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Oil at $40 a Barrel: A Threat and a Signal

(Jaffee Center for Strategic Studies) Paul Rivlin- The recent rapid rise of oil prices reflects an increase in demand because the U.S. economy is buoyant, the Chinese economy is growing rapidly, and Japan is making a long-awaited recovery. These strong regional demand factors are operating simultaneously, which is unusual. In 2003, over 60% of supply came from non-OPEC countries, but OPEC controls the majority of world oil reserves and oil production costs in the Gulf are the lowest in the world. In April-May 2004, oil prices rose largely because of real worries about supply. Terrorism in the Middle East has increased prices on international markets by $5-10/barrel. This is a serious threat to the world economy, especially to poorer countries that cannot afford higher oil prices. While the Bush administration favors increasing supply, there is no supply source that can substitute for OPEC/Middle East output in the long run. The main forecasting organizations suggest that, over the next twenty years, reliance on Middle East oil will increase.
2004-07-02 00:00:00
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