On Friday, Jad Mouawad of the Times reported on rising anxieties concerning global oil supply. Prompted by a new report from Cambridge Energy Research Associates, it seems as though the recent price decline, generally seen as good news, is setting the global economy up for a fall.

The report says about 7.6 million barrels a day of future supplies are "at risk" of being deferred or canceled, like heavy oil or deepwater projects, and which could bring total supplies to 101.4 million barrels a day by 2014. Last year, the group projected that capacity would rise to 109 million barrels a day by then.

Note that, as Philip Verleger has argued, the seven-year increase in oil prices was driven by a combination of regulation -- particularly regulations that forced a shift to low-sulfur diesel, and thus to lighter crudes -- and systematic underinvestment in refining capacity, which was exacerbated by the FTC's effort to curb the power of a number refiners. This dynamic goes a long way towards explaining the woes experienced by the airline industry, and by run-of-the-mill consumers. New refining capacity that is capable of turning heavier crudes into low-sulfur products is supposed to come on line in the next few years. But the CERA report suggests that this will take a little longer than planned. So what's the upshot?

Simple. As soon as the economy "picks up," we'll run smack into another price spike.

"The lower that oil prices drop now and the longer they stay low, the greater the negative impact on future supply," John Lipsky, the first deputy managing director of the I.M.F., told an OPEC conference in Vienna this month. "In other words, today's low prices could be setting the stage for another price run-up in the future."

This has a deeper significance. As Jim Manzi wrote last week, we face a grim fiscal picture that will reach new levels of nightmarishness if compounded by an oil shock.

In addition to the government budget deficit, we have the massive "off balance sheet" activities of the Fed. The Fed announced last week that it will create $1.2 trillion of new money, which is apparently much less interesting to everyone than the offensive bonuses paid by AIG. Ceteris paribus, that sure sounds inflationary to me.

Do you think we're done with this? You know what the Fed didn't spend a huge amount of time worrying about in August of 1970? OPEC quadrupling oil prices three years later. The U.S economy is enormous and resilient, but it is not limitless.

Implicit in Manzi's post is the notion that the threat of stagflation is real. Which leads me to Iraq, and a perhaps fanciful scenario.

In a piece helpfully titled "Major Oil Companies Are Circling Iraq," Stanley Reed of BusinessWeek recounts the various efforts by Iraq's government and oil majors to raise Iraqi production.

The key player is Oil Minister Hussein Al-Shahristani, a Canada-educated nuclear scientist and chemical engineer who spent 11 years in Abu Ghraib prison for refusing to help Saddam Hussein build a nuclear weapon. He is feeling huge pressure to boost production to compensate for falling prices. ...

Al-Shahristani outlined for his fellow OPEC ministers an ambitious program to reach that 6 million barrel-per-day goal in the next six to seven years. That would make Iraq the world's fourth-largest producer, after Saudi Arabia, Russia, and the U.S. Al-Shahristani estimates that achieving his goal would cost $50 billion, which he hopes to raise almost entirely from the oil companies.

Iraq's incentives are clear. Over the longer term, Iraqi production could radically change the face of the global hydrocarbon economy.

Despite the fits and starts, the Iraqis seem bound to gain traction sooner or later. With 115 billion barrels of reserves, Iraq's potential production capacity could eventually challenge Saudi Arabia's 12 million barrels a day, according to Helmut A. Merklein, a former senior U.S. energy official who is now a consultant. "The [only] limitation is what the market will bear," he says.

It is often said that President Obama is focused on the economy rather than, say, Iraq's politifcal future, which has been pushed from the headlines by the relative calm and by rising tension in Afghanistan. But it could be that a stable Iraq is vital to any lasting economic recovery. 

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