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Even after oil prices have tumbled more than $24 in the past two weeks, largely as the result of easing tensions in the Middle East and slowing U.S. economic activity, crude is still trading near historic highs.
In a series of articles starting today, The Washington Post examines the economic forces that have unhinged oil prices from their longtime cyclical patterns, propelling fuel costs to once unimaginable levels that are now both fraying the lifestyles of our recent past and speeding the search for an energy source of the future.
* * *
Earlier oil shocks have had obvious causes. In October 1973, OPEC raised prices and declared an oil embargo against the United States and other countries that had supported Israel in its war earlier that month against its Arab neighbors. The embargo ended in March 1974, but pricing power had shifted from the oil companies to the producing countries. In 1979, prices soared again after the Iranian Revolution curtailed output and consumers and oil companies went on a spree of panic buying.
Now, however, there is no one culprit and no single international crisis to blame. Instead, world demand has been increasing faster than supply, steadily squeezing oil markets.
This in turn has signaled to investors that prices are inevitably heading higher. Financial players, such as Wall Street banks and hedge funds, have bet just that, investing tens of billions of dollars in oil futures. Critics on Capitol Hill and elsewhere say this speculation has turbo-charged the market, helping lift prices even more.
The tightening of the oil market reflects decisions made a decade ago, when conditions looked radically different. Regular unleaded gas was less than a dollar a gallon. Oil was little more than $10 a barrel. And the Economist magazine, predicting prices could soon be half that, ran a cover story with the headline: "Drowning in Oil."
Those low prices sent the wrong signals to consumers and oil companies alike.
Demand for oil jumped as U.S. sales of gas-guzzling cars soared and China's breakneck economic expansion picked up pace.
Daniel Yergin, a historian of the oil business and head of Cambridge Energy Research Associates, said that over the five years from 1998 to 2002, world oil demand grew 1.1 percent annually, raising daily consumption by 4.2 million barrels. But in the following five years from 2003 to 2007, world oil demand grew 2.1 percent annually, boosting consumption by about 8.2 million barrels per day.
The low prices of the late 1990s also dampened the impetus for finding new supplies. Oil companies delayed exploration for new fields. Capital spending dropped 15 percent at the biggest oil companies in late 1998 and plunged as much as 70 percent at the smaller ones. Too few drilling rigs were built. And refineries weren't expanded or upgraded, making it hard for them to use the lower-quality crude oils that have become a larger portion of supplies or to produce the right balance of products as gasoline use is stagnating and diesel fuel use growing.
Investment slackened just as finding new supplies was becoming more difficult and costly. Most of the world's big, easy-to-tap fields have already been discovered and largely drained.
