THE RUN-UP in gasoline and other energy prices-with its impact on consumers' purchasing power-has captured the public's attention after two decades of relative quiescence. Though energy mavens argue energy issues endlessly, it is only a sharp rise in price that captures the public's attention. A perfect storm-a combination of the near-exhaustion of OPEC's spare capacity, serious infrastructure problems (most notably insufficient refining capacity) and the battering that Hurricanes Katrina and Rita inflicted on the Gulf Coast have driven up the prices of oil and oil products beyond what OPEC can control-and beyond what responsible members of the cartel prefer. They, too, see the potential for worldwide recession and recognize that it runs counter to their interests. But the impact is not limited to economic effects. Those rising domestic energy prices and the costs of fixing the damage caused by Katrina have weakened public support for the task of stabilizing Iraq, thereby potentially having a major impact on our foreign policy.
What is the cause of the run-up in energy prices? Is the cause short term (cyclical) or long term?Though the debate continues, the answer is both.
Clearly there have been substantial cyclical elements and "contradictions" at work. For several decades, there has been spare capacity in both oil production and refining. Volatile prices for oil and low margins in refining have discouraged investment. The International Energy Agency, which expresses confidence in the adequacy of oil reserves, urges substantially increased investment in new production capacity and has recently warned that, in the absence of such investment, oil prices will increase sharply.1 Such an increase in investment clearly would be desirable, but it is more easily said than done.