Inflation and recession 4.1.1 United States 4.1.1.1 United States and GDP 4.1.1.2 United States stock market 4.1.2 Europe 4.1.3 Asia Pacific region 4.1.4 Developing Countries 4.1.5 Sub-Saharan Africa 4.1.6 Latin America and Caribbean 4.1.7 Persian Gulf States and Eurasian Arab-Islamic regions 4.2 Transportation 4.2.1 Ground transport 4.2.2 Air travel 4.2.3 Shipping 4.3 Food security 5 Possible mitigations 5.1 Alternative fuels 5.2 United States Strategic Fuel Reserve 5.3 Fuel taxes 5.4 Telecommuting 6 See also 7 Notes 8 External links

[edit] Causes

[edit] Supply

One important factor contributing to the current rise in worldwide oil prices has been increasing demand, from both expanding economies (such as China and India) and established markets. While efforts are underway to increase supply, for example through a number of new mines in Canada's tar sands region which is estimated to contain as much "heavy" oil as all the world's reserves of "conventional" oil^{[citation needed]}, such efforts lag behind the increasing demand of recent years^{[citation needed]}. Regulation and environmental efforts have also increased the shortage and price of oil^{[citation needed]}.

An important contributor to price increases has been the slow down in oil supply growth, which has continued since oil production surpassed new discoveries in 1980. The fact that global oil production will decline at some point, leading to lower supply is the main long-term fundamental cause of rising prices.^[18] This is because there is a limited amount of fossil fuel, and the remaining accessible supply is consumed more rapidly each year. Increasingly, remaining reserves become more technically difficult to extract and therefore more expensive. Eventually, reserves will only be economically feasible to extract at extremely high prices. It is thought by many, including energy economists such as Matthew Simmons, that prices could continue to rise indefinitely until a new market equilibrium is reached at which point supply satisfies worldwide demand.

Although there is contention about the exact timing and form of peak oil, there are now very few parties who do not acknowledge that the concept of a production peak is valid.

In addition, turbulence in the Middle East, the world's largest oil-producing region, has led to decreased exports, especially civil unrest in Iraq after the 2003 U.S. invasion. Outside the Middle East, Venezuela has experienced strikes and political turbulence, and there is growing instability in West Africa.

Alternatively, lower production rates may be due to the fact that oil's historically high ratio of Energy Returned on Energy Invested continues a significant decline. The increased price of oil also makes other, non-conventional sources of oil attractive to businesses. The most prominent example of this are the massive reserves of the Canadian tar sands. They are a far less cost-efficient source of heavy, low-grade oil than conventional crude, but with oil trading above $60/bbl, the tar sands have become very attractive to exploration and production companies. Recent months have seen billions of dollars invested in the tar (bitumen) sands.

In view of tighter supplies worldwide, terrorist and insurgent groups have increasingly targeted oil and gas installations to maximize both mayhem and political gains^{[citation needed]}. Sometimes, such attacks are perpetrated by militias in regions where oil wealth has produced little tangible benefits for the local citizenry, as is the case in the Niger delta. The terror factor adds an additional premium, including insurance costs, to the price of oil.^[19]

Even if total oil supply does not decline, increasing numbers of experts believe the easily accessible sources of light sweet crude are almost exhausted and in the future the world will depend on more expensive sources of heavy oil and renewable energy sources. Until the rises of 2008, CERA (a consulting company wholly owned by energy consultants IHS Energy^[20]) did not believe this would be such an immediate problem. However, in an inteview with the Wall Street Journal, Daniel Yergin, best known for his quotes that the price of oil would soon return down to 'normal' has publicly amended the company's position on May 7th 2008, and now expects oil to reach $150 during 2008, due to tightness of supply^[21] This reversal of opinion is significant, as CERA, among other consultancies, provide price projections that are used by many official bodies to plan long term strategy in respect of energy mix and price, so the impact of a misprediction is far wider than might otherwise be expected. In contrast, some other organisations, such as the International Energy Agency (IEA), had already been much less optimistic in their assessments for some time .^[22]

[edit] Financial causes

[edit] Financial Speculation

Please help improve this article or section by expanding it. Further information might be found on the talk page or at requests for expansion. (June 2008)

In May 2008, Uwe Beckmeyer, transport chief for Germany's Social Democrats, said a recent 25 percent rise in the price of oil to $135 a barrel had nothing to do with underlying supply and demand; “It’s pure speculation,” he said.^[23]

Also in May 2008, hedge fund manager Michael Masters testified to a US Senate committee about his belief that "What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors... In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculatorsʼ demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!"^[24]

[edit] Effect of US dollar value on oil prices

The price of oil is closely tied to the value of the US dollar because oil is traded in dollars. This has led to concern among some economists that the principal earned from the sale of oil may lose value in the long run if the US dollar loses real value.

In discussing the effect of the changing value of the US dollar on the real price of oil, however, it is important to include a calculation of effective exchange rates of the currencies in question, to separate the real and nominal values of those currencies. This method accounts for the amount that a dollar can buy (of electronics or food for example) compared to the amount another currency, such as a Euro or Pound sterling, can purchase. While the US Dollar has lost nominal value to other major currencies from 2001 to 2007, its change in real value has not differed significantly from other currencies.^[25]

In addition, by comparing the price of oil in various currencies to the fluctuations in the exchange rates of those currencies it is clear that oil price is no more significantly correlated to the value of the dollar than to any other currency. This also holds true in a comparison of oil price to gold price.^[26] Similarly, since the early 1970s, the price of oil has been negatively correlated to the value of the dollar, suggesting that the price of oil has more of an effect on the value of the dollar than vice versa. As developed economies depend heavily on oil for transportation, petrochemical feedstock, and industrial agriculture, this correlation would affect most currency values.^[27]

[edit] Other Causes

Besides supply concerns, many other issues have also had some effect on oil prices. Labour strikes, hurricane threats to oil platforms, fires and terrorist threats at refineries, and other short-lived problems are not solely responsible for the higher prices. Such problems do push prices higher temporarily, but have not historically been fundamental to long-term price increases.

[edit] History

This article or section deals primarily with the United States and does not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page.

This needs a better flow than a timeline of events, price of gasoline info moved, and irrelevant facts moved or removed. needs copy editing for grammar, style, cohesion, tone or spelling. You can assist by editing it now. A how-to guide is available. (January 2008)

[edit] 2003

The U.S.-led 2003 invasion of Iraq was a significant event for oil markets because of Iraq's large oil reserves. The price of oil rose in the months running up to the invasion in March. Prices dropped in mid-2003, and several observers attributed this to the perception that the armed conflict would come to a quick resolution. The War coincided with an increase in global demand for petroleum, but it also reduced Iraq's current oil production, and has commonly been blamed in part for oil price increases since.^[28] However, peakniks such as Matthew Simmons tend to emphasize the simultaneous peaking and decline of many present or former oil-exporting countries around the world, such as Mexico, Indonesia, and the U.K. for the overall upward price trend of oil, contending that the combination of relentlessly rising global demand and peaking or eventually declining supply means the price must eventually go up. According to Simmons,^[29] isolated events such as the Iraq war affect short-term prices but by themselves do not determine the long-term trend. Simmons cites the use of enhanced oil recovery techniques in large fields such as Mexico's Cantarell,^[29] which maintained production for a few years, but only made the eventual decline all the more drastic. Pumping oil out of Iraq faster may reduce petroleum prices in the short term, but cannot keep the price low forever. From Simmons' point of view, then, the invasion of Iraq happened to be a major event that we can associate with the start of the long-term oil price rise, but at most this merely shifted the schedule ahead a few years, and may actually mitigate the inevitable decline in oil production by keeping some of Iraq's oil in reserve.

[edit] 2004

As a direct consequence of the Iraq War that followed the 2003 Invasion of Iraq, the oil production capacity of Iraq was cut from more than three to two million barrels per day.^[30]

[edit] Mid 2005 increase

After retreating for several months during the winter of 2004/2005, crude oil prices rose to new highs in March 2005. The price on NYMEX has been above $50/barrel since March 5, 2005. On March 16, 2005, the price surpassed the October 2004 high of $55.17 to close at $56.46. In April 2005 the price began to fall, reaching $53.32 on April 9. It then reversed course and headed to an all time high of $58.28, driven mainly by lingering concerns of a prolonged weak dollar. In June 2005 crude oil prices broke the psychological barrier of $60.

[edit] 2005–2006 increases

In the United States gasoline prices reached a record high during the first week of September 2005 in the aftermath of Hurricane Katrina. The average retail price was nearly $3.04 per US gallon.^[31] The previous high was $1.42 per gallon in March 1981, which would be $3.20 per gallon after adjustment for inflation. In comparison, the average retail price of a litre of petrol in the United Kingdom was 86.4p on 19 October 2006.^[32] This equates to US$6.13 per U.S. gallon.

On January 17, 2006 crude oil for February delivery rose by $2.38 (3.7%) to $66.30 a barrel. This was the highest increase since early October 2005. Observers believe that violence in Nigeria, and Iran's friction with the West are responsible for this price increase. Continued concerns about Iran raised the price to $68.38 on January 31.^[33] However, due to rising stockpiles of crude oil and an abnormally warm winter, as of February 14, the price of crude had hit a 2006 low of $59.60.^[34]

Oil production in Iraq continued to decline as result of the ongoing conflict, decreasing to an output of just 1 million barrels per day (160,000 m³/d).^[35]

"[The Iraq production shortfall is] a significant contributing factor to the high price of oil,"

– Dalton Garis, economist at the Petroleum Institute in Abu Dhabi^[35]

[edit] Mid 2006 increase

Regular gasoline prices were averaging $3.036/gallon across the U.S. in August, 2006, slightly below the post-Katrina peak of $3.057.^[36] Adjusted for inflation, these U.S. prices were the highest in 25 years. The all-time U.S. inflation-adjusted record is approximately $3.20/gallon, set in March, 1981.^[37]

In July 2006, crude oil for August delivery traded over $79/bbl,^[38] an all-time record. The early and mid-summer 2006 runup is attributable to increasing gasoline consumption, up 1.9% year over year in the U.S., and geopolitical tensions as North Korea launched missiles, the Iran nuclear standoff drags on, and Israel and Lebanon went to war. The early spring 2006 runup in prices has been attributed to a number of factors, including continuing supply disruptions from the summer 2005 hurricane season (18% of Gulf Coast supplies were still off-line in spring '06), supply disruptions from the changeover from MTBE to ethanol, lingering concerns over Iran and Nigeria, and anticipation of higher summer demand. Hostilities in Nigeria alone have caused a supply disruption of 675,000 bbl/day.^[39] On August 7, BP shut down its Prudhoe Bay, Alaska field due to pipeline corrosion, bringing supply down by up to 400,000 bbl/day or about 8% of total U.S. production.^[40]

The higher price of oil substantially cut growth of world oil demand in 2006, including an outright reduction in the oil demand of the OECD.^[41]

[edit] September 2006 decreases

Oil prices began to decrease during September 2006, closing below US$66/barrel on September 11.^[42] The U.S. national average gas price dropped to US$2.70/gallon in early September, down US$0.11 from the previous week. Some cities were seeing average prices below US$2.40/gallon.^[43]

As of September, prices continued to fall, and the average cost of gasoline per gallon (U.S. nationwide) was below US$2.50. On September 19, crude oil fell US$2.14 to a 6-month low of US$61.66. The recent significant fall in the price of crude oil has led some to speculate that price of gasoline may fall to as low as $1.15/gallon^[44] By October 3, the price closed at US$58.68, its lowest close since mid-February.^[45] Reasons for the recent price decreases have included easing tensions with Iran, ample supply and the lack of hurricane activity in oil-producing regions of the Gulf of Mexico^{[citation needed]}.

After news of North Korea's successful nuclear test on October 9, 2006, oil prices rose past $60 a barrel, but fell back the next day. Also, for several days in early October, oil prices bounced around the $60 mark on possible news that some OPEC countries would cut oil production by 1 million barrels per day (160,000 m³/d). OPEC had not cut its production since December 2004. However, the oil market has lately seemed to shrug that news off, especially considering that Saudi Arabia said that no such agreement exists (to cut production).

On October 11, oil prices fell below US$58 for the first time since February. Days later, on October 20, a barrel of crude oil closed at US$56.82 per barrel. The same day, OPEC declared that they would cut production by 1.2 million barrels per day (190,000 m³/d) in order to arrest the sliding price, the first drop since December 2004.^[46]

[edit] Mid 2007 increases

The US national average (as of May 16. 2007) was $3.09, and some parts of the West Coast were selling regular unleaded at $3.33/gallon (e.g. San Francisco and Los Angeles). On NYMEX, a barrel was trading at $73.93, based on civil unrest in Nigeria. A pipeline disruption in the North Sea has also bumped the price of Brent Crude up to $79.64 (an all time high).^[47]

Legislation from the Democratic-controlled U.S. Congress, from approving the No Oil Production and Exporting Cartels Act of 2007 (where the Sherman Act is amended towards foreign companies acting as cartels), and hearings (as of 5/22/2007) from the House Energy and Commerce Committee's Oversight and Investigations Subcommittee will address the following: price gouging (especially from oil companies) as a federal crime, and the intervention of the Joint Economic Committee led by Senator Charles Schumer to which lawmakers should intervene where the current corporate mergers (Exxonmobil, ConocoPhillips, Chevron, Shell) should break up, as a way to protect American consumers.

The "NOPEC" bill passed the U.S. House of Representatives with a 345-72 vote on May 22, 2007.

On September 12, 2007 oil prices rose to an all-time high of $80 per barrel, which surpassed even the highs of the early 1980s. High prices and restricted supplies have increased the concerns of those who believe that peak oil is either imminent, or may have already passed, because of the implication that oil supplies will not increase significantly beyond that point, and in the longer term a decline will occur. It should be remembered that some of this trend in prices is partly due to the slide of the dollar against other currencies. Measured in Euro for example, as the dollar has been falling steadily, the price of oil appears much less volatile. This results in worldwide price gains being relatively mild, but as the dollar loses its value against the euro, oil prices in the United States rise because they are priced in dollars.

[edit] Late 2007 increases

On October 19, 2007, US light crude rose to a new height of $90.02 per barrel due to a combination of ongoing tensions in eastern Turkey and the reducing strength of the US dollar.^[48] Prices fell briefly on the expectation of increased US crude oil stocks, however they rose again rapidly to a peak of $92.22 on October 26, 2007 when stocks were revealed to have instead fallen.^[49]

Prices increased throughout late October and early November. On November 7, 2007 light crude oil reached another record, closing at $98.10 per barrel. As of November 21, 2007 oil prices rose to a new high of $99.29 per barrel,^[50] leading to fears of the price breaking the $100 per barrel mark due to a Wall Street Journal report which stated that peak oil had arrived.

[edit] Early 2008 increases

On January 2, 2008 US light crude surpassed the psychological barrier of $100 before falling to $99.69, due to tensions on New Years Day in Nigeria and on suspicion that US stocks of crude will have dropped for the seventh consecutive week. A BBC report from the following day stated that a single trader bid up the price. Stephen Schork, a former floor trader on the New York Mercantile Exchange and the editor of an oil market newsletter, said one floor trader bought 1,000 barrels (160 m³), the smallest amount permitted, and sold it immediately for $99.40 at a $600 loss. However, on January 3, oil rose to $100.05 a barrel in intraday trading.^[51] Oil fell back later in the week to $97.91 at the close of trading on Friday, January 4, in part due to a weak jobs report that showed unemployment had risen.^[52]

Despite news on weakened demand, the price of oil once again rose to $100.10 a barrel on February 19th after a Texas refinery fire, rumors about OPEC production cuts, and evidence that the supply of oil is decreasing faster than demand of oil. Oil prices rose above $101 a barrel February 27, 2008.^[53] Oil prices surpassed $103 a barrel February 29, 2008 as continued weakness in the U.S. dollar and the prospect of lower Federal funds rates attracted fresh capital to the oil market.^[54]

Oil prices continued to rise to $104 on March 3, 2008 continued by the weakness in the United States dollar.^{[citation needed]} The OPEC on March 5, 2008 accused the United States of economic "mismanagement" that it said is pushing oil prices to record highs, rebuffing calls to boost output and laying blame at the feet of the George W. Bush administration.^[55] Oil prices surged above $110 to a new inflation-adjusted record on March 12, 2008 before settling at $109.92.^[56] Oil continued its soar skywards, hit $111 a barrel, on March 13, 2008, before sliding back to below $110 amid fears of economic recession in the United States.^[57] The record was again broken on March 17, 2008, with U.S. light sweet crude reaching $111.80.^[58] On April 15, 2008 the price of oil broke the $114 mark for the first time. The price increased to $115.07/barrel on April 16, 2008 due to the increasing weakness of the US dollar,^[59] and increased again to $117 per barrel on April 18, 2008 after a militant group in Nigeria said it had attacked an oil pipeline.^[60] Oil prices rose to a new high of $119.90 a barrel on April 22, 2008,^[61] before dipping and then rising $3 on April 25, 2008 to $119.10 on the New York Mercantile Exchange after a news report that a ship contracted by the U.S Military Sealift Command fired at an Iranian boat.^[62]

[edit] Mid 2008 increases

On May 9, 2008, the oil price exceeded $125 per barrel for the first time^[63], while on May 21, 2008 the oil price exceeded already $130 per barrel of Brent Crude. In approximately 24 hours from May 21 to May 22nd, 2008, the price per barrel of oil passed $135.

In June, oil prices fell sharply at first but then rebounded nearly $6 on June 5 after evidence that Venezuela, a major oil supplier to the United States saw production fall 5% since January 2008 due to aging oil fields, generating serious supply concerns in the wake of falling oil production in Mexico, Russia, and Nigeria. On June 6, prices rose $11 in 24 hours, the largest gain in history^[64]. The possibility of an attack on Iran by Israel was considered to have contributed to the rise.^[65] The combination of two major oil suppliers reducing supply has generated fears of a repeat of the 1973 energy crisis.

[edit] Forecasted prices and trends

Fatih Birol, chief economist of the International Energy Agency expressed his opinion in October, 2007 that oil prices will remain high for the foreseeable future due to rapid increases in demand from the huge developing economies of China and India. Although India has raised prices, China has "no plans" to do so.^[66] According to informed observers, OPEC, meeting in early December, 2007, seemed to desire a high but stable price that would deliver substantial needed income to the oil producing states, but avoid prices so high that they would negatively impact the economies of the oil consuming nations. A range of 70–80 dollars a barrel was suggested by some analysts to be OPEC's goal.^[67]

Some analysts point out that major oil exporting countries are rapidly developing; and because they are using more oil domestically, less oil may be available on the international market. This effect, outlined in the export land economic model, could significantly reduce the oil available for trade and cause prices to continue to rise. Particularly significant are Indonesia (which is now a net importer of oil), Mexico and Iran (where demand is projected to exceed production in about 5 years), and Russia (whose domestic petroleum demand is growing rapidly).^[68]

In May, 2008, Barclays Capital raised its forecast for average crude oil price in 2008 from its previous prediction of $100.80/bbl to $116.90/bbl, citing the only modest decreases in oil consumption among OECD countries, strong demand growth among non-OECD countries, the slow development of alternative fuels, and weak non-OPEC supply which "continues to under-perform dramatically relative to consensus expectations."^[69]

In May, 2008, Arjun N. Murti and other Goldman Sachs analysts issued a research report predicting oil prices are likely to rise to between $150 to $200/bbl in the next six to 24 months.^[70] This was a marked increase from Goldman Sachs' earlier (September, 2007) forecast of oil prices averaging $85/bbl through 2008, rising to $95/bbl at year end, which was in turn an increase from still-earlier predictions.^[71]

Near-term peak oil proponent Matthew Simmons predicts a rise to $300 a barrel or higher by 2013 as sweet crude petroleum becomes more scarce and major producers begin failing to meet demand.^[72]

[edit] Effects

The effect that rising oil prices have on a market is not directly proportional to the cost of crude oil. For example, while crude oil prices increased 400% from 2003–2008, United States gasoline prices did not rise by the same factor. This is because the profits of distributors and retailers, production costs (such as refining, transportation), and taxes are all part of the price of auto fuel. However, as the cost of crude oil increases, the crude-oil cost becomes a relatively larger component of the retail price of gasoline, causing any further increases in crude oil prices to have correspondingly larger impact on consumers.

There is debate over the effect the current long term elevation of oil prices will have. Some speculate that an oil-price spike could create a recession comparable to those that followed the 1973 and 1979 energy crises or a potentially worse situation such as a global oil crash.

[edit] Inflation and recession

Further information: Oil crisis and Recession of 2008

The perceived increase in oil price differs internationally according to currency market fluctuations and purchasing power of currencies. For example, excluding changes in relative purchasing power of various currencies, from 2002-01-01 to 2008-01-01:^[73]

• In US$, oil price rose from $20.37 to nearly $100, about 4.91 times more expensive;
• In the same period, the Taiwanese dollar gained value over the US dollar to make oil in Taiwan 4.53 times more expensive;
• In the same period, the Japanese Yen gained value over the US dollar to make oil in Japan 4.10 times more expensive;
• In the same period, the Euro gained value over the US dollar to make oil in the Eurozone 2.94 times more expensive.

On average, oil price has increased approximately 400% for these areas, with the US population being the most affected due to the recent depreciation of the US dollar. Because of this protests are appearing. ^{[74] [75]}

Rising transport costs can reverse globalization ("distance costs money") . As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage. ^[76]

[edit] United States

It is easiest to gauge the effects of oil prices in the United states, where comparison of oil prices to average income are simplified. One of the most closely watched measures is the price of gas, but the average United States consumer's basket of goods contains many other petroleum products as well.

Despite the rapid increase in the price of oil, neither the stock markets nor the growth of the global economy were noticeably affected until supply declined rapidly starting in November 2007. Arguably, inflation has increased; in the United States, inflation averaged 3.3% in 2005–2006, as compared to an average of 2.5% in the preceding 10-year period.^[77] As a result, during this period the Federal Reserve has consistently increased interest rates to curb inflation.

Exactly how much trade, soaring transport costs divert from China (or for that matter anywhere else) depends ultimately on how important those costs are in total costs. Goods that have a high value to freight ratio carry implicitly small transport costs, while goods with low value to freight ratios typically carry significant moving costs. A surprisingly high percentage of Chinese exports to the US fall in the later category. Furniture, apparel, footwear, metal manufacturing, and industrial machinery—all typical Chinese exports, incur relatively high transport costs.^[78]

[edit] United States and GDP

In the United States, for instance, each 1000 dollars in GDP required 2.4 barrels of oil in 1973 when adjusted for inflation, while this number had fallen to 1.15 by 2001.^[79] For calendar 1981, United States oil consumption was 5,861,058,000 bbl (0.9318338 km³)^[80] and GDP was $5,291.7 billion^[81] (chain-volume 2000 dollars), a ratio of $902.86/bbl. In 2005, consumption was 7,539,370,000 bl and GDP was $11,048.6 billion, a ratio of $1,465.45/bbl.

[edit] United States stock market

The increase in oil prices over two years was mirrored by an increase in stock values in the energy sector. Energy ETFs like XLE (an overall energy sector fund) and OIH (an oil service industry fund) did well during the period, with XLE's price increasing from $26 (2004-01-01) to $54 (2006-03-02), and OIH's price increasing from $60 (2004-01-01) to $143 (2006-03-02).

The value of the stock in companies such as Apache^[82] and Conoco-Phillips^[83] rose sharply during this period. These prices increased more rapidly toward the end of August, particularly after Hurricane Katrina.^[84]

Wal-Mart shares continued their decrease in value that began with the increase in the oil prices. Over two years, stock in Wal-Mart dropped in value by 25% from $60 per share to under $45 per share.^[85] Earlier in August, Wal-Mart announced that higher than expected oil prices cut into the corporation's profits for the 2nd quarter of 2005. Since oil prices after the end of the 2nd quarter continued to rise, 3rd quarter profits from Wal-Mart are expected to be small. Because Wal-Mart's distribution system relies on the customer to drive to a large discount big-box store, increases in the price of fuel might discourage some customers from making the trip as often. Wal-Mart, like all retailers, will also face higher shipping costs to get goods from the factory to the stores. This will likely cause inflationary pressures.

[edit] Europe

In the developed countries of Western and Central Europe, the prices of transport fuels are made up of the price of the refined product, plus a substantial tax element, which can vary between roughly 2/3 and 3/4 of the total price. (in the UK nearly 70% of the price of a litre of petrol is made up of fuel duty and VAT. A doubling of the oil price would add perhaps 30% to the cost of fuel at the pump in the UK, if the duty was not changed.) These taxes are not harmonised, nor are different countries' budgets updated at the same time. As a consequence, people who live nearby will often find it worthwhile to drive over the border to fill up, despite the hassle and traffic congestion this causes. However, in general, by having a large tax fraction, governments have the benefit of some room for manoeuvre, to smooth sudden price shocks by relaxing and then slowly ramping back the fuel duties, and the population has lifestyles that are already well adapted to fuel prices that would appear very high to consumers in the USA (where the tax fraction is less than 20%). These two effects conspire to make European demand largely independent of the crude oil price, at least over short periods of a few years.

[edit] Asia Pacific region

The Pacific rim had been experiencing oil shortages on an ongoing basis prior to Hurricane Katrina. Some countries are increasing production of biofuels to offset the higher costs of oil.^{[citation needed]}

[edit] Developing Countries

High oil prices are likely to first affect less affluent countries, particularly the developing world, with less discretionary income. There are fewer vehicles per capita, and oil is often used for electricity generation, as well as private transport. The World Bank has looked more deeply at the effect of oil prices in the developing countries. An analysis finds that in South Africa a 125 percent increase in the price of crude oil and refined petroleum reduces employment and GDP by approximately 2 percent, and reduces household consumption by approximately 7 percent, affecting mainly the poor.^[86]

[edit] Sub-Saharan Africa

High oil prices are hurting many countries in Africa, including Zimbabwe, Eritrea and Tanzania. High oil prices have created an oil supply instability, per barrel price instability or both. There are reports that this has led to fuel rationing being enacted in some cases.^[87] Many countries in Sub-Saharan Africa lack the foreign exchange reserves to purchase enough oil products at increasingly higher prices. These nations have little choice but to limit imports and/or ration their existing supplies.

[edit] Latin America and Caribbean

Venezuela's president, Hugo Chávez, came under increasing scrutiny as he began selling oil at lower-than-market prices to poor U.S. consumers, as heating oil, and to island nations in the Caribbean such as Cuba.^{[88][dead link]}

[edit] Persian Gulf States and Eurasian Arab-Islamic regions

Some stock markets in the GCC, notably in Saudi Arabia and Dubai, experienced a boom, roughly 100% index increase in the Saudi stock market.^[89] However, this boom was followed by a market crash. A number of planned projects to stir development, such as King Abdullah Economic City, have been proposed due to $29.3 billion surplus.^[90] On May 1, 2006 Saudi Arabia lowered prices on all hydrocarbon fuels for local consumption; 95 octane gasoline costs .606 USD/gallon (fixed price).^[91]

[edit] Transportation

[edit] Ground transport

Prior to the runup in fuel prices, many motorists opted for larger, less fuel-efficient sport utility vehicles and full-size vehicles in the United States, Canada and other countries where fuel taxes have historically been low. This trend began reversing in 2008 due to rising prices of fuel along with an increasing perception that future fuel prices will be at least as high. The September 2005 sales data for all the vehicle vendors indicated SUV sales dropped while small cars sales increased compared with 2004 sales. There is also an ever increasing market for hybrid vehicles (e.g., Toyota Prius and Honda Civic Hybrid) and diesel engine vehicles (e.g., Volkswagen TDI and Mercedes-Benz E320 CDI) since they are more fuel efficient; since the 1973 energy crisis, the front-wheel drive passenger car has replaced rear-wheel drive as the preferred layout for energy efficient cars. There is increasing demand of "crossover SUVs" (i.e., SUVs based on unibody platforms) which are marginally lighter and therefore more fuel efficient than SUVs built on body-on-frame chassis.

[edit] Air travel

Further information: History of aviation#The challenge of peak oil

Jet fuel costs were low during the 1980s oil glut, and air travel enjoyed robust growth around much of the world. For example, air travel in the United States grew five times faster than population in the decades after 1978, with 769 million passengers boarding U.S. airline flights in 2007.^[92] However, the run-up in oil prices after 2003 began eroding airline profits, and the further doubling of oil prices from May 2007 to May 2008 began to have a substantial impact on airline operations, forcing airlines to reduce flight schedules, and pushing weaker carriers into merger or bankruptcy.^[92][93]

The air travel industry as a whole, however, remained generally optimistic that the boom would continue, with manufacturers such as Airbus Industries projecting robust future sales,^[94] airports around the world planning for future expansion, and China expecting as of 2008 to build 97 new airports by 2020.^[95] In sharp contrast, Peak oil theorists such as David Goodstein, Richard Heinberg, and others, had for years predicted sharp declines in air travel following the peaking of world oil production and its subsequent decline.^[96]

[edit] Shipping

Recent changes in transportation have led to increased sensitivity to higher energy prices. Most notable of these changes is the massive trend towards containerization that effectively makes shipping costs more vulnerable to swings in fuel costs. Container ships can be unloaded much faster than break cargos so they spend much more time at sea than in ports. ^[97]

Another factor is speed. The shift to container ships has increased the importance of ship speed. Over the past two decades, container ships were built to go faster than bulk ships and since container ships were steadily gaining share, the world’s fleet speed picked up. But greater speed requires greater energy, as it does in all other modes of transport. In global shipping, the increase in ship speed over the last fifteen years has doubled fuel consumption per unit of freight. ^[98] Accordingly, in 2008 some shipping companies responded to higher fuel costs by slowing down their ships,^[99] while companies such as SkySails began prototyping large towing kites to harness wind power, partly offsetting some engine power for propulsion.^[99]

The cost of shipping a standard 40-foot container from East Asia to the US eastern seaboard has already tripled since 2000 and will double again as oil prices head towards $200 per barrel. At 2008 oil prices, every 10% increase in trip distance translates into a 4.5% increase in transport costs. ^[100]

Including inland costs, shipping a standard 40-foot container from Shanghai to the US eastern seaboard now costs $8,000. In 2000, when oil prices were $20 per barrel, it cost only $3,000 to ship the same container. But at $200 per barrel, it will soon cost $15,000 in transport costs to ship from China to the US eastern seaboard. Trans-oceanic transport costs also literally exploded during the two historic OPEC oil price shock. The cost of shipping a standard cargo load overseas almost tripled, just as it did over the past few years.^[101]

[edit] Food security

Further information: Risks to food security, Agriculture and population limits, Food vs fuel and 2007–2008 world food price crisis

Since the 1940s, agriculture has dramatically increased its productivity, due largely to the use of petrochemical derived pesticides, fertilizers, and increased mechanization (the so-called Green Revolution). During this time, the world population has more than doubled. Between 1950 and 1984, as the Green Revolution transformed agriculture around the globe, world grain production increased by 250%.^[102]

By late 2007, increased farming for use in biofuels,^[103] world oil prices at nearly $100 a barrel^[104] and growing consumer demand in China and India^[105] pushed up the price of grain.^[106] Food riots occurred in many countries across the world in 2007 and 2008.^{[107][108][109]} As of December 2007, 37 countries faced food crises, and 20 had imposed some sort of food-price controls. Geologist Dale Allen Pfeiffer claims that the coming decades could see spiraling food prices and massive starvation on a global level such as never experienced before.^[110][111]

[edit] Possible mitigations

Further information: Mitigation of peak oil

[edit] Alternative fuels

Main article: Biofuel

Economists say that the substitution effect will spur demand for alternate fossil fuels, such as coal or liquefied natural gas and for renewable energies, such as solar power, wind power and advanced biofuels.

For example, China and India are currently heavily investing in natural gas and coal liquefaction facilities. Nigeria is working on burning natural gas to produce electricity instead of simply flaring the gas, where all non-emergency gas flaring will be forbidden after 2008.^[112][113] Outside the U.S., more than 50% of oil is consumed for stationary, non-transportation purposes such as electricity production where it is relatively easy to substitute natural gas for oil.^[114]

Ironically, oil companies including the supermajors have begun to fund research into alternative fuel. BP has invested half a billion dollars for research over the next several years. The motivations behind such moves are to acquire the patent rights as well as understanding the technology so vertical integration of the future industry could be achieved.

On the other hand, alternate fossil fuel can increase global warming.

[edit] United States Strategic Fuel Reserve

The United States Strategic Petroleum Reserve could, on its own, supply current U.S. demand for about a month in the event of an emergency, unless it were also destroyed or inaccessible in the emergency. This could potentially be the case if a major storm were to hit the Gulf of Mexico, where the reserve is located. While total consumption has increased,^[115] the western economies are less reliant on oil than they were twenty-five years ago, due both to substantial growth in productivity and the growth of sectors of the economy with little oil dependence such as finance and banking, retail, etc. The decline of heavy industry and manufacturing in most developed countries has reduced the amount of oil per unit GDP; however, since these items are imported anyway, there is less change in the oil dependence of industrialized countries than the direct consumption statistics indicate.

Strategic Fuel Reserve could also include biofuels.

[edit] Fuel taxes

One recourse used and discussed in the past to avoid the negative impacts of oil shocks in the many developed countries which have high fuel taxes has been to temporarily or permanently suspend these taxes as fuel costs rise.

France, Italy, and the Netherlands lowered taxes in 2000 in response to protests over high prices, but other European nations resisted this option because public service financiation is partly based on energy taxes.^[116] The issue came up again in 2004, when oil reached $40 a barrel causing a meeting of 25 EU finance ministers to lower economic growth forecasts for that year. Because of budget deficits in several countries, they decided to pressure OPEC to lower prices instead of lowering taxes.^[117] In 2007, European truckers, farmers, and fishermen again raised concerns over record oil prices cutting into their earnings, hoping to have taxes lowered. In England, where fuel taxes were raised in October and are scheduled to rise again in April 2008, there was talk of protests and roadblocks if the tax issue was not addressed.^[118]

This method of softening price shocks is even less viable to countries with much lower gas taxes, such as the United States.

More recently, a 25 Yen per liter fuel tax in Japan was allowed to lapse temporarily on April 1, 2008.^[119]

[edit] Telecommuting

The alternatives to daily commuting and long-distance air travel for business, such as videoconferencing, e-mail, and corporate wikis, continue to improve, in keeping with the overall improvement in information technologies ascribed to Moore's law. As the cost of moving information by moving human brains continues to rise, while the cost of moving information electronically continues to fall, presumably market forces should cause more people to substitute virtual travel for physical travel. Matthew Simmons explicitly calls for "liberating the workforce" by changing the corporate mind-set from paying people to show up physically to work every day, to paying them instead for the work they do, from any location.^[120] This would allow many more information workers to work from home either part-time or full-time, or from satellite offices near to where they live, freeing them from long daily commutes to central offices.

[edit] See also

• CPI
• Hirsch report
• Oil crisis

[edit] Notes

The references in this article would be clearer with a different or consistent style of citation, footnoting, or external linking.

• Rising Oil Prices, Declining National Security, testimony of David B. Sandalow in the House Committee on Foreign Affairs.

[edit] External links

• U.S. DOE EIA energy chronology and analysis
• Gasoline and diesel fuel prices, EIA, Department of Energy.
• EU Oil Bulletin Fuel prices in EU countries updated weekly, includes information on taxes and VAT.
• World Bank article which states that US$90 per barrel is the equivalent of the 1980 oil shock (pdf file, page 18, 473kb)
• Oil Prices and the Iraq War: Market Interpretations of Military Developments by U.S. Navy CCC
• Oil Price History and Analysis
• The Oil Drum
• TrendLines Research's "Barrel Meter" chart tracks oil price components: Geopolitical/Depletion Fear Premiums, Speculation, Currency Debasement, Extraction Costs & Lack of Surplus Capacity
• John V. Mitchell (Associate Fellow Chatham House, London): A New Era for Oil Prices; 32 Pages, August 2006
• Asia/Pacific: Scary Oil Andy Xie, MorganStanley economist for Asia, commenting on possibility that oil is financial bubble, (16 Jun 2005).
• Explanation of pricing mechanism in oil markets
• The real problems with $50 oil, An analysis by Henry C.K. Liu in Asia Times Online, details the economic impact of high oil prices.
• Oil Industry Combined Graph Graph of oil prices in relation to other fossil fuel prices.
• Double, double, oil and trouble May 29th 2008, From The Economist print edition, Is it “peak oil” or a speculative bubble? Neither, really.
• Fuel subsidies, Crude measures May 29th 2008, From The Economist print edition, Not everybody is paying higher prices for oil.

v • d • e Peak Oil Issues Peak oil · Mitigation of peak oil · Predicting the timing of peak oil · Hubbert peak theory · Hirsch report · Oil Depletion Protocol · Price of petroleum · Oil price increases since 2003 · Energy crisis · Export Land Model · Food vs fuel · Oil reserves People Albert Bartlett · Colin J. Campbell · David Goodstein · Richard Heinberg · M. King Hubbert · James Kunstler · Jeremy Leggett · Dale Allen Pfeiffer · Richard Rainwater · Matthew Simmons · Doomer Books The Long Emergency · Out of Gas · The Party's Over · Power Down Films Crude Awakening · The End of Suburbia · How Cuba Survived Peak Oil · What a Way to Go Organizations ASPO · Energy Watch Group · ODAC · OPEC