Crude petroleum prices have gone up 11 times in nine years, four times in the last five years, and doubled in the last year. The cost of a barrel of oil has increased like never before and it appears it will increase further. Some fear it will cross the USD 200 a barrel within the year, though the consensus among forecasters appears to be in the vicinity of USD 150. As petroleum becomes more expensive, inflation is spreading throughout the world economy, land is being diverted from production of food to energy crops, and economic growth is being impacted adversely across the world. Most important, there is no end in sight. Many believe that petroleum prices will continue their northward trajectory for some time to come.

The current explosion in petroleum prices started in about 2003, around the time the US invasion of Iraq occurred. Iraq is, of course, one of the largest crude oil producers and has among the highest reserves. With the lack of a stable government in Iraq, and consequent unrest, supply uncertainties contributed to the rise in oil prices. Around 2003, the international economic boom strengthened, and it became quite clear that countries such as India will soon join China in becoming a large user of petroleum products. All in all, therefore, uncertainty and fear of supply constraints combined with sustained rise in oil consumption led to this rapid price rise.

Something like this happened before — in the OPEC-led price jumps of the ’70s. The international economic boom following World War II was leading to a rapid increase in energy consumption. Crude petroleum consumption was growing rapidly and it seemed nothing could affect the world’s insatiable need for petroleum. The OPEC cartel (with perhaps some help from the US) then ramped up crude prices. For a while, crude consumption continued to go up even though prices were increasing. Economists wrote tomes on how petroleum consumption was not sensitive to prices. For all of the ’70s and some part of the early ’80s, prices rose, consumption rose, and the world went through its most intensive case of stagnation cum inflation.

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