However, besides the price of oil, several other factors contributed to the widespread sense of relaxation. On the international front, the peace agreement between Israel and Hezbollah was holding; Iran’s position on nuclear proliferation appeared more conciliatory; and the constant disruptions in Nigeria had settled down. On the domestic front, fears of a disruptive hurricane season didn’t materialize, and the expected 400,000 barrel shortage from the breakdown of a gathering pipeline system in Prudhoe Bay, Alaska – the largest U.S. oilfield – turned out to be a loss of only half that amount. Full production was restored ahead of schedule.

But here too the sense of security is shaky and, to the keen observer, the calm is misplaced. The worrisome fundamentals of the world’s energy markets are still the same. Global consumption is creeping up to 85 million barrels a day (from 78 mmb/d in 1978) and is expected to reach 98 mmb/d by 2015. On the other hand, production increases have come almost entirely from expensive unconventional supplies, such as Canada’s oilsands. Aside from a new find recently in the Gulf of Mexico, true “elephant fields” – the industry term for giant deposits – have not been discovered in decades, and production from existing ones is on the decline. Moreover, no new refineries have been built, and existing infrastructure is aging. These factors have translated into tight supply and upwardly spiraling oil prices from an average of US$30/barrel in 2003, to US$40/barrel in 2004, to US$50/barrel in 2005, to over US$60/barrel this year. Despite the September falloff in price, the upward trend
remains constant.

Further, U.S. crude oil and oil products consumption last year reached almost 21 mmb/d, equivalent to 25 per cent of the world’s total. Of this amount, 64 percent came from foreign sources. The outlook is even more troubling when you combine the historical trend with future projections. U.S. consumption has been increasing steadily since the 1980s – from 16mmb/d to 18mmb/d in the 1990s, to 20mmb/d this decade. Domestic production has followed the same trend – in the opposite direction. U.S. crude oil production declined from an average

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