Oil Prices: Cause and Effect

Why is crude oil so expensive? Why does it matter?

The price of crude didn't rise from $12 in early 1999 to nearly $60

because the world suddenly ran out of oil. On the contrary, the

world supply of petroleum has risen 10 percent since then,

according to the International Energy Agency (IEA), from 65.8

million barrels a day in 1999 to 72.5 million in 2004. Cambridge

Energy Research Associates estimates global oil production

capacity will increase at least twice that rapidly over the next five

years -- by as much as 16 million barrels a day by 2010.

 Oil prices did not quintuple after 1999 because Americans

suddenly switched from mini-cars to SUVs. On the contrary, if all passenger cars, pickups and

SUVs were replaced with bicycles, the United States would still import a lot of oil.

 We import nearly 58 percent of all petroleum, yet only 45 percent of each barrel is used to 

produce gasoline, and a significant portion of that gasoline is used in delivery vans and taxis.

Commuter and leisure driving accounts for little more than 40 percent of the oil we consume -- 

far less than the amount we import. The rest of each barrel of crude is used for heating oil 

and diesel fuel for trucks, busses, farm machinery and ships (23 percent), petrochemicals 

(17 percent), jet fuel (9 percent), asphalt (4 percent) and propane (4 percent).

U.S. industries use petroleum to produce the synthetic fiber used in textile mills making

carpeting and fabric from polyester and nylon. U.S. tire plants use petroleum to make synthetic 

rubber. Other U.S. industries use petroleum to produce plastic, drugs, detergent, deodorant, 

fertilizer, pesticides, paint, eyeglasses, heart valves, crayons, bubble gum and Vaseline.

When the cost of oil goes up, production costs are increased and profits reduced for industries 

that depend on oil. Producer costs -- not consumer gasoline costs -- are the reason high oil

prices threaten to shrink industrial production of goods directly affected and also of energy-

intensive products such as aluminum and paper. This threat affects all new and old industrial 

economies, whether those nations import or export oil. The United States may be least

vulnerable because of superior energy efficiency and a larger service sector.

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