Oleaginous shock therapy

In March, 2005, Goldman Sachs, the U.S. investment bank, released a shocking report roiling the international financial markets. The report predicted that the world oil price could surge above $105 per barrel within a few years. As soon as the report was released, the oil price, which had hovered around $50 at the time, skyrocketed and the New York stock market plummeted. A rumor swirled in the market that the third oil crisis could arrive at any moment. But no oil crisis has occurred, and the world economy has maintained a steady course.
In an oil crisis, world oil prices surge within a short period, making the world economy sluggish. The first oil crisis in 1973 started as oil- exporting countries in the Middle East closed off or limited the supply of oil to the countries that were supportive of Israel. World oil prices jumped by 4.5 times in a year and the world economy was severely damaged by the aftermath.
The second oil crisis broke out when the Organization of Petroleum Exporting Countries suddenly raised oil prices when Iran stopped producing oil after the Iranian Revolution in late 1978. The world oil price increased threefold in two years and the world economy became sluggish again. The two oil crises went through the same process: insecurity in the Middle East, reduction of oil supply, surging world oil prices and a sluggish world economy.
Now the world’s oil price has almost reached $100 per barrel, some are talking about a third oil crisis, as if the world economy would collapse if the oil price exceeds $100 per barrel. But it has been expected to rise to this level, and even if it happens, the world economy will not crumble.
The current increase in oil prices has a different pattern to the two previous oil crises. The war in Iraq created insecurity but the rise in oil prices was not abrupt. That was due to gradual increase in demand. With economies booming in countries like China, oil supply cannot match the increased demand, causing oil prices to go up. The slope of the rise is not as steep as in previous oil crises. It is true that oil prices have increased but the jump is not so shocking as to be called a crisis.
However, this doesn’t mean that it is alright that the increase has been relatively shallow. When repeated over time, even small problems can produce a massive disaster.
If we ignore small changes, we become numb to them, and finally we become insensitive when a serious danger arises. The era of high oil prices has started. If we do not respond to this change properly, we will fall into a coma and might need the shock of a financial crisis to wake us up again.

*The writer is an editorial writer of the JoongAng Ilbo.

By Kim Jong-soo [jongskim@joongang.co.kr]