This Time, It's Different - Global Pressures Have Converged to Forge a New Oil Reality

By Steven Mufson - Washington Post Staff Writer - Sunday, July 27, 2008
The two events, half a world apart, went largely unheralded.

Early this month, Valero Energy in Texas got the unwelcome news that Mexico would be cutting supplies to one of the company's Gulf Coast refineries by up to 15 percent. Mexico's state-owned oil enterprise is one of Valero's main sources of crude, but oil output from Mexican fields, including the giant Cantarell field, is drying up. Mexican sales of crude oil to the United States have plunged to their lowest level in more than a dozen years.

The same week, India's Tata Motors announced it was expanding its plans to begin producing a new $2,500 "people's car" called the Nano in the fall. The company hopes that by making automobiles affordable for people in India and elsewhere, it could eventually sell 1 million of them a year.

Although neither development made headlines, together they were emblematic of the larger forces of supply and demand that have sent world oil prices bursting through one record level after another. And while the cost of crude has surged before, this oil shock is different. There is little prospect that drivers will ever again see gas prices retreat to the levels they enjoyed for much of the last generation.

Unlike the two short, sharp oil jolts of the 1970s, the latest run-up has been accelerating over several years as ample supplies of crude oil have proven elusive and the thirst for petroleum products has grown. The average price of a barrel of oil produced by the Organization of the Petroleum Exporting Countries doubled from 2001 to 2005, doubled again by March this year and jumped as much as 40 percent more after that.

For American motorists, a full tank of gas costs nearly twice what it did at the start of last year, racing past the $4-a-gallon mark, and has begun cutting into other household spending.

"What can you do? You need gas," said Barry Modeste, a construction worker who stopped his van at a Shell station in Takoma Park one recent morning to add $15 worth. It was enough, he said, to get him to a cheaper station in Rockville. "If you don't have gas, you can't get to work. And if you can't get to work, you don't get paid. And if you don't get paid, you can't buy food. We're at their mercy."

Last month, 51 percent of the respondents in a Washington Post poll said rising gas prices were causing a serious financial hardship for them or others in their household. It was the first time a majority had said that since the poll began posing that question eight years ago.

The rising prices are also adding to inflation, aggravating the U.S. trade deficit -- oil now accounts for about half of it -- and taking a toll on businesses already struggling with the economic slowdown caused by the housing and financial crises.

"I'm a very small businessman. If I get any smaller, I'll be out of business," said independent trucker Lee Klass, who was driving through the Texas Panhandle this month with a 33,000-pound load of plastic containers bound for Colorado. Klass had just paid $636 for fuel, enough for the trip but no more. Filling the tank would cost nearly twice that much.

Abroad, riots shook India after the government trimmed fuel subsidies. Truckers in Britain, France, Spain and South Korea have clogged the roads to protest rising fuel prices. In the Philippines, soaring prices for oil and petroleum-based fertilizer have derailed the economy and ignited calls for a cut in the tax on oil imports. With her popularity at a record low, President Gloria Macapagal Arroyo is expected to confront the issue in a nationally televised speech scheduled for tomorrow.

Even after oil prices have tumbled more than $24 in the past two weeks, largely as the result of easing tensions in the Middle East and slowing U.S. economic activity, crude is still trading near historic highs.

In a series of articles starting today, The Washington Post examines the economic forces that have unhinged oil prices from their longtime cyclical patterns, propelling fuel costs to once unimaginable levels that are now both fraying the lifestyles of our recent past and speeding the search for an energy source of the future.

Read the entire article and other parts of the series in the Washington Post.