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Published: Thursday, 3/10/2005

The oil squeeze

With the price of crude firmly ensconced at near-record levels, high fuel costs will continue to dampen the economy

THE price of a barrel of oil on the world market is now approaching $55. Two years ago, forecasters were projecting oil earnings for countries based on a mean price of $22.50 a barrel. What happened, and what does it mean?

The first element was that few observers had projected the astronomical economic growth of oil-poor China and India, adding their demand for oil to the world market, pushing up prices. A second element was the unrest in the Middle East - in particular, the impact of the Iraq war.

One more significant piece of Bush Administration prewar fiction was that Iraqi oil was going to pay for the war; that is, as opposed to the American taxpayer paying for it. The story ran then that Iraqi oil production was inefficient, one more piece of Saddam Hussein's regime misgovernment. America would take charge of Iraqi oil production. It would be revitalized to pay for the war, rebuild the Iraqi economy, and the increased Iraqi oil supply on the market would push world prices down.

Wrong on all counts. Iraqi oil production remains feeble because the country is not secure. In fact, Iraqi insurgents have specifically targeted oil production facilities and pipelines. The United States is paying for the war, to the tune of at least $200 billion so far. Current Iraqi oil exports have a negligible effect on the market.

A third significant factor in the rise of the price of oil is the weak U.S. dollar. The oil market is denominated in dollars. Oil producers are paid in dollars. Much of their costs are in dollars. The weak dollar, a result of record-setting U.S. budget deficits rising from the Bush administration's tax cuts for the rich and the costs of its Iraq war, means that producers will continue to push up the price of oil, not to lose ground as the greenback continues to fade.

The Organization of Petroleum Exporting Countries is widely expected to take price-raising or at least price-maintaining measures at its next meeting in Iran next month.

Russia, the world's second largest oil producer now, another relatively recent phenomenon, has no economic or political motivation to cut the United States or the rest of the world any kind of break by taking action to restrain oil price rises. It needs the cash and its production has been perturbed by wrangling between President Vladimir V. Putin's government and the companies that comprise the Russian oil industry.

Roiled political relations between Mr. Putin's Russia and the United States are unlikely to have been improved by the short, contentious issue-crammed luncheon discussion between Presidents Bush and Putin in Bratislava, Slovakia.

Thus, oil prices are - and are almost certain to remain - high. Profits of U.S. and other oil companies also will remain high, a comfortable phenomenon for a Bush administration closely tied to the oil industry. The price of gas at the pump will stay high. High fuel costs will continue to exercise their normal dampening effect on the U.S. and world economies.

It's not a pretty picture overall, and one that is unlikely to be modified until U.S. balkiness at tackling the budget deficit, the war, and energy conservation are changed. Mr. Bush's stated intentions for his second term offer little prospect of progress in any of these areas.

Grit your teeth.



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