DNO, the Norwegian oil producer, is battling to save its investment in Iraq after the Kurdish regional government threatened to terminate its license to drill. It has initially been suspended for six weeks and could be permanently expelled over a dispute sparked by the sale of DNO shares to a Turkish investor. DNO is just one of many international oil companies that have invested in Iraq. The economic and business risks of the oil market with respect to highly uncertain exploration expenditures, huge capital requirements and volatile prices are already large. But once again it is the political risks and uncertainty associated with these investments that have been most noticeable and that will have the greatest immediate impact on economic activity.

The global economy is beginning to pull out of recession. Financial conditions have improved more than expected. This economic upturn will restore oil demand growth and gradually work off the surplus oil inventories. Companies will continue to explore for more oil, but in many areas of the world this is becoming more difficult and global spare capacity is once again predicted to tighten. The consequence is higher projected crude oil prices for 2010 (about $12 per barrel, or 29 cents per gallon higher than the 2009 average). How much further will these prices rise as more crude oil production is taken offline?

Also in the news today, an economic (and political) profit led China to help Iran fill its ‘gasoline gap’ following the withdrawal of both BP and Reliance of India from long-standing supply agreements. At such relatively small quantities—the United States uses almost 20 times as much gasoline—if China had not done so, another nation likely would have. But when prices once again return to highly damaging levels what happens here? No-one can bail the United States out of its dependence. The United States consumes almost 20 mbd of crude oil. Economic recovery will not fix our dependence—it will restart it. And as demand increases and supplies tighten as a result of international disputes, political maneuvering or terrorism, prices will continue to rise as will the costs to our nation. We have a short window, and if we want to strengthen our economy and improve our energy security over the long term we need to act now.

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