New Energy crisis

With oil prices approaching the symbolic threshold of $100 a barrel, the world is headed toward its third energy shock in a generation. But today’s surge is fundamentally different from the previous oil crises with broad and longer lasting global implications.

Just as in the energy crises of the 1970s and 80s, today’s high prices are causing anxiety and pain for consumers, and igniting wider fears about the impact on the economy.

Unlike past oil shocks, which were caused by sudden interruptions in exports from the Middle East, this time process have been raising steadily as demand for gasoline grows in developed countries, as hundreds of millions of Chinese and Indians climb out of poverty and as other developing economies grow at a sizzling pace. This is the world’s first demand led energy shock.

Demand from China and India alone is expected to double in the next two decades as their economies continue to expand with people there buying more cars and moving to cities to seek a way of life long taken for granted in the west.

But as prices rise the global economy is entering uncharted territory. The increase so far does not appear to be hurting economic growth, but many economists wonder how long that will last. These prices are too high and will end up hurting everybody, producers and consumers alike. But the price has become volatile and many analysts expect the psychologically important $100-a-barrel threshold to be breached sometime in the next few weeks.

Oil is not far from its historic inflation-adjusted high, reached in April 1980 in the aftermath of the Iranian revolution. At the time, oil reached the equivalent of $101.70 in today’s money.

For most of the 20th century, as it transformed the modern world, oil was cheap and abundant. Throughout the 1990s for example oil prices averaged $20 a barrel. Even at to day’s highs, oil is cheaper than imported bottled water, which would cost $180 a barrel, or milk at $150 a barrel. The concern today is how the energy sector can meet the anticipated growth in demand over the longer term. Energy demand is increasing at a rate we’ve not seen before. On the supply side, we’re seeing it is struggling to keep up. That’s the energy challenge. More than any other country China represents the scope of that challenge. As it turned into a global economic behemoth over the last decade, China also became a major energy user. Its economy has grown at a furious pace of about 10% a year since the 1990s, lifting nearly 300 million people out of poverty. But rapid industrialization has come at a price: oil demand has more than tripled since 1980, turning a country that was once self-sufficient into a net oil importer.

India and China are home to about a third of humanity. People there are demanding access to electricity cars, and consumer goods and can increasingly afford to compete with the west for access to resources. In doing so, the two Asian giants are profoundly transforming the world’s energy balance.

Today, China consumes only a third as much oil as the United States, which burns a quarter of the world’s oil each day. By 2030, India and China together will import as much oil as the United States and Japan do today. While demand is growing fastest abroad, Americans appetite for big cars and large houses has pushed up oil demand steadily in this country, too Europe has managed to rein in oil consumption through a combination of high gasoline taxes, small cars and efficient public transportation, but Americans have not. Oil consumption in the United States has jumped to 21 million barrels a day this year from about 17 million barrels in the early 1990s where gasoline is far cheaper than in Europe.

The only solution to avoid crisis is to develop alternate forms of energy other than oil. More money has to be dedicated for research in the energy sector other than oil.