Conspiracy theories abound, but the soaring price of crude oil (today around $137 a barrel) is related to four more mundane forces:
(1) growing demand from developing nations, especially China and India. This is the main reason for the price rise over the last six years.
(2) the dropping dollar. As it drops, because of our trade imbalance and overall indebtedness to the rest of the world as well as our slowing economy, everything we buy from abroad — including much of the oil we import — costs more; everything we sell to foreigners — including much of the oil we produce — costs less to them. I attribute half of oil’s price rise since January to this.
(3) Global investors (including, perhaps, your own pension fund) are anxious about the American economy, and looking to hedge their bets against future declines. Oil is one of the commodities that looks like a good bet. Hence, there’s speculation in oil futures. This isn’t a nefarious plot. It’s the way the market works. A bit of a speculative bubble is forming, so beware. I attribute a big part of oil’s price rise over the last few weeks to this.
(4) Instability in the Middle East. Israel’s recent bellicose statements about Iran have generated fears about the continuing capacity and willingness of Middle Eastern oil producers to generate oil (about a third of world oil production). OPEC refuses to produce more. Some of oil’s price rise over the last week is attributable to this.
In other words, a perfect storm. Given the US recession and slowing of European economies, I expect oil to fall to around $125 a barrel but then be pushed up by speculators and the falling dollar to around $135 over the next several weeks. Wall Street investment houses are talking about $150 by July but that’s their way of stoking more speculation (in which they have a financial interest).
Bottom line: The days of cheap energy are over, folks. Gas may go down to $3.50 a gallon by this time next year, but you’d be wise to trade in your SUV for an economy car. And you’d be wise to avoid building that new addition to your home and put the money instead into better insulation.
Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people. This entry originally appeared on his blog.
Copyright 2008 Robert B. Reich