Oil prices are now running well above $50 a barrel, partly owing to short-run supply shocks, such as the Iraq conflict, Nigerian labor disputes, the conflict between Yukos Oil and the Russian government, and Florida's recent hurricanes. Oil prices may fall once these shocks dissipate, but speculative effects could keep them relatively high, weakening the world economy and depressing stock markets.
Even a temporary spike in oil prices can have long-term effects because of the social reactions they provoke. High oil prices fuel public discussion about the future of oil prices. The outcome of any public discussion can never be known with certainty, but chances are that it will amplify stories that imply risks of higher oil prices. Experts may say that short-run supply factors caused the recent price increases, but the price increases will nonetheless lend credibility to scarier long-term stories.
The scary story that is being amplified now concerns the developing world, notably China and India, where rapid economic growth - and no restrictions on emissions under the Kyoto Protocol - are seen as creating insatiable demands for oil. The story's premise is that the world will run out of oil faster than we thought, as these billions of people chase their dreams of big houses and sport utility vehicles. Is this plausible?
Certainly, China, India, and some other emerging countries are developing fast. But experts find it difficult to specify the long-run implications of this for the energy market. Too many factors remain fuzzy: the rate of growth of these countries' energy demand, discoveries of new oil reserves, developments in oil-saving technology, and the ultimate replacement of oil by other energy sources.