Power plants that supply our electricity are run by coal, fuel oil, and
natural gas, and we know that electricity has become so much a part of our
daily lives that without it there would be no civilization as we know it today.
Hospitals wouldn’t function, our military would be immobilized, and
our transport network, including subways and airlines, wouldn’t operate.
Just about everything that depends on electricity, like refrigerators
and telephones, would be rendered useless—at least in the United
States, where hydropower is no longer in much use. Given such potential
problems, think of what our lives will become when we eventually
run out of oil. Unemployment and inflation would follow.
Today’s relentless surge in oil prices because of rising demand and a lack
of spare capacity suggests the tough road ahead. Oil prices soared to $75
per barrel in April of 2006, and the upside remains a possibility. Indeed,
none other than Goldman Sachs, New York’s top investment bank, has
forecast oil prices rising to $100 at some time, which I don’t think is far off.
Oil prices started their steep climb in 2004 because of four factors that
will remain relevant for a while: first, rapidly growing demand from China
and India is putting a strain on the global supply system. What’s happening
in those two Asian powerhouses, with a combined population of 2.3 billion
and oil demand growth rate of more than 6 percent, is a fundamental concern
to the world, especially those who follow the financial markets.
China and India, or Chinindia to some, are thirsty for oil to power their
rapid industrial growth, and they are now competing with the United
States for oil and other scarce fossil fuels everywhere in the world. Little
wonder that last summer the Chinese National Offshore Oil Company
(CNOOC) engaged Chevron in a bid war for California-based oil explorer
Unocal, for which the Chinese company offered to pay $18.5 billion.
Secondly, the world’s major oil producing countries, most of them in
the politically volatile Middle East, have almost maximized their output
and have no spare capacity. The only producer able to flex its muscles is
Saudi Arabia, but it too has only a paltry 1.5 to 2 million barrels per day
of spare capacity, which isn’t worth much. That means they are powerless
to contain any additional oil demand pressures, and the fear resulting
from that situation is fueling even bigger concerns about a future supply
crunch, which in turn pushes up fuel prices.
Third, geopolitical tensions have become common, disrupting supply
from Venezuela, Nigeria, Russia, and the Middle East. All of this started
with a two-month strike in Venezuela in early 2003 that severely crippled
8 INTRODUCTION