After almost three years of highlighting the remorseless rise in the price of oil, this column has developed a tradition of its own: whenever the price hits a new record, it examines the latest developments in the oil market, finds that nothing fundamental has changed and concludes that additional price increases are in store. With the latest surge in prices carrying the cost of a barrel of crude well past the previous record of just below $71 - reached in the immediate aftermath of Hurricane Katrina last August - the time has come to renew that tradition.
The key question, as usual, is whether anything has changed - and, if so, what? The good news, from both a journalistic and substantive viewpoint, is that there are indeed some changes to the story this time around. The most prominent change is that now everyone agrees that the primary factor behind the very sharp rise recorded in recent weeks is "geopolitical." to be precise, it is the growing fear that the crisis developing around the Iranian nuclear program is getting worse and may lead to serious trouble. In purely market terms, this is categorized as a "supply-side" issue because sanctions on Iran, let alone the resort to military intervention by the US or NATO, is seen as leading to significant supply disruptions.
The Iranian problem is still only a threat. Other supply-side problems are actual, albeit less severe than the potential disruption involving Iran. The most notable of these is that in Nigeria, where ethnic and religious violence has caused a moreor-less ongoing disruption of some half-million barrels of daily production. To these must be added two other supply disruptions, which have become chronic. One, which still merits mention in most reports, is the supply of refined products within the US - many refineries are still partially out of action following last year's hurricanes, or for what is described as "regular maintenance," or to undergo upgrading to meet more stringent regulations regarding the quality and cleanliness of the fuel they process. The other, which has long since ceased to be a cause of comment, is the low level of Iraqi production compared not only to that country's enormous potential, but also to the level it used to achieve under Saddam, during the now-infamous "oil-forfood" regime.
These real and ongoing supply disruptions are not insignificant, but the disruption that is still at the "maybe" level - that connected to Iran - is the one that has wreaked havoc with the market. This may seem strange, but the logic behind it is quite sound, given the sheer scale of the potential disruption, which could affect not only Iranian production, but also - assuming the Iranians react by closing the Straits of Hormuz - on Saudi, Kuwaiti and other Gulf production. If that scenario were played out, the direst forecasts of oil at $100 or even $120 a barrel could very easily be realized.
The flip side of this new focus on supply is the way the analysts have now largely ditched demand as the primary cause of higher prices. China has just reported, yet again, that its economy grew at an annual rate in excess of 10%, but no one cites this as a factor driving up oil prices. The only demand side factor that gets big play, at least in the American media, is the imminence of the "driving season" in the US, the demand it is generating for refined petrol ("gas" in American parlance) and the shortage thereof due to inadequate refinery capacity etc.
Interestingly, the Chinese are engaged in adjusting their economic policy and, in particular, taking steps to reduce the country's breakneck growth in energy demand. The US, on the other hand, has not yet done anything meaningful to reduce its demand for oil; the most useful thing it could do is slap a hefty tax on petrol consumption, but that is not on this Administration's radar screen. In any event, although overall demand is increasing, it is no longer seen as the proximate cause of the rise in prices.
The other big change is that no one is surprised anymore when the price hits new records. On the contrary, it is now widely assumed that prices will eventually surpass the inflation-adjusted levels equivalent to those reached in 1980/81 (about $87 in today's money) after the Iranian revolution and Iraq's invasion of Iran. This change can be seen as a source of hope, because only when everyone is convinced that prices can only rise further will the market finally peak and fall.