This Wall Street Journal ($) article provides a timely overview of the economic and political forces that have caused the increased energy prices over the past two years and how this price hike differs from previous ones:
As oil prices near $50 a barrel, a fundamental difference between this oil crunch and prior ones is becoming clear: This one is less acute, but it may prove to be more chronic.
So far, the current oil-price surge still trails the big blows of the past. In inflation-adjusted dollars, oil peaked in 1981 at $73 a barrel, 55% above where it’s trading now. Back then, moreover, the oil crisis sparked a full-blown recession. Today, despite some signs of a slowing, the economy continues to grow — and, with it, oil demand.
However, it’s that knotty problem of growth that continues to push prices upward:
It’s precisely the steadily rising demand, however, that is worrying the market. Unlike in the 1970s, the problem this time isn’t primarily a supply shock in which the world’s biggest oil spigots have been shut off. It’s that, even though they’re wide open, the world is consuming pretty much everything that comes out of the ground. The resulting fear is that isolated supply disruptions — a change in government in Venezuela, say, or a terrorist attack in the Middle East — could push prices even higher.
And although U.S. energy prices remain relatively high, there are contrarians as to the current prices:
Still, [U.S.] commercial inventories of crude oil are 5% above last year’s level, and gasoline stocks are up 4.5%.
Some observers see the U.S. inventory levels as evidence that there’s plenty of oil to meet growing demand and that today’s oil price is largely the result of excessive speculation. Trading volume has soared in recent months as hedge funds and other fast-moving traders have headed into the oil markets. “I don’t think the fundamentals support prices anywhere close to this level,” says Kyle Cooper, an oil analyst at Citigroup in Houston. He believes prices should be closer to $30.
But futures markets are still betting on continued high prices:
The market isn’t betting on a quick fix. In a big change from past experience, this time it isn’t just the price of today’s oil that’s surging. Futures contracts through May 2006 delivery are above $40. The contracted price of oil to be delivered six years down the road is also rising. After years in which they hovered between $20 and $25, these so-called six-year futures now are trading around $35.
And although the market takes time to adjust to higher energy prices, it does eventually work, as reflected in its reaction to the energy price hike of the 1970’s:
Improving energy efficiency takes a long time. But it can be done, says a longtime advocate, Amory Lovins, chief executive of the Colorado-based Rocky Mountain Institute. He says that between 1977 and 1985, real GDP in the U.S. grew by 27% while oil use fell by 17%.
By his calculation, if the U.S. kept reducing oil use at that pace, every year and a half the U.S. would decrease its daily oil consumption by some 2.5 million barrels, about the amount it currently imports from the Gulf. “It’s a measure of how much we did the last time we paid attention,” Mr. Lovins says.
Read the entire piece. Moreover, here is an NY Times article on speculation regarding similar increases in natural gas prices.
Also, for more analysis on how this energy price hike relative to past ones, review this earlier post on the work of James D. Hamilton, an economics professor from San Diego who specializes in analysis of energy markets.