Violence Abroad May Affect Oil Prices In The U.S.

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Amy Myers Jaffe, director of energy research, Rice University's Baker Institute for Public Policy

Oil prices have surged to a two-year high as unrest grows in Libya. A number of oil companies have pulled their staffs out of the country and market analysts worry that tensions in the Middle East and North Africa will threaten crude production.

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LYNN NEARY, host:

Crude oil prices hit a two-year high this morning. The price jumped comes as unrest grows in Libya, where a number of oil companies have pulled their staffs out of the country. Libya, an OPEC member, is the 12th largest oil exporter in the world and holds the largest oil reserves in Africa. Market analysts are worried that the violence in Libya and elsewhere in North Africa and the Middle East will threaten crude production across the region.

Amy Myers Jaffe is the director of energy research at Rice University's Baker Institute for Public Policy. She's also the co-author of "Oil, Dollars, Debt and Crises: The Global Curse of Black Gold."

If you want to pick her brain in what we're seeing the oil markets and what effects it may have, give us a call. The number is 800-989-8255. And our email address is talk@npr.org. And you can join the conversation at our website. Go to npr.org and click on TALK OF THE NATION.

And Amy Myers Jaffe joins us now from Rice University in Houston. Welcome to the program.

Ms. AMY MYERS JAFFE (Director Energy Research, Rice University's Baker Institute): Thank you very much.

NEARY: Now, we haven't seen a big effect on oil prices after the protests in Egypt and Bahrain. So why is it different with Libya?

Ms. JAFFE: Well, I think that, first of all, Egypt was a very small oil producer and they used oil internally in Egypt. And I think that now the market is really starting to understand what I call the contagion effect. That the idea that somehow this was going to be contained in Tunisia and Egypt and it wasn't going to spread to other countries or that somehow, magically, it wasn't going to spread to countries that produce oil was probably a very naive image.

And if you think about the history of the Middle East, you know, the Egyptian revolution of 1952 spread across the Middle East for over 10 years. I mean, Egypt had their revolution movement in the '50s. And as late '69, is when Colonel Gadhafi came to power on the heels of that same revolutionary movement. So what's happening in the Middle East today could play out for a long time, and we could be in for high oil prices for a long time.

NEARY: Yeah. So what other countries - if this - if what's going on now spreads to - across that whole region, what would be the, really, key countries in terms of affecting the price of oil and the price that we might have to pay eventually for gas?

Ms. JAFFE: So starting out, there have already been disruptions of oil products exports from Libya to Europe. We're seeing that today and...

NEARY: Right. And we just want to say we haven't - NPR News has not yet confirmed that. But go ahead.

Ms. JAFFE: Okay. So as that spreads, there's a possibility that you could have the same kind of unrest, say, in Algeria, which is also a big supplier of oil and natural gas to Europe. But I think the market's bigger concerns would be if it spread around the Persian Gulf. So let's say the Green Movement were to become more violent and active in Iran, you're talking about 4 million barrels a day of exports.

I might give people a little bit of a history lesson. In 1978, the shah starting firing on people in the streets in Iran and the oil industry went out on strike in sympathy with the people. And that is what caused the 1979 oil crisis. We kind of don't remember. It started with oil workers going on strike. So, again, that could happen again in Iran.

The Iranian government is aware of that so they put a lot of people from the Revolutionary Guard into key positions in the oil industry to try to avoid that. But my feeling is if they weren't worried about it, they wouldn't have to put the Revolutionary Guard in the oil industry. So that still remains a possible flashpoint.

NEARY: You know, there was one headline this morning that said, if unrest spreads, gas may hit $5. Is that just speculation? Is there any indication that that's reality or can you say that yet?

Ms. JAFFE: Well, I think what I would say is, we're basically about to beat a $3 gasoline. And we're not to what we call the summer driving season. You know, there's typically a psychological and physical push for the price of gasoline that comes around Memorial Day.

So I think it's just a question of how much oil really actually gets disrupted by May. And, you know, I think the jury's still out on that. We don't really know. Will Libya's oil be disrupted in a small amount from some oil refineries? Or will all their oil fields go down, which would take us, you know, a little over a million barrels a day out of the market?

Saudi Arabia might be willing to make some of that oil up. But what if Shia oil workers in Saudi Arabia, you know, made a protest or went on strike? Is that going to be disruptive? So I'm hoping that this last scenario of something spreading to Saudi Arabia is looking fairly unlikely. But if that happened, we would be in a major 1979-like crisis.

NEARY: What effect are speculators having on prices right now?

Ms. JAFFE: Well, I think that speculators were already in the market, and they were already betting on sort of a $95 to $100 oil price for this year, sort of based on, you know, supply, uncertainty, growth - you know, compared to the economic rebound.

And so you have this very dynamic factor, which is that the higher the price of oil goes off of this turmoil in the Middle East, the quieter the rebound's going to be, because all of us are going to be spending a little bit more money on fuel. Businesses and industry are going to be spending more money on fuel. And so therefore, businesses' ability to hire new workers is going to be somewhat restrained by the fact that they have to pay higher fuel costs.

And then there's just the psychological effect. If we start to have a feeling in America that there's a crisis looming, and gasoline prices could go to $5 a barrel, that just creates like a psychological break, like I'm afraid to plunk down money on my summer vacation because I'm afraid about the economy and whether I'd lose my job. And then it becomes sort of self-fulfilling.

NEARY: We're talking with Amy Myers Jaffe about the price of oil. If you'd like to join us, the number is 1-800-989-8255. We're going to go to Andrew in Cleveland, Ohio.

Hi, Andrew.

ANDREW (Caller): Hi. Thanks for taking my call. I'm a courier in Cleveland. I work out of my own vehicle. I take - you know, I transport various sundry things all over Cleveland and northeast Ohio. So I keep a close watch on the gas pumps every day. And, you know, the public perception is that whenever there's a rippling of crisis or even a rumor of some sort of crisis with the oil industry, the price goes up really quick, but then it's slow to come down, if it ever does.

You know, as soon as there's any kind of news out of the Middle East that there's some sort of problem, they run out there and jack up the price. Like today, it actually already shot up 20 cents, from about 3.09 yesterday. It's 3.29 right now. And, you know, I'm just wondering, is that true? I mean, is that an accurate perception, that the oil companies are really quick to jack up the price, but then they make all kinds of excuses to bring it back down to what it might have been before?

NEARY: When you say that...

Ms. JAFFE: Well, I'm...

NEARY: Go ahead.

Ms. JAFFE: I'm glad to say that you are totally correct. There are professors of energy economics who study that phenomenon. And it's true. It's very quick on the way up, and sticky on the way down. The interesting factoid is that a cargo of oil that would arrive at a refinery in the United States today, it would take it about six weeks to get to the gasoline station where you're buying your gasoline. So theoretically, you know, whatever price is happening today, it's based on whatever happened in oil prices six weeks ago...

NEARY: Right. So...

Ms. JAFFE: ...in terms of the feedstock.

NEARY: So it shouldn't be going up 20 cents again.

Ms. JAFFE: In one day, no.

NEARY: No.

Ms. JAFFE: That's just opportunity.

NEARY: Yeah. So they're just taking advantage of it, then - the oil companies, you're saying.

Ms. JAFFE: Well, I'm sure - and remember, a lot of the gasoline stations - it depends on the station. Maybe it's owned by an individual. Maybe it's owned by a franchise, right?

ANDREW: Well, I think...

Ms. JAFFE: So it's not necessarily an oil company.

NEARY: Go ahead, Andrew.

Ms. JAFFE: But the bottom line is...

ANDREW: I just wanted to interject there, just kind of dispel that. I've seen that price point reflected over numerous franchises in both private and corporately owned gas stations today. I mean, it seems like everybody's skyrocketing their prices. And I can't imagine why, other than that they opened up the newspapers this morning.

NEARY: OK.

Ms. JAFFE: Well, and indeed, they would say they're anticipating the, you know, price impact down the road. But, yes, you're right. That real price, that real higher price that they may pay tomorrow based on some kind of disruption in Libya is not going to go to their refinery for six weeks. So you are correct in that regard.

NEARY: All right. Thanks so much for your call, Andrew.

We're going to move on to Shodi(ph), who is calling from Portland, Oregon.

Hi, Shodi.

SHODI (Caller): Hi. I look around on the Internet, and it appears that oil production - which is pumping it out of the ground, as opposed to refining it - costs about anywhere from one to $20 a barrel, that it's sold on the commodities markets for, you know, 80 to $100. And I was wondering where that money goes to, the difference in that money?

Ms. JAFFE: Well, you know, the amount that you've cited, one to $20, is actually - it really depends where you're producing the oil. You know, if you're trying to strip little bits of oil out of the sands in Canada, it's a lot more expensive than if they're just, you know, sticking a drill down in Saudi Arabia or Iraq, where it's only a couple of dollars a barrel.

The difference between the two - in economics we call that the economic rent, and where that money goes kind of depends of on who you are. So if you're a royal family in the Middle East or a corrupt government somewhere in the world, you might be skimming that money off and putting it in a bank account in Switzerland, or you might be using it to build new colleges and universities for your people. It kind of varies from country to country.

Here in the United States, we have private companies that produce oil. And whatever that economic rent is, the difference between what it cost them to produce it and what they could sell to us, the consumers, that's just goes into corporate profits, basically.

SHODI: Well, thank you.

NEARY: All right. Thanks for your call.

And we're talking with Amy Myers Jaffe. She is the director of Energy Research at Rice University's Baker Institute for Public Policy. She's also the co-author of "Oil, Dollars, Debt and Crisis: The Global Curse of Black Gold."

We're talking to her about oil prices. And if you'd like to pick her brain, the number is 1-800-989-8255.

And you're listening to TALK OF THE NATION, from NPR News.

We're going to take another call now. We're going to go to Jose in Port Charlotte, Florida.

Hi, Jose.

JOSE (Caller): Hello. How you doing?

NEARY: Good.

JOSE: I got a real quick question, and I'll take my answer off air. What would be the odds if oil ceased to be traded or bought with the dollar -like, what if the current - what's the odds that all of these countries come together and say, OK, we don't want to accept the dollar no more, or something scenario like that?

Ms. JAFFE: Well, Saddam Hussein proposed that a few years ago before he fell from power. It's something that comes up from time to time inside OPEC, the Organization of Petroleum Exporting Countries. One of the reasons it hasn't happened, in my opinion, is that there are countries such as Saudi Arabia and Kuwait that hold a tremendous amount of foreign investment in dollar-denominated assets. They own U.S. treasuries. They have investments here in the United States. And so they don't have any interest in weakening the dollar, because that would hurt their own economy and their foreign holdings.

So I think that they have been pretty much against that idea. And it would be hard to do it without the major Arab producers like Saudi Arabia, Kuwait and the United Arab Emirates. So that's one of the reasons it hasn't happened, is that there are lot of countries who have high-dollar holdings, and it's not in their strategic interests to switch oil off the dollar.

NEARY: All right. Thanks for your call, Jose.

And we'll go to Samantha, and Samantha is calling from Sacramento, California.

Hi, Samantha.

SAMANTHA (Caller): Hi. Thank you for taking my call. So my question is -and maybe I'm speaking for other listeners out there, as well. I'm just wondering if you can explain to me why we're paying so much for overseas oil when we have oil in our own country that costs so much less. And why, you know, are we - our gas prices are based on the overseas oil, as compared to our own oil, whose, you know, prices are so much lower?

Ms. JAFFE: Well, the problem is we use a tremendous amount of oil here in the United States. I think this will shock you. We're about five percent of the world's population, and we use 35 percent of all road fuel manufactured in the world. So we are real gluttons when it comes to fuel use. And, indeed, there isn't enough oil under the ground in America that can be produced at any one time to meet our demand. And so we actually have to import a lot of oil from abroad, millions of barrels a day.

So we use about 20 million barrels a day of oil. Of that, about 60 percent of it we're importing. And because we import and we don't have a closed market, we all pay the same global price. So whatever the price is for China and whatever the price is for Britain, that's also the price here in the United States. So everybody is paying this high price

NEARY: All right, does that answer you questions, Samantha?

SAMANTHA: Yes. Thank you so much.

NEARY: All right. Thanks so much for calling. And we're going to go to Francis in Mt. Shasta, California.

Hi, Francis.

FRANCIS (Caller): Good evening, ladies. My question is: Libya has, actually, very little oil compared to Saudi Arabia or the big oil sheikdoms over there. Don't people see that this is kind of like the big oil companies just using the little excuse to jack up the price?

Ms. JAFFE: Well, no. I mean, if million barrels a day from Libya comes off the oil market, you know, that's a real disruption. That's going to have an impact. So there's two possibilities. One is that you mentioned the oil sheiks in the Arabian Gulf. So we have good allies in the Arabian Gulf. And maybe Saudi Arabia will increase its production to replace the oil loss from Libya, and then, you know, this could be a non-event, right?

But the reason that the market is so jittery and speculators are betting is that, you know, how do we know that, you know, there won't be protests and oil won't be disrupted say, from Iran? And that could be four million barrels a day, because there gets to be a number at which we can't actually replace the oil that's lost in the market.

And we had that experience in 1979, and it caused a huge dislocation here in the United States. You all might remember, depending on your age. You know, I remember driving to school with my father, and we would have to get in line because it was an odd - we have an odd-number license plate...

NEARY: That's right. Yeah.

Ms. JAFFE: ...so we had to buy gasoline on Tuesdays. So...

NEARY: All right.

FRANCIS: Thank you very much, ladies. Price here, by the way, is about $3.70 a gallon in California.

NEARY: Well, that's pretty high. Thanks for calling, Francis.

FRANCIS: Thank you.

NEARY: And that, you know, that brings me to my last question, which is: You know, how price could gasoline prices go? How high could they go?

Ms. JAFFE: Well, you know, again, I think the real critical question is, you know, how long are we all glued to our sets watching unrest in the Middle East? I mean, my opinion is if we're watching unrest in the Middle East still in May, that we're - I think we're very likely to see, you know, $4 gasoline price.

And as your last caller said, in California, they're already to 3.70. So maybe that's not such a big prediction.

NEARY: Yeah.

Ms. JAFFE: To get the $5, we have to really, I think, have a major disruption that has to be sustained.

NEARY: All right. Thanks so much for joining us today.

Oil market expert Amy Myers Jaffe is the director of Energy Research at Rice University's Baker Institute for Public Policy.

Tomorrow, Motown comes to Washington, D.C. We'll talk with Martha Reeves and Bob Santelli.

This is TALK OF THE NATION, from NPR News. I'm Lynn Neary.

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