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Pain at the Pump


For anyone suffering from fuel-price sticker shock, March 27 will be a day to celebrate or mourn.

On that day, ministers from the 11-member OPEC oil-production cartel will meet in Austria to formally endorse a number of decisions that will determine whether world prices will continue rising, stay about the same, or fall.

Eye in the Sky


Many analysts believe OPEC will vote at its semi-annual strategy session to increase production, and thus drive prices down. If so, the questions are: when and by how much?

Whatever happens, the pain currently being felt by consumers is not likely to go away soon.

By early March, the cost of heating oil in some parts of the United States was U.S.$2 per gallon. The price for a gallon of unleaded gasoline had shot up to U.S.$1.42, the highest level since the Gulf War in 1991. Airlines routinely were adding U.S.$20 surcharges to tickets to cover rising fuel costs.

Just in time for spring vacations, the cost of filling a high-capacity sports utility vehicle could run U.S.$50 or higher.

Things might not improve by the beginning of the summer driving season. It takes six weeks for a barrel of crude to find its way into neighborhood gas pumps in refined form. Some experts foresee the possibility of U.S.$2-per-gallon gasoline this summer – which would be an all-time record in the United States.

STOCK MARKET JITTERS

Besides immediate discomfort for consumers, rising oil prices have raised the specter of inflation – and consequent Wall Street jitters.

Federal Reserve Chairman Alan Greenspan mentioned the "substantial negative consequences" of high oil prices in late February congressional testimony hinting at further interest rate hikes. Just days later, the Dow Jones fell below 10,000, wiping out most of its gains during the preceding 12 months.

In a worst-case scenario, successive increases in interest rates, triggered by the Fed’s concerns about inflation, could further decimate the stock market and plunge the nation into a recession.

The bad news crosses international borders. U.S. Energy Secretary Bill Richardson, on a late-February jaw-boning tour of oil-producing countries, noted damage being done to economies in other parts of the world. He specifically cited Asia – which is still bouncing back after its recent bout of severe recessions.

EVENTS IN ASIA FUELED CURRENT PRICE SPIKE

Oil prices basically are governed by the same law that controls all other commodities: supply versus demand. When oil inventories around the world are high, prices are low. When refinery tanks begin to run dry, prices go up. OPEC’s self-appointed mission is to manipulate prices by turning the production spigots up and down. The taps are currently turned down.

Secretary Richardson estimates that producers as of late February were shipping about 73 million barrels of crude oil per day, while the world was consuming about 75 million—a certain prescription for shortages and high prices. And, he said, if production isn’t increased soon, it will get worse.

The past year has seen a near tripling in the cost of a barrel of crude oil: from less than U.S.$11 to about U.S.$30. Analysts blame the most recent rounds of production cuts and consequent price hikes on a number of factors, principally events in Asia. The 1997-98 Asian recessions brought about a severe drop in demand for oil, and thus a collapse in prices. OPEC was slow in forming an effective response, but eventually the cartel did unite to cut production.

Now, Asia’s robust recovery has driven demand back up. With OPEC’s production caps holding firm, prices have skyrocketed.

WHAT PRICE IS JUST RIGHT?

OPEC members insist that they’re not trying to gouge other countries or punish them (as some producers did during the 1970s' Arab oil embargo). They say they’re only interested in cutting a fair deal for themselves. What would a reasonable price level look like today? Since World War II, the price for a barrel of crude oil has averaged just under U.S.$20.

Secretary Richardson said recently that U.S.$10 is too low, and U.S.$30—the current mark—is too high.

A more specific target has been suggested by United Arab Emirates Oil Minister Obaid bin Saif al-Nasseri. He said that something between U.S.$20 and U.S.$25 per barrel would be "an acceptable price" for both producers and consumers.

Eye in the Sky is a weekly series that brings you the story behind the headlines using satellite imagery, remote sensing, aerial photography, and maps. This feature is developed by National Geographic News with the sponsorship of the National Imagery and Mapping Agency (NIMA) and Earth-Info. Check out maps and imagery at http://www.earth-info.org.

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More Information
• Fuel prices have soared due to rises in the price of crude oil, which has nearly tripled in the past year - from less than U.S.$11 per barrel to about U.S.$30.
• Crude-oil prices have averaged just over U.S.$19 per barrel in inflation-adjusted dollars since the end of World War II. Until the most recent spike to U.S.$30, prices have exceeded U.S.$20 only during turmoil in the Middle East.
• OPEC (the Organization of Petroleum Exporting Countries) describes itself as an “intergovernmental organization dedicated to the stability and prosperity of the petroleum market” – in other words, a cartel that seeks to influence prices by regulating production.
• OPEC was formed in 1960 by five oil-producing countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Six others have since joined: Algeria, Indonesia, Libya, Nigeria, Qatar and United Arab Emirates.
• While not a complete monopoly, OPEC by its own estimates has about 78 percent of the world’s total proven crude oil reserves. It accounts for about 40 percent of the total world oil supply.

More Information
HOW OPEC MANIPULATES PRICES

OPEC influences prices by regulating how many barrels its member nations produce per day. (Daily production in the fall of 1999 ranged from Algeria’s 760,000 barrels to Saudi Arabia’s 7.8 million.) Non-members, like Mexico, Norway, Russia and Oman, often cooperate.

Efforts at price manipulation sometimes backfire. Severe production cuts beginning in the 1970s encouraged consuming nations to improve home insulation, create better energy efficiency in industrial plants, and use automobiles with higher mileage.

These improvements have been permanent – so that when OPEC eventually responded to reduced demand by lowering prices, demand did not return proportionately.

OIL PRICES SENSITIVE TO MIDDLE EAST TURMOIL

The most recent spike in oil prices was due principally to economic shifts in Asia. But earlier dramatic price increases have resulted from turmoil in the Middle East. The Arab oil embargo, imposed on the United States and other Western powers as punishment for supporting Israel during the 1973 Yom Kippur War, resulted in a quadrupling of oil prices to around $20 per barrel in inflation-adjusted dollars.

Prices spiked to over $50 per barrel in the early 1980s following the Iranian Revolution and the war between Iran and Iraq. The 1991 Persian Gulf War coincided with a rise to about $24 per barrel.