– Oil Crisis...is the world about to be shocked

Oil Hits $100, Jolting Markets
By Neil King Jr., Chip Cummins and Russell Gold.

The surging price of oil, from just over $10 a barrel a decade ago to $100 yesterday, is altering the wealth and influence of nations and industries around the world.

These power shifts will only widen if prices keep climbing, as many analysts predict. Costly oil already is forcing sweeping changes in the airline and auto sectors. It is intensifying the politics of climate change and adding urgency to the search both for fresh sources of crude and for oil alternatives once deemed fringe.

The long oil-price boom is posing wrenching challenges for the world's poorest nations, while enriching and emboldening producers in the Middle East, Russia and Venezuela. Their increasing muscle has a flip side: a decline of U.S. clout in many parts of the world.

Steep gasoline prices also threaten America's long love affair with the automobile, while putting strains on many lower-income people outside big cities, who must spend an increasing share of their budgets just on fuel to get to work.

No one can say for sure whether sky-high oil -- part of a price boom in a wide range of commodities, from gold to wheat -- is here to stay. But most in the industry agree that a 20-year stretch in which oil was consistently cheap is long gone. The global thirst for oil shows little sign of retreating, and large new discoveries are few. Some in the industry say prices could go far higher; others suspect that speculators -- or an economic slump in the U.S. or China -- could send prices falling in the near term.

Yesterday, with a single trade, crude-oil futures hit an intraday high of $100 a barrel, a record for the U.S. benchmark. For the day, they rose $3.64 to a record close of $99.62 a barrel. Crude is still shy of the inflation-adjusted peak of $102.81 a barrel set in April 1980, amid political turmoil in Iran and unrest elsewhere in the Middle East. The 1980 peak in nominal terms was $39.50 a barrel.

The arrival of $100-a-barrel oil adds to the pressure on the U.S. economy, which has sustained a big blow from a drop in housing prices and a wave of foreclosures. Even at today's prices, though, the oil spike alone isn't enough to push the world into recession, economists say.

When crude oil hit its 1980 high, drivers squealed and the economy slumped. So far there is no comparable pain, and America, which consumes a quarter of the world's crude, retains its taste for big cars and energy-devouring homes. That's largely because the U.S. economy is more efficient and most Americans spend less of their disposable income -- about 4% -- on gasoline than in 1980, when they spent about 6%.

The robust economies of Asia, especially China, have so far swallowed the price surges with relative ease. That's because the price spurt this time is itself largely caused by surging demand within the developing world, not by politically induced supply shocks as in the 1970s and early 1980s.

But there are signs of strain. China, in a bid to limit demand and the huge fuel subsidies it gives consumers, announced in October that it would impose an almost 10% increase in domestic prices for gasoline and diesel fuel. Other countries that heavily subsidize domestic fuel use, which include the oil-rich states Iran and Venezuela, are feeling the pinch as prices climb.

Impact on Middle East

Oil's run-up is bringing the most startling changes of all to the Middle East. Big producers like Saudi Arabia and the United Arab Emirates are using their billions in profits to build their economies with roads, schools, airports and entire new cities. The value of hydrocarbon exports from the Middle East and Central Asia is expected to approach $750 billion this year, almost four times the level in 2001, according to the International Monetary Fund.

The region's new wealth has triggered a bout of deal making that has bankers rushing to the petrostates of the Persian Gulf. McKinsey & Co. estimates that the world's biggest investors of petrodollars -- including state-owned vehicles known as sovereign-wealth funds -- now manage as much as $3.8 trillion in assets. The Abu Dhabi Investment Authority, which McKinsey estimates manages $900 billion in assets, is today among the world's largest financial-market participants -- about the same size as the Bank of Japan.

Underscoring the region's new global financial heft, Abu Dhabi recently swooped to the rescue of Citigroup Inc. with a $7.5 billion cash infusion as it struggled with write-downs from this year's credit crisis.

Even before that deal, Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates, which includes Abu Dhabi, spent about $124.3 billion in the past three years buying up foreign companies, real estate and other assets, according to London-based Dealogic. One transaction underscores the region's financial-markets ambitions. Dubai, also part of the UAE, agreed to a complex deal with Nasdaq Stock Market Inc. that essentially gives Dubai major stakes in Nasdaq, the London Stock Exchange and Nordic exchange OMX AB.

This wave of oil wealth is blunting America's influence. Oil money has galvanized the might of Russia under President Vladimir Putin. He has overseen a dramatic consolidation of power and rollback of democracy in Moscow, while sticking a thumb in the West's eye on issues ranging from independence for Kosovo to the U.S. bid to build an anti-Iran missile-defense system in Europe.

Surging oil prices have also weakened the Bush administration's efforts to use financial pressure to get Iran to back off its nuclear program. China, eager to secure all possible access to energy, increasingly is turning to Iran as a trading partner, with oil going east and Chinese technology heading the other way. High oil revenue, meanwhile, has kept the otherwise rickety Iranian economy humming and Iran's current government firmly in power.

In Khartoum, the once-drowsy capital of Sudan, glimmering skyscrapers are rising along the Nile as oil riches attract investors from Asia and the Persian Gulf. Sudan, accused by Washington of supporting terror groups and killing civilians in Darfur, had been hobbled for years by U.S. economic sanctions. Those restrictions are having less effect now, with the desire for oil resources high and with both know-how and capital pouring in from the Gulf and Asia.

Venezuela will continue to use its oil prod, perhaps more aggressively than any other country. In 2005, in one of a series of jabs at the U.S., Venezuelan President Hugo Chávez began offering cut-rate heating oil to poor neighborhoods of the Northeastern U.S. He also has used favorably priced fuel to prop up Fidel Castro and win friends in South America, while shouldering aside U.S. efforts to champion regional trade deals.

Full-Blown Oil Shock

For poor nations that don't produce oil, the past several years have been a full-blown oil shock. The price rise adds another obstacle to providing modern energy to the estimated 1.6 billion people who have no access to electricity and the 2.4 billion who cook with traditional sources like wood, coal or dung. A recent World Bank study concluded that a sustained $10 increase in the price of a barrel of oil translates roughly into a 1.5% knock to the gross domestic product of the world's poorest countries.

Few places have been harder hit than Malawi, a small southern Africa country with annual per capita gross domestic product of just $179. According to the World Bank report, a $10 oil-price increase is expected to translate into a 2.2% fall in the GDP of Malawi, where tobacco is the dominant cash drop.

Malawi subsidizes the price of gasoline and paraffin, a petroleum-derived fuel its people use for lighting and cooking. But according to an IMF study, the government is now passing along to the population all fresh increases in energy costs, and then some. Pump prices in Lilongwe, the capital, climbed about 19% in October, to the equivalent of $5.16 a gallon.

"When gasoline goes up, everything goes up, so we really have to struggle to earn a living," said James Mdachi, 43 years old, an assistant accountant for the government. He and his wife, a teacher, bring in about $200 a month, to support three children and five other dependents.

A world away, U.S. industry has so far managed to take the oil surge in stride, although economists fret that this may not last long. Auto makers, for instance, may have even more reason to fear high oil prices today than they did in the late 1970s, when price shocks and gas lines tipped Detroit's auto giants into crisis. Then and now, surging petroleum prices caught U.S. auto makers with model lineups full of powerful rear-wheel-drive vehicles designed for an era of cheap gas.

Auto makers have more things to fret about now. Surging oil prices embolden political leaders to call for tougher fuel-efficiency standards and other moves to discourage car use, such as fees that London and some other big cities levy on commuters who drive into congested districts. These ideas are gaining traction because of concern that petroleum-fueled cars and trucks exacerbate climate change. Groups worried about global warming are finding allies in more-conservative circles whose main concern is to enhance security by reducing reliance on oil from unstable nations.

After 20 years of largely leaving fuel-economy standards alone, the U.S. in December enacted an energy bill that requires auto makers to boost the average efficiency of their new-vehicle fleets to 35 miles a gallon from 27.5 by 2020. Auto makers got some important concessions, such as credits for building vehicles designed to burn ethanol and a new classification system that will make it easier for them to continue to sell larger vehicles. But the bill marks the end of an age in which the industry was able to make vehicles heavier and more powerful without making significant gains in fuel efficiency.

Moreover, the 2007 energy bill may not be the last auto makers hear from Washington. As part of her presidential campaign program, Sen. Hillary Clinton has proposed a target of 55 miles per gallon for cars and trucks by 2030.

These proposals threaten a fundamental automotive marketing strategy: Bigger is better. Industry executives, particularly in Detroit, worry that without the freedom to market large, powerful vehicles, their businesses will be decimated.

The fall of the Ford Explorer is emblematic of how $3-a-gallon gasoline has undermined Detroit's profit model. In 1999, Ford sold more than 428,000 of the midsize sport-utility vehicles, at an estimated $4,000 in profit each, and earned record profits of $7.2 billion. In 2007, through November, Ford sold just 126,930 Explorers.

Costly fuel gives a further edge to Japanese makers like Toyota Motor Corp. and Honda Motor Co. because of their expertise in small-vehicle and small-engine design. And if more markets tilt toward small, efficient diesel engines, as Western Europe already has, that's a plus for European companies such as Volkswagen AG or Renault SA.

General Motors Corp., the biggest U.S. car maker, is gambling that it can develop its own technology for plug-in hybrids and fuel-cell vehicles fast enough to stay in the game. GM is heavily promoting its plug-in hybrid Chevrolet Volt model, even though it isn't due to hit the market until 2010.

Raising Air Fares

In the global airline industry, meanwhile, pessimists just a few years ago were predicting that some carriers would fail if crude hit $45. The industry has proved adaptable, with airlines grounding their oldest and thirstiest planes, raising fares and drastically reducing labor and operating expenses.

But if oil's ascent keeps pushing up jet fuel prices, travelers are sure to feel a squeeze. John Heimlich, an economist for the Air Transport Association, predicts that if oil stays where it is or goes higher, airlines will identify their worst-performing routes and then cut the number of flights assigned to them, substitute smaller planes or cancel the routes.

Oil's rising cost is sure to put a sharper focus on calls to promote alternative fuels and curb burning of carbon-based fuels. The record there so far is decidedly mixed.

Pricey oil and a quest for "energy independence" have led to an ethanol boom, but higher corn prices now pinch that industry's profits. Historically, ethanol sold at a premium to gasoline; today there's so much ethanol available that it's selling at a discount.

Even in abundance, ethanol is a tiny factor in the U.S. fuel market, displacing a little more than 200 million barrels of crude oil annually, according to the Renewable Fuels Association. The blend of 85% ethanol and 15% gasoline called E85 is available at only bout 1,400 of the roughly 170,000 U.S. fuel stations. And though ethanol is blended into most U.S. gasoline, at up to 10%, calls to dial up that percentage have sparked controversy because of concern this might increase certain forms of air pollution.

Paradoxically, the high oil price in some ways hinders the quest to curb greenhouse-gas emissions. The oil price makes it economic to develop unconventional deposits such as Canada's oil sands. But the gummy substance is mined, and turning it into usable products takes extensive refining. Gallon for gallon, producing gasoline from oil sands emits far more carbon dioxide than making it from conventional crude.

The price rise has a similarly dirty impact at power plants. In the 1990s, when natural gas was cheap, many countries pushed to use more of that, in place of coal, to make electricity. This was good for the environment, because per unit of energy generated, natural gas emits about half as much CO2. But natural-gas prices roughly track oil prices, and they've been rising too. Their rise has prompted a resurgence in coal use, one reason greenhouse-gas emissions are going up faster than many expected. China, the second-largest oil user after the U.S., still meets the bulk of its energy needs with coal.

Oil's price run-up is fanning support for a revival of clean but controversial nuclear energy. The International Energy Agency, an energy watchdog for the U.S. and 25 other wealthy nations, has become a big promoter of nuclear power. Still, its latest annual outlook predicted the use of nuclear energy would grow by less than 1% annually world-wide between now and 2030, while coal usage would rise three times as fast.

The great oil boom of the 2000s has also wrought dramatic changes within the oil industry itself, which high prices will only intensify.

Oil-rich nations, seeking to take greater command of their resources, are marginalizing the once-mighty Western oil companies. For the first time since World War II, the future of oil and gas production isn't in the hands of Texas-educated engineers working for U.S. companies but of executives at companies like Qatar Petroleum and Russian behemoth OAO Gazprom.

Gone are the days when companies such as Exxon Mobil Corp. and Royal Dutch Shell PLC had an unmatchable combination of financial clout and technological know-how. Thanks to several years of high prices, government-controlled oil companies have the financial muscle to bankroll their own projects.

And they have access to the latest tools for finding oil and drilling holes. During the last downturn, in the 1990s, big oil companies outsourced many of these tasks to oil-field-service companies. Now the national oil companies can hire these service companies directly, bypassing integrated Western oil giants.

Schlumberger Ltd., the largest oilfield-service company by market value, has said its revenue from national oil companies tripled from 2002 through 2006, while its work for Western oil companies rose just 60%. "The growing influence of national oil and gas companies on the world energy market is abundantly evident even to the casual observer," ConocoPhillips Chief Executive James Mulva said in March.

Competing for Resources

As the state-owned giants grow more confident and self-sufficient, they have begun to compete aggressively for resources beyond their borders. Last year, Libya put some potentially oil-rich acreage out for bids. While Exxon Mobil won some of it, so too did state-controlled oil companies from Russia, India and China.

More than from their bank accounts, national oil companies' strength stems from their control of resources. Exxon Mobil, with a market capitalization of around $500 billion, is one of the largest and most successful publicly traded companies ever. But there are 12 state-controlled oil companies, such as Saudi Aramco and PetroChina Co., that control more oil reserves.

Driving this power shift is geology. Major new finds in North America and Europe have been rare for two decades. Western oil companies now control only about one in 10 barrels of the world's proven reserves. As the Western giants struggle to find fresh oil, the Aramcos of the world are only likely to rise in importance in the years ahead.

-- Joseph B. White, Sarah Childress, Lauren Etter, Timothy Aeppel, Jeffrey Ball and Susan Carey contributed to this article.

Write to Neil King Jr. at neil.king@wsj.com , Chip Cummins at chip.cummins@wsj.com  and Russell Gold at russell.gold@wsj.com