Iran, Demand and the Dollar Drive Up Oil Prices What's causing record-high oil prices? Tension in the Middle East adds a "security premium" to every barrel of oil, says one oil expert. But oil prices would be high even without that premium because of growing worldwide demand in places like China and India.
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Iran, Demand and the Dollar Drive Up Oil Prices

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Iran, Demand and the Dollar Drive Up Oil Prices

Iran, Demand and the Dollar Drive Up Oil Prices

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From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.


And I'm Melissa Block.

Crude oil prices are approaching unchartered territory. Whenever we talk about high priced oil on this program, we usually include the qualifier that oil is still cheaper than at its all-time peak once you adjust for inflation. Well, that may not be true much longer. Crude oil prices are now within striking distance of their all-time high, even accounting for inflation.

In a few minutes, we'll talk with two NPR reporters about the repercussions of that price spike.

First, NPR's Scott Horsley reports on what's behind this push toward the $100 barrel of crude.

SCOTT HORSLEY: The last time oil prices were this high, the shah of Iran had been run out of the country, Ayatollah Khomeini was calling the shots, and a group of radical student protesters had captured the American Embassy.

(Soundbite of news)

Unidentified Reporter: The U.S. Embassy in Tehran remains occupied by Iranian students, demanding extradition of the shah and a total break in relations with America.

HORSLEY: Five months of negotiation failed to free the American hostages. And in April of 1980, President Jimmy Carter ordered a military raid. It ended in disaster. Eight would-be rescuers were killed when an American helicopter and airplane collided over the Iranian desert.

President JIMMY CARTER: The mission of which they were involved was a humanitarian mission. It was not directed against Iran. It was not directed against the people of Iran. It was not undertaken with any feeling of hostility toward Iran or its people.

HORSLEY: Nevertheless, Iran threatened to cut off oil supplies. And with the Iran-Iraq War, just a few months away, the price of West Texas crude climbed to $39.50 a barrel. That's about $99 a barrel in today's terms - a record that stood for more than 27 years, but maybe not much longer.

Dr. DAN YERGIN (Oil Historian, Cambridge Energy Research Associates): The current high prices have a back-to-the-future quality to them.

HORSLEY: Oil historian, Dan Yergin, of Cambridge Energy Research Associates, says prices are approaching the all-time record for reasons that begin in the Middle East.

Dr. YERGIN: Once again, Iran is the very central factor.

HORSLEY: But it's not just oil-rich Iran, Yergin says. Violence in Iraq, tension in Turkey, even a bombing in Lebanon can cause a spike in oil prices because the Middle East remains the bread basket of world oil production. It's a fairly fragile bread basket. Yergin figures the region's political instability adds a $10 or $15 security premium to every barrel of oil.

Dr. YERGIN: What the security premium reflects is a sense of uncertainty of whether geopolitical events will lead to some kind of disruption that shuts off supply. Now, the security premium really reflects the fear of the unknown.

HORSLEY: Oil prices were already high without that security premium because of growing worldwide demand. The U.S. is the world's biggest oil consumer, but other countries are catching up.

Exxon Mobil spokesman Alan Jeffers noted this week, energy demand in the developing world is growing four times as fast as in Europe or the United States.

Mr. ALAN JEFFERS (Spokesman, Exxon Mobil): China and India are two of the main areas. You can understand why when you read almost daily in the paper, both standard of living increases in China, for example, with that massive population base, how would that have a huge impact.

HORSLEY: In years past, hurricanes along the oil rich Gulf Coast have also contributed to a run-up in prices. This year, it's a storm cloud in the currency market.

Since the beginning of June, the dollar has lost about 7 percent against the Euro, 6 percent against the Yen.

Chief economist David Malpass of Bear Stearns says that means oil producers have to charge more just to keep pace. It also prompts more investors to buy oil as a kind of insurance against the falling dollar.

Mr. DAVID MALPASS (Chief Economist, Bear Stearns): If you think about what moves commodities a lot, it's almost always the change in the currency that you're paying for them. And that's what's going on now. The dollar is the driver behind this high oil price, I think.

HORSLEY: One lesson of the 1980 price spike is that it didn't last forever. By the middle of the following decade, oil prices had fallen by half.

Historian Yergin says the laws of economics suggest today's high oil prices will eventually boost supply and slow demand. But there could be a long wag time before that happens.

Scott Horsley, NPR News.

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