Gas prices are above two dollars per gallon, making the antiwar chant “no blood for oil” sound even more naive than usual.  Gasoline prices in Europe and Japan are, as usual, running more than twice American prices.

According to research by the International Energy Agency (IEA), in cooperation with the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund, a sustained $10 per barrel increase in oil prices (from $25 to $35) will result in the OECD as a whole losing 0.4 percent of GDP.  Inflation would rise by half a percentage point, and unemployment would also increase.  The adverse economic impact would be even greater in developing countries whose economies are more dependent on imported oil.  Developing countries are also less able to cope with the financial strain from higher oil-import costs.

The dramatic increase in oil prices over the last year comes from both decreased supply from OPEC and increased demand by China.

OPEC pledged on March 20, 2003, to make up any decrease in oil production resulting from the war in Iraq.  By April, however, OPEC was facing the prospect of increased oil exports from a liberated Iraq, which would put downward pressure on world oil prices.  The world price was then about $24 per barrel, in the middle of the OPEC price band, which runs for a low of $22 to a high of $28.  On April 24, 2004, OPEC decided to cut production by two million barrels per day (mbd).  It held to this level until September, when it further cut production quotas from 25.4 mbd to 24.5 mbd.  It made another cut, down to 23.5 mbd, at its February 2004 meeting.  Prices had already moved above $28 per barrel by the end of 2003, so OPEC’s actions must be seen as a concerted effort to push prices higher.

OPEC was founded in Baghdad in 1960, but Iraq currently is not part of the OPEC supply-management system.  Iraq is producing at capacity (2.3 mbd), roughly equal to the output of Kuwait, Nigeria, and Venezuela but less than that of Iran and only about 30 percent of Saudi production.  Iraq has the second-largest oil reserves in the region but needs substantial capital to develop its potential, which, in turn, requires peace and political stability.  France, Russia, and China had been eager to get their hands on Iraqi oil, which is why they favored the survival of Saddam Hussein’s regime.  American and British firms should now be given the concessions, but it will still take years to bring new production online.

In the meantime, world demand will continue to grow.  The U.S. Department of Energy believes that energy use in Asia will double between 2001 and 2025.  The IEA reports that the main factor behind this year’s surge in world crude-oil prices is China’s record oil imports.  China, the world’s second-largest oil consumer, imported 18 percent more oil in the first quarter of 2004 than a year ago.  Indeed, explosive Chinese economic growth has pushed up commodity prices across the board, from iron ore and steel to coal and copper.  There is even a worldwide shortage of shipping space to carry goods to and from China.

Oil is expected to maintain its roughly 40-percent share of world energy consumption.  There will continue to be a shift to natural gas, coal, and nuclear power for electricity generation.  However, as the developing world discovers the wonders of mass automotive mobility and expands its use of aircraft, heavy equipment, railways, and ships, the demand for oil and gasoline will expand.  The Department of Energy expects the demand to be met primarily by the development of new oil fields in the Caspian Basin and off the coasts of Latin America and Africa, none of which are particularly secure and stable regions.  China has been very aggressive in looking for oil in Central Asia and Africa, one result of which is Beijing’s backing of the Sudan regime in its genocide against Christians and other non-Muslim tribes in the oil-rich Upper Nile area.

The United States has large reserves in Alaska and off her coasts but remains politically paralyzed in developing them.  Yet the era of cheap oil that allowed Washington to ignore domestic-energy policy is coming to an end.  Pressure on Saudi Arabia, the only producer with substantial excess capacity, to boost output by up to 2.0 mbd may bring down prices later this year, but the long-term trend will still be upward.  Thus, the struggle for control of this valuable resource will intensify, and the 21st century will undoubtedly see much blood spilled for oil.