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| Watching and Waiting |
A Slippery Slope
Eileen P. Gunn
03/01/2005
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The current volatility in the Middle East and soaring oil prices have made citizens of the United States acutely aware of the vulnerability of our energy supply. “The energy supply all comes from parts of the world that are unstable,” the Middle East first and foremost, notes Michael Economides, who teaches at the University of Houston and wrote The Color of Oil: The History, the Money and the Politics of the World’s Biggest Business.
 The United States also finds itself competing with developing economies to buy oil. In China, auto sales rose 50 percent in 2003, according to a report produced by Ferguson Wellman Capital Management in Portland, Ore. Those additional drivers helped push China’s appetite for oil up 12 percent last year alone (that country now accounts for 8 percent of world oil demand). A similar, albeit slower, consumer ascendancy in other parts of Asia means that “for the first time, we have reached an equilibrium between supply and demand. We have gone from bona fide excess capacity to zero,” Economides notes. “So things that people used to be able to shrug off can cause changes in oil prices overnight.
“[Al Qaeda] would love to hit the Saudi oil supply,” Economides adds. “And if it did that with supplies as tight as they are, oil would go to $80 a barrel. That’s the fear that’s in the back of everyone’s mind.”The $80-per-barrel scenario would not only cause pain at the pump, but could spark a return to the stagflationary spiral last encountered following the Vietnam War. It has not happened yet—even when prices topped $50 per barrel—because the economy is bigger and more diverse than it was in 1975; this softens the impact of oil’s price moves. “If you go back to 1982, oil was 18 percent of the S&P 500’s market capitalization,” notes Dean Dordevic, a portfolio manager at Ferguson Wellman. “By 2002 it was 5.4 percent.” He cautions, however, that as oil has become scarcer, its influence has grown.
Illustration by Viktor Koen.  Back to Main Article: Watching and Waiting
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