By SEN. DICK LUGAR
The dangers of high oil prices may be only beginning. Global oil markets are hanging on by the slimmest margin, leaving every American motorist — and our economic recovery — vulnerable to hostile governments, terrorist strikes on infrastructure, extreme weather or other shocks.
Oil prices are again above $100 a barrel and likely to increase. Higher prices are a genuine hardship for many Hoosier families and small businesses struggling to make ends meet. Every 10 percent increase in oil prices is expected to knock 0.25 percent off economic growth — meaning it most likely will be all the harder for job creation to catch up with employment needs if prices continue to rise.
This worrying trend is taking place against a seemingly favorable backdrop. Despite the Obama administration’s slow-walking production on federal land, U.S. crude oil production is climbing, so supply is up. Meanwhile, U.S. demand is down, partly because of the recession and partly because of increasing fuel economy in our vehicles, which began under President George W. Bush.
So why are we in this squeeze? Several factors are at play, including loose monetary policy that inflates oil prices. Continued unrest and poor governance in oil-rich countries also adds to the risk premium now attached to every barrel.
The problem, fundamentally, is that oil prices are set in a global market, and that market has changed. Booming demand by China, India and other emerging economies quickly absorbs new supplies. Old oil fields are running low while new ones are expensive and harder to find.
This means two things: First, there are no easy solutions to high gasoline prices, despite the simplistic proposals out there. Second, the tight global petroleum market puts us at risk of an unpredictable oil price surge that could be ruinous to our economy.
Price stability depends on a cushion of excess oil production capacity that could be brought online within 30 days or so if needed. A good rule of thumb is 5 percent of the market — now about 4.5 million barrels per day — is a sufficient cushion. Drop much below that, and the market cannot easily cope with planned or unplanned outages.
Historically, almost all that cushion has been in Saudi Arabia, giving rise to the deplorable situation that the price Americans pay for gasoline directly depends on Riyadh.