In March 2005, Goldman Sachs warned that the oil market was in the early stages of a “super spike,” and predicted that oil prices could soon rise to $105 a barrel.1 At the time, the price of a barrel of oil stood at $57.
Then, in early September, Hurricane Katrina temporarily damaged U.S. oil refineries and offshore platforms in the Gulf of Mexico. The hurricane’s impact on the oil industry amounted to an average of 1.3 million lost barrels of oil per day until the platforms and refineries came back on line. Prices hit $70 a barrel, and many alarmists warned of soaring oil prices, gasoline shortages, and an economic collapse.
If oil prices reached $100 a barrel, analysts predicted the impact on the economy would be huge. According to William Hummer, chief economist at Wayne Hummer Investments, “The economy would slow to a crawl. We’d have a return to stagflation, that cliché from the 1970’s. We’d see a huge cutback in driving. The sacrifices would be severe. It would be another blow to the airlines and the whole transportation sector.”
But, as we’ll discuss, the rise in oil prices over the past two years is not due to the increase in demand, nor is it caused by a shortage in the oil supply. Instead, prices have soared because of speculation in the oil market.
It’s true that the world’s demand for oil has increased somewhat. According to The New York Times,2 it went up by more than 2 percent per year over the last two years, which is twice the average annual increase for the past decade.
In the U.S., demand for oil has risen to 20 million barrels a day. Meanwhile, China’s growing economy is expected to increase its demand to 7 million barrels a day by 2007, up from 2 million barrels a day 20 years ago. As we will discuss in Trend #4, China is building 50,000 miles of a new superhighway to connect nearly 250 cities with populations of more than 200,000.
But the global growth in demand should not present a problem when we consider the supply side. There is an abundance of evidence that proves that there is absolutely no shortage of oil.
Even after the increased demand in the U.S. and China, the world is still producing more oil than it is consuming, according to the International Energy Agency. In fact, during the first half of 2005, surplus...
