As Oil Surges, Memories of the '70s Return
Government-imposed speed-limit reductions and long lines at the pump may be woes of the past, but with unrest in the Middle East catapulting oil prices to new recent highs, memories of those days from the 1970s have reemerged in the U.S.
While moves as drastic as those implemented three decades ago to curb consumption seem unlikely in 21st century America, pressure is mounting in a country that consumes roughly 18.8 million barrels of oil a day, the most in the world.
In contrast to Spain, which recently launched several regulations to lower its national energy bill, many argue that a government-imposed mandate in the U.S. limiting oil intake would do little but annoy consumers, particularly since they are likely to react on their own to rising prices.
“The greatest offensive for public transportation is $5 gas,” said Phil Flynn, energy analyst and vice president of research at PFGBest. “Nothing changes motorists’ behavior like price.”
As unrest mounts in Libya, Africa’s largest oil producer, and other hot spots loom in the Middle East and Persian Gulf, oil prices continue to push higher as countries’ production slows and supply is squeezed.
On Wednesday afternoon, oil was spiking higher again, up about 2% to $101.72 a barrel.
Since protests in Libya emerged last month, its oil production has been cut nearly in half, with the International Energy Agency estimating last Friday production of 850,000 barrels of oil a day, out of a total of 1.6 million barrels. While reports that Saudi Arabia, OPEC’s largest producer, boosted production to help close the gap, some worry that turmoil could soon spread to the Persian Gulf, creating an unstable lapse in production.
“Saudi has been the go-to producer to moderate the impact from these global events,” said Flynn. “But what if they become a victim of global events, then who’s going to be the backstop? Who has enough oil to cover Saudi?”
Crude has hit 30-month highs over the past few weeks, surging nearly 18% since its near-term low on Feb. 15. Analysts say a long-term spike in prices coupled with Americans’ over-dependency on oil and still lingering recession could push the U.S. and other Western economies back into a downward spiral.
The IEA has said that if prices average $100 a barrel this year, the U.S. would have to spend $385 billion on oil imports, nearly $80 billion more than a year ago.
“I don’t see crude settling down until the Middle East settles down and I don’t see the Middle East settling down any time soon,” Flynn said. “This could knock us back into our recession.”
1970s déjà vu
In 1973, prices surged when oil-producing countries in the Middle East embargoed shipments to the U.S. in an attack against Washington’s support for Israel in the Arab-Israeli War. Then, starting in 1978, supplies were impeded during the Iranian Revolution and Iran-Iraq War, sending prices to a modern day equivalent of $100 per barrel of oil.
“That political upheaval is certainly on par to what we’re seeing now,” said Stephen Schork, editor of energy publication the Schork Report.
The current spike could very well be the most significant since the 1970s. Though prices climbed as high as $175 a barrel during the latest recession, it was mostly due to traders buying oil as a hedge against failing banks. Flynn argues the current situation is different because it deals with long-term geopolitical concerns.
The Middle East is “ground zero when it comes to the global oil market,” particularly since its countries are some of the largest producers in the world, and transit and pipelines weave through its lands, Flynn said.
“When you have oil prices spiking because of tensions in the Middle East, fear and actual loss of oil supplies, those are the types of spikes that hurt,” Flynn said. “You can marginalize the impact on the U.S., but if gas prices get to $6, that’s going to be a major blow to the U.S. economy.”
Jobs could disappear along with dollars at the pump as expense-heavy, oil-dependent companies striving to return to profitability from the latest recession succumb under the weight of new record-high energy costs.
“This could turn out to be the most expensive summer driving season ever,” Flynn said, noting that “hopefully, if prices go up, there will be jobs to drive to.”
Time to tango with the time machine?
Fearing an overbearing hike in its national energy bill, Spain recently launched preparations to curb its countries’ consumption, including reduced prices for public transportation and decreased highway speeds.
The move mimics that of the U.S. during the oil crisis of the 1970s, when sharply lower supplies led to a unified highway speed limit of 55 mph and specific schedules limiting when motorists could visit the pump.
By implementing its proactive initiatives, Spain’s deputy prime minister, Alfredo Perez Rubalcaba, said the regulations could cut oil consumption in the country by 15%.
Unlike the measures taken by Madrid, however, the U.S. is likely to avoid a government-imposed mandate curbing consumption.
“Let’s allow the market to decide where demand will go and where price will go,” Schork said. “Let the consumer decide where they want to spend their money, they’ll make decisions based on their wallets.”
If oil continues its upward trend, motorists will inevitably alter their behavior.
“I don’t think you’ll need incentives,” Flynn said.
Others fear the U.S. will be worse off if it sits back and waits for the market to cycle through, while those such as Federal Reserve Chairman Ben Bernanke claim the U.S. has less to fear than suspected. In a semi-annual economic report to Congress, Bernanke downplayed the threat, noting a rise in oil prices will lead to a modest boost in consumer prices, not runaway inflation.
“Right now,” Flynn said, “we’re in a very scary period because it’s hard to tell where this is going to stop.”