Oil Trouble

The last time oil prices were this high was more than a quarter-century ago. Then, too, the Middle East was aflame. Following the 1979 overthrow of the shah of Iran, revolutionaries had taken Americans hostage at the embassy in Tehran. U.S. forces later mounted a failed rescue mission, prompting worries of escalating conflict. Now tensions with Iran are roiling again, as President Mahmoud Ahmadinejad vows to continue his country's nuclear program in defiance of the United States and other Western governments. Global demand for crude is growing, yet the business of finding and developing new oil fields is becoming more expensive. On Monday the price of a barrel of oil briefly topped $99.04—a level last reached in April 1980 (after factoring in inflation), according to Cambridge Energy Research Associates. How high can oil prices go, and what impact will they have? James Burkhard is managing director of the Global Oil Group at CERA, a private company that advises governments and corporations on energy trends. He spoke to NEWSWEEK's Jeffrey Bartholet. Excerpts:

NEWSWEEK: Oil prices are flirting with $100 a barrel. Do you expect them to continue rising?
James Burkhard: As long as anxiety about the reliability of supply remains strong, prices will rise. They are going to be volatile, with significant upward pressure.

Why are analysts worried about supply?
Let me boil it down to one thing: what is behind this price rise is the perception that supply will not be able to keep up with rising demand. And the reason we have that perception has several facets. One is geopolitical tensions: concerns about the nuclear issue with Iran. One is the high-cost environment, meaning it's much more expensive to develop oil fields today than it was just five years ago. And there's great demand for people who can develop oil fields, so there's a shortage of qualified personnel.

What is the role of demand from China and India?
China is very important. China and the Middle East together account for more than half of the total world-oil-demand growth.

Iran and Venezuela have blamed high oil prices on the weak dollar. To what extent is that correct?
That's definitely a part of it. But it's certainly not the only variable … It's not necessarily the dominant variable.

Can you explain how the weak dollar connects to people paying more at the pump here?
Oil is kind of like the new gold, in that it's seen as a hedge against weakness in the dollar. When the dollar weakens, we tend to see oil prices rise as investors move away from the dollar and look to oil as a way to hedge against that exposure to the dollar.