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Over a Barrel

How sky-high oil prices affect everything from what you pay to fill up your tank to American influence around the globe

By Jad Mouawad in New York


Across the country, it's costing people a lot more to gas up their cars. Prices of goods and services from snack foods to postage are starting to creep up. And thousands of miles away from the United States, the leaders of oil-rich countries like Iran, Russia, and Venezuela seem to be smiling a lot these days.

A swaggering President Putin in Moscow, $3 for a gallon of gas, and a higher tab for lunch may not seem related, but in fact, they're all effects of the soaring price of oil, which last month briefly topped $100 a barrel.

In the past, dramatic increases in the price of oil were caused by sudden disruptions in supply (usually cutoffs in oil shipments from the Middle East). This time, however, prices have risen largely due to increasing demand for oil, primarily from the booming economies of China, India, and other developing nations.

And that's not likely to change: Demand for oil from China and India is expected to double in the next 20 years as their economies continue to grow—and their exploding middle classes are able to buy millions more cars (see Opinion).

At the same time, Americans' appetite for bigger cars and houses has kept demand for oil climbing in the U.S.— 21 million barrels a day last year, up from 17 million in the early 1990s. (In Europe, high gasoline taxes—in the Netherlands, drivers pay more than $8 a gallon—have kept smaller cars popular and restrained the demand for more oil.)

Also putting pressure on oil prices: Tension in the Middle East and other oil-producing regions, including concern over Iran's nuclear program, the war in Iraq, violence in Nigeria's oil-producing regions, and Venezuelan President Hugo Chávez's general unpredictablity.

As recently as a decade ago, oil cost less than $11 a barrel. For most of the 20th century, as it transformed the modern world, oil was abundant and easy to find. Cheap oil fueled America's love affair with the car and the growth of suburbia. But as oil became harder to find domestically, the U.S. became dangerously dependent on imported oil, much of it from unreliable, even hostile, sources.

Now, Americans are feeling the pinch. Gas is at or near $3 a gallon (some experts think it could be heading to $4 a gallon), and people in colder states are facing soaring heating bills this winter.

There are also many less obvious effects. Energy costs are built into the price of practically everything we buy: When a retailer or fast-food chain pays more to gets its jeans or burgers to its stores, it's likely to pass on the additional cost to you. And because plastic is made out of petroleum products, the price of everything from soda bottles to iPods can be affected.

Higher gas prices are also hurting the ailing U.S. auto industry: In recent years, Detroit has focused on producing gas-guzzling trucks and SUVs, while foreign carmakers turned out smaller, more fuel-efficient—and now more popular—cars.

Add all this together, and what do you get? When people spend more of their money on gasoline, heating oil, and other necessities, they have less money to spend on everything else. That's slowing down the economy and heightening fears that the U.S. could be headed for a recession.

Less U.S. Clout

Overseas, as oil-rich nations see billions of dollars flow their way, their influence rises, and that of the U.S. is diminished.

"Soaring oil prices are poisoning the international system by strengthening antidemocratic regimes around the globe," according to Times columnist Thomas L. Friedman.

Iran has defied the international community and pushed ahead with its nuclear program. In Venezuela, President Hugo Chávez is using oil wealth to promote his socialist, anti-American agenda across Latin America. In Russia, high oil prices created the economic boom that underlies President Vladimir Putin's popularity and may help keep him in power.

There are also less obvious geopolitical effects: One reason China has opposed international sanctions on Sudan as punishment for its actions in Darfur is that China buys oil from Sudan and has been unwilling to jeopardize its supply.

On the plus side, high prices have encouraged oil companies to invest in finding new oil. And they're encouraging investments in alternative energy sources.

Energy is also getting attention in the presidential campaign, with the Democrats generally talking about reducing consumption, and Republicans about finding more oil in the U.S. No one is talking about higher taxes on gasoline or oil, which most economists think is the approach that would have the most significant impact.

"The challenge is to have leaders in our country who have the wisdom and courage to take those measures that are necessary so we can reduce our dependence on foreign oil," says James Bartis, an energy expert at the Rand Corporation. "The reason we don't have an energy policy is that it takes sacrifice."