09-11-07 Just as in the energy crises of the 1970s and ’80s, today’s high prices are causing anxiety and pain for consumers, and igniting wider fears about the impact on the economy. Unlike past oil shocks, which were caused by sudden interruptions in exports from the Middle East, this time prices have been rising steadily as demand for gasoline grows in developed countries, as hundreds of millions of Chinese and Indians climb out of poverty and as other developing economies grow at a sizzling pace.
“This is the world’s first demand-led energy shock,” said Lawrence Goldstein, an economist at the Energy Policy Research Foundation of Washington.

Forecasts of future oil prices range widely. Some analysts see them falling next year to $ 75, or even lower, while a few project $ 120 oil. Virtually no one foresees a return to the $ 20 oil of a decade ago, meaning consumers should brace for an era of significantly higher fuel costs.
At the root of the stunning rise in the price of oil, up 56 % this year and 365 % in a decade, is a positive development: an unprecedented boom in the world economy. Demand from China and India alone is expected to double in the next two decades as their economies continue to expand, with people there buying more cars and moving to cities to seek a way of life long taken for granted in the West.

But as prices rise, the global economy is entering uncharted territory. The increase so far does not appear to be hurting economic growth, but many economists wonder how long that will last.
Oil is not far from its historic inflation-adjusted high, reached in April 1980 in the aftermath of the Iranian revolution. At the time, oil jumped to the equivalent of $ 101.70 a barrel in today’s money. For most of the 20th century, as it transformed the modern world, oil was cheap and abundant. Throughout the 1990s, for example, oil prices averaged $ 20 a barrel. Even at today’s highs, oil is cheaper than imported bottled water, which would cost $ 180 a barrel, or milk, at $ 150 a barrel.

More than any other country, China represents the scope of that challenge. As it turned into a global economic behemoth over the last decade, China also became a major energy user. Its economy has grown at a furious pace of about 10 % a year since the 1990s, lifting nearly 300 mm people out of poverty. But rapid industrialization has come at a price: oil demand has more than tripled since 1980, turning a country that was once self-sufficient into a net oil importer.
India and China are home to about a third of humanity. People there are demanding access to electricity, cars, and consumer goods and can increasingly afford to compete with the West for access to resources. In doing so, the two Asian giants are profoundly transforming the world’s energy balance. Today, China consumes only a third as much oil as the United States, which burns a quarter of the world’s oil each day. By 2030, India and China together will import as much oil as the United States and Japan do today.

While demand is growing fastest abroad, Americans’ appetite for big cars and large houses has pushed up oil demand steadily in this country, too. Europe has managed to rein in oil consumption through a combination of high gasoline taxes, small cars and efficient public transportation, but Americans have not. Oil consumption in the United States, where gasoline is far cheaper than in Europe, has jumped to 21 mm bpd this year, from about 17 mm barrels in the early 1990s.
If the Chinese and Indians consumed as much oil for each person as Americans do, the world’s oil consumption would be more than 200 mm bpd, instead of the 85 mm barrels it is today. No expert regards that level of production as conceivable.

More realistically, global demand is expected to rise to about 115 mm bpd by 2030, a level that is likely to tax the world’s ability to pump more oil out of the ground. Already, the world is running on a limited cushion of spare capacity; any interruption in supplies, whether from hurricanes or armed conflict, causes prices to spike.
For oil companies, high prices have set off a frenzied search for new sources around the world. After a long lull in investments through most of the 1990s because of low prices, major oil companies have invested billions of dollars to bring in more supplies. The trouble is that these big new developments take a long time, and companies have been hobbled by higher costs. The cost of drilling rigs, for example, the basic tool of the trade, has doubled in recent years. Analysts say it will take time, but new supplies will eventually work their way to market.