Are We Over A Barrel?

Will spiraling energy costs doom the longest economic boom in American history? With petroleum selling in the past few weeks for nearly $35, close to a 10-year high, talk of a possible oil shock--a threat unseen since the 1990 Gulf War--is suddenly gaining respectability. And prices could go higher still if dictator Saddam Hussein suddenly shuts off Iraq's flow of crude, which the victorious West has allowed to flow into Western markets since 1996. Or if the Organization of Petroleum Exporting Countries makes good on threats to rein in crude-oil supplies in 2001. The Clinton Administration's decision last September to release some 30 million bbl. of oil from the U.S. Strategic Petroleum Reserve (SPR) did little to cool the crude market, and since then Middle East turmoil and strong global demand have kept traders on edge. At the same time, global refining capacity is strained to the limit. "When you have a market this tight, it's vulnerable to disruption," warns Daniel Yergin, chairman of Cambridge Energy Research Associates. "It could be a political event. It might involve a logistical problem with refineries or even the weather."

Scare talk about oil prices will probably reach a peak this winter. Colder than usual temperatures are forecast for North America, and inventories of home heating oil and natural gas are at what the U.S. Energy Department calls "alarmingly low levels." That's the classic formula for a price spike that could quickly drive the cost of oil above $40 per bbl., a level that, if sustained for any significant length of time, could inflict considerable damage on the U.S. and global economies. O.K., that's the scare-your-pants-off scenario. At the moment, though, most experts are more optimistic. Despite the capacity strains, they don't think the oil pinch will get anywhere near so bad. Indeed, in the absence of a Middle East war or some other unforeseen calamity, the price of crude is expected to drift down after the winter peak-demand period, perhaps to less than $30 per bbl. by spring and even into the low-$20 range by the end of 2001. Says Yergin, one of the country's foremost experts on the energy supply: "We should see the fundamentals of supply and demand reassert themselves over the tension that has been driving the market for much of this year."

For all the scare stories to pass, though, cooperation from OPEC is essential. The only problem with this notion is that many countries in the 11-member organization feel short of cash, a hangover from the time, only two years ago, when oil was selling at close to $10 per bbl. That cost such major producer countries as Saudi Arabia, Indonesia and Venezuela tens of billions of dollars in revenue and has left OPEC wary of increasing supplies beyond the 3.7 million bbl. a day it has released onto the world market so far this year.