Rising oil and gas prices are a concern to everyone. The impact of higher oil prices goes far beyond the gas pump and has adverse effects on the world economy, in particular industrialized economies.
With turmoil in oil-producing countries, oil has been trading at its highest level since the second half of 2008, rising more than 15 percent in February. While the political unrest in Libya is a cause for concern - production in Libya, the world's 13th largest oil exporter, has halved since the uprising began and it may take months for Libyan supply to return to pre-crisis level, many countries in the Persian Gulf could be the next target for similar upheavals.
"As we have already begun to see," writes Scott Minerd, chief investment officer of Guggenheim Partners, "the mere threat of a disruption to the world's oil supply has caused the price of crude oil to spike. The extent and duration of the spike in oil prices will depend largely on whether the threat extends beyond smaller oil producers like Libya, Algeria, Yemen, and Bahrain, and into larger players like Saudi Arabia and Iran. Keep in mind that oil prices spiked 15 percent on the perceived threat that Libya's production of 1.6 million barrels per day might be in jeopardy. Imagine what may happen to prices if investors perceive the possibility of an interruption to Iran's production of 3.7 million barrels per day, or Saudi Arabia's 8.6 million barrels per day."
While unrest in the Persian Gulf is to a certain extent responsible for the latest jump in oil prices, another significant, if not most important, driver of rising oil prices is increased demand worldwide. Industrialized countries are using more oil to climb out of their recessions and China and India are using more oil for their rapid economic growth - China is the world's second-largest oil importer after the United States, India the fifth largest, ahead of Great Britain and France. China, according to U.S. Energy Secretary Steven Chu, has surpassed the U.S. as the top Saudi oil importer and International Energy Agency (IEA) is forecasting that China will account for 43 percent of the total increase in global oil demand before 2030. Such rising demand for oil is putting enormous upward pressure on its prices.
The U.S., Europe and Japan might be hit the hardest, as a new IEA study shows. The cost of oil imports for the U.S., European Union and Japan may rise about 29 percent to $900 billion in 2011. Together, industrialized countries will have to spend $200 billion more on imports of crude in 2011 than they did last year. According to IEA chief economist Fatih Birol, if the price of oil averages $100 a barrel this year, the U.S. would have to spend $385 billion on oil imports, $80 billion more than it did last year, and cost nearly 100,000 jobs. EU would have to spend $375 billion, versus $299 billion last year. Such sharp increase in import costs presents a serious problem for American, European and Japanese economies and potentially threatening their economic recoveries.
What the United States should do about rising oil prices?
Currently, according to Nicolas Loris and John Ligon of Heritage Foundation, at least 19 billion barrels of recoverable oil lie off the restricted Pacific and Atlantic coasts and the Gulf of Mexico, with another 19 billion barrels estimated to be in the Chukchi Sea off the Alaskan coast. In addition, in the Arctic National Wildlife Refuge, there are 10 billion barrels of oil that lie beneath just a few thousand acres that can be accessed with minimal environmental impact. Those 48 billion barrels are equivalent to 77 years' worth of imports from Saudi Arabia at the current rate.
As Loris and Ligon rightly pointed out, "Increasing access to oil reserves in the U.S., both onshore and offshore, would help offset rising demand, increase jobs, and stimulate the economy. Moreover, this will help improve the United States' strategic position, as much of the world's supply of oil is delivered in a restrictive market dominated by unstable or hostile nations. Some of these nations are using energy as a tool to frustrate U.S. national security and foreign policy objectives. The United States should allow access to easily recoverable domestic oil, remove unnecessary restrictions on oil shale development, and simplify the arduous permitting process."
What the United States should do now is to increase domestic supply and reduce foreign dependency. While such an increase in domestic oil production may still not be enough to end America's dependence on imported oil, it would certainly reduce this country's vulnerability to supply shocks and help to regain some control of our own economic destiny.
Xiaoxiong Yi is the director of Marietta College's China Program.