Hurricane Iran

More storms, more Mideast turmoil, more fun with the price of oil.

Published July 9, 2008 2:37PM (EDT)

One reason why the price of oil hit a record $145 per barrel just before the 4th of July weekend: The Wall Street Journal reports that the emergence of Hurricane Bertha frightened traders who feared that while financial markets were closed over the holiday weekend, the storm might bear down on energy infrastructure in the Gulf.

But when they came back to work, Bertha had wandered off in a less threatening direction. So, on Tuesday, the price of oil dropped by more than $5 -- the largest such drop in 17 years (in terms of price, not percentage).

But in 2008, there's always another disaster looming. And on Wednesday morning oil prices are back up, on the news that Iran's Revolutionary Guard test-fired its Shahab-3 long-range missiles -- capable of reaching Israel -- in an army drill.

Gen. Hossein Salami, the Guards' naval commander, was quoted as saying the exercise, dubbed "The Great Prophet 3," would "demonstrate our resolve and might against enemies who in recent weeks have threatened Iran with harsh language."

"Our fingers are always on the trigger and our missiles are ready for launch," the official IRNA news agency quoted Salami as saying.

Caught between a hurricane and a trigger-happy Iran -- no wonder energy traders are nervous. The only good news, for oil prices, is economic distress in the U.S. Americans bought 1.2 percent less gasoline in the week ending July 4 than the previous week, which is notable because the holiday usually registers a big bounce upward in consumption.

So high prices, whether brought on by the fear of hurricanes or war in Iran or sheer scarcity, are having their inexorable effect on demand. Which ensures that eventually the price of oil will drop, in tandem with a slowing world economy.

But as economist William Buiter notes in a wide-ranging Financial Times column mulling the prospects of $500 a barrel oil, any such easing will be only temporary. The momentum of emerging nation economic growth is simply too great. A few years of relaxed pressure on the oil price front will only stoke up developing nation industrial engines.

Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets. Even if common sense breaks out in India, China (perhaps even in the Middle East and other oil and gas producers) and domestic oil and energy use is priced at its global opportunity cost, the energy-intensity of global production and demand will be rising for quite a while. At a horizon of a decade or more, high energy costs may reduce the energy intensity of production, investment and consumption, but total energy demand is still likely to rise even if global real GDP growth averages only 3 or 4 percent per annum.

And meanwhile, the storm clouds continue to gather. Felix Salmon provides a bunch of discouraging charts from the European reinsurance giant Munich Re this morning, detailing the stark rise in frequency of climatological disasters in this century. "The number of disasters in just the first half of 2008 was bigger than the number of disasters in any of the full years between 2001 and 2005," he notes.

More storms, more floods, more droughts -- and does anyone think it likely the geopolitical stresses in the Middle East will ease as the price of oil goes ever higher?

Buiter's column notes that Europe is much better situated than the U.S. to deal with a future of $500 a barrel oil, both because they've long been accustomed to gas and energy prices that are far higher than what the U.S. enjoys -- even now -- and because "the accidents of geography and history" have resulted in far denser societies, able to benefit from public transportation, etc.

The U.S., on the other hand, consuming a solid quarter of the oil in the world, shivers at each approaching storm, and each Persian Gulf political disruption, as if roiled by an earthquake. Disaster capitalism, indeed.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Related Topics ------------------------------------------

Globalization How The World Works Hurricanes Iran Middle East