Forecasts that long-term oil prices would recede again this decade have turned out to be well off the mark, but not because those who had predicted scarcity had it correctly. The problem with oil supplies today is fundamentally political. Vast oil resources that lie under the ground in places such as Iraq, Russia, Saudi Arabia, Venezuela and West Africa could eventually bring to bear the low-price scenario envisioned in "Shocks of a World of Cheap Oil." Yet the likelihood that they will be exploited in a timely fashion has faded with a dramatic change in the political landscape of those countries.

The new world oil crisis began, not weeks ago, but over a year ago, with Venezuela's crippling civil war, which radically altered the outlook for the Americas' oil balance almost overnight. Under the leadership of populist President Hugo Chavez, political acrimony and a prolonged oil workers strike heavily damaged the country's production capacity: it fell to just under 2.5 million barrels a day, down from 3.5 million barrels a day when Chavez took office. The drop put to an end to Venezuela's plans to challenge Saudi Arabia by raising its output to 7 million barrels a day by 2007 through a reopening to foreign oil company investment--a move that would have threatened the unity and effectiveness of the Organization of Petroleum Exporting Countries (OPEC).

The bravado of U.S. neoconservatives hoping to "break OPEC" rings hollow against the Venezuelan setback. The prospects that privatization in another major oil domain will alleviate the extreme shortage of spare, unused oil production capacity and revive competition in the world market are looking dimmer now, as the Kremlin hunts down tax evaders in the Russian private oil sector and the oil industry in postwar Iraq limps along. The anticipated lifting of oil sanctions against Libya cannot be expected to add new giant field capacity soon. And oil markets remain unnerved by terrorist attacks on industrial facilities inside Saudi Arabia. With the stability of the Middle East so comprehensively at risk, it is difficult to see how dispassionate assessments of resources that may be available in the future could rule discussions today. Current price inflation will probably be solved, as it has repeatedly over recent history, but with a good sized recession that deeply curbs demand, rather than a change in geopolitics that stimulates supply.

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