Oil Prices, Producing and Consuming

Oil Prices, Producing and Consuming
By Radi K. Radi - October 9th, 2004

The oil prices that recently reached the $53 mark caused a lot of thinking around the world, people in developing countries and Industrialized nations alike, are worried by inflation such increase could cause. The global economy -especially western nations- has suffered numerously from increased oil prices. The world oil shock of 1973 began in earnest on October 17, 1973, when Arab members of the Organization of Petroleum Exporting Countries (OPEC), in the midst of the Yom Kippur War, announced that they would no longer ship petroleum to nations that had supported Israel in its conflict with Egypt—that is, to the United States and its allies in Western Europe. The main reason being a little thing called inflation.

Western countries for long had used its powers or the "gunboat" diplomacy -basically threatening with a show of power - to keep oil prices at low levels, while inflation caused the exports to keep getting more expensive, for Arab oil producing countries that was not viable as it was their only source of income.

What happened was inevitable and although it set the prices at the quadrupled rate of 12 dollars a barrel it was not the end. The first gulf war -of 3- between Iraq and Iran caused the price to peak again at 39 dollars per barrel in February 1981. I heard on many media outlets that today's prices are unsurpassed but that requires a lot of informed calculation. To start we have to think of the income inflation and the CPI. You probably know that people in the twenties were making a fraction of what people are making today, yet people lived happily and income was sufficient. According to the US Department of Labour(1), a man with a yearly income of let us say $20,000 in September 1920 has an income equivalent to $189,000 in 2004. Simply prices increased and incomes increased.

Why I explained this is, the $39 per barrel of February 1981, is equivalent to $81.30 in 2004. This is probably going to happen again, but to conclude that $53 in today's prices is higher than $39 in 1981 prices is simply misinformed. This is what Real Dollars and the CPI is about, for further information, the CPI in September 1920 was 20, in 1981 was 90.9 and today it is 189.5 .

The Producing countries in the middle east have relied heavily on oil for money, that is at a high cost though, when prices reached 9.39 in December of 1998 the countries who are heavily dependant on oil for income had to do serious cutbacks in their already weak public services and serious layoffs were in place. In real dollars that is 5.5 of 1981 dollars. You did not hear free trade countries speaking. In 1973 The United States government seriously contemplated using military force to seize oil fields in the Middle East during the Arab oil embargo 30 years ago, according to a declassified British government document made public on January 1st 2004 by the British(2).

For the current increase there are a number of real factors:

The OPEC countries are already at their full production capacity and an increase is not possible before two years. That is mainly why OPEC won't increase production more than the current 30 million barrels per day. They Can't!


Iraq is capable of 2 million Barrels per day if the situation there stabilizes, the US government is more interested in having a production later for itself rather than sooner for open market.


The Prices at around $50 is fair for the producing countries considering the scarcity of this non-renewable resource. The Industrialized nations should start researching the renewable resources.


Resources such as wind energy for electricity in an Island like the United Kingdom, Hydrogen fuel for automobiles and maybe even solar energy for parts of the Middle East, Asia and Africa are not far-fetched and many studies have shown why it might work. According to Hubbert's Peak (3) and studies related to it , the production peak will be between 2004 and 2015. This is not a very good sign as decline in production will follow and since no other fuel is as easy to extract, transport and use as oil, an unprecedented recession in the global economy might happen. On the other hand such shortages and what is expected to be soaring prices will push industrialized nations to find other possible sources of energy.

Update of Late August 2005 prices reached $65+ and with the biggest port in the US New Orleans badly damaged by Hurricane Katrina the prices will reach $80 by break of winter in the Northern Hemisphere. It is only fair to the environment, people might consider cutting down now.

1-http://www.bls.gov/cpi/home.htm

2-http://www.commondreams.org/headlines04/0102-01.htm

3-http://en.wikipedia.org/wiki/Hubbert_peak