Suggested Citation:
Jaffe, Amy Myers (2008) Testimony to the Select Committee on Energy Independence and Global Warming, U.S. House of Representatives, Washington, DC, June 11, 2008. James A Baker III Institute for Public Policy

Since 2004, a growing scarcity of energy commodities worldwide has heightened concerns about key geopolitical risks and threats. Concerns about these threats and other factors have led to an almost 250 percent strengthening in oil prices between April 2004 ($36/barrel) and May 2008 ($125/bbl).

Those threats included:

• A politically-motivated cutoff of oil or natural gas supplies by a major exporter (such as Russia to a European country or Venezuela to the United States) or group of exporters;
• A confrontation with Iran over its nuclear aspirations that results in sanctions against Iranian oil exports, an American or Israeli attack on Iranian nuclear facilities or an Iranian and/or terrorist threat to oil shipping through the strategic Strait of Hormuz, through which 16 million b/d to 17 million b/d of Mideast oil passes each day;
  
• Terrorist attacks on major oil production facilities or export infrastructure;
• The possible spread of conflict or instability from Iraq into other oil producing countries or the escalation of a proxy war involving Saudi Arabia, Syria, Turkey and Iran over the outcomes in Iraq; 
  
• A cutoff of oil or natural gas exports or a delay in resource investment and development
  due to resource nationalism, domestic unrest, or crises in succession of political leadership;
• A work stoppage or strike by oil workers, possibly motivated by political trends
  involving power-sharing or human rights issues related to internal instability in a major oilproducing
  country;
• Destruction of oil production or fuel manufacturing infrastructure following a severe
  storm or natural disaster.

These threats are all real, and they justified a rise in the price of oil above the $36 level seen in May 2004. Still, it is hard to quantify how much of a risk premium is built into the current price of oil, how much is based on perceptions of long term fundamentals such as supply and demand, how much of the oil price today reflects a speculative mania linked to negative trends in other financial markets and instruments.