At this time last year, uncertainty swirled in oil-producing nations such as Venezuela, Nigeria, and Russia. Energy consumption in population-heavy countries like China and India was rising, tightening supplies worldwide. The price of oil: $30 a barrel.
Today analysts are blaming the very same factors for pushing oil above $54 early Thursday - to yet another record. What's going on here?
Analysts say an unusual confluence of long-term energy trends, coupled with some short-term disruptions, are changing - perhaps permanently - the psychology of the oil markets. At the least, they believe prices are going to remain high, and swing more sharply, for some time to come.
"With several consistent years of risk, people are starting to feel like the old world of $18-a-barrel oil is really gone," says Amy Jaffe, an energy expert at Rice University in Houston. "And that's created a different mind-set about everything."
Certainly the most basic laws of supply and demand lie behind much of the current run-up in prices. There is barely enough crude to fuel the world's factories, cars, and power plants at the moment. Nor is Saudi Arabia or any other country able to draw up enough oil from the subterranean depths to offset the rising world demand.
In 1979, for instance, the Organization of Petroleum Exporting Countries (OPEC) had excess capacity of 47.5 million barrels of oil a day. Twenty years later, in 1999, that was down to 400,000 barrels of spare capacity, while global demand had risen to around 77 million barrels of oil a day.
Today OPEC has virtually no new spigots it can turn on and demand is up to 84 million barrels a day - a jump of almost 10 percent.
At the same time, the Sept. 11 terrorist attacks have had a lot to do with the changing psychology of oil pricing. Now, in traders' minds, terrorism carries the real possibility for major disruptions, analysts say. In this hand-to-mouth environment, even small perturbations - a ruptured pipeline here, a disfunctioning refinery there - become magnified.
"Any minor disruption causes quite an impact on the marketplace," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas. "So the jitters are real. They are driven by the realities of the marketplace."
For instance, when hurricane Ivan hit the Gulf of Mexico in September, it knocked out 20 percent of production there - 10 percent of which is still shut down. That means to meet national demand, the US is having to compete in world markets for what little excess capacity there is, sending prices even higher. The spikes wouldn't have been so bad even a few years ago when countries had the ability to pump more crude.
Yet increasing demand is contributing to the current imbalance as well. In the past year, global demand has increased by three million barrels - the largest increase in 24 years and far exceeding many forecasts. "We are definitely in a situation where demand is outpacing supply, and we are going to have a more and more difficult time keeping up with it," says Fred Lawrence, a vice president at the Independent Petroleum Association of America in Washington. "But we have big problems on both the supply and demand sides, and we need to find a balance."
His organization estimates that tight supplies are keeping prices in the $35 to $40 range. The rest is a reflection of political uncertainties. Even if more oil were being pumped out of the ground, analysts doubt the US has the refining capacity to turn the extra crude into gasoline and heating oil. Mr. Lawrence notes, for instance, that the US hasn't built a new refinery in a decade.
To some, another factor affecting pricing at the moment is how the Strategic Petroleum Reserve (SPR) has been used. President Clinton tended to dip into the reserve with more frequency than President Bush has - adding to traders' insecurity about any kind of cushion.
"The Bush administration has been so purist in its use of the SPR," says Ms. Jaffe.
Still, many analysts caution against panic, noting that prices today are still $30 off what they were at the peak in 1980 in inflation-adjusted dollars. Nonetheless, many also predict that they're are going to rise before they fall again. While no one knows the exact amount, at least some are speculating oil will hit $60 before it hits $40 again.
What seems probable is that prices at the pump will head up even more, reflecting the higher crude oil prices. Instead of producing more gasoline, refiners are shifting over to turn out heating oil for the winter season.
And Jaffe, for one, thinks that may be a good thing. "I've gotten to the point now where I am so despondent over the possibility of ever having an energy policy that is effective, maybe socking it to Americans at the retail pump is the only way to get one," she says. "It might come from political pressure or it might just come from Americans changing their habits, buying a smaller car, or using public transportation."