Over the past seven years, the price of oil has skyrocketed.

For the first time ever, on August 29, crude oil prices on the New York Mercantile Exchange topped $70 per barrel. Only eight years ago, crude oil traded for just $10.50 per barrel. Goldman Sachs is predicting possible oil spikes to $80 over the short term and $105 over the long term.

Why are prices so high?

According to oil analyst Kenneth Deffeyes, “We are facing an unprecedented problem. World oil production has stopped growing; declines in production are about to begin. For the first time since the Industrial Revolution, the geological supply of an essential resource will not meet demand” (Beyond Oil, the View From Hubbert’s Peak).

These record levels are reminiscent of the 1970s oil shock and have caused some people to wonder if we really have reached “Hubbert’s Peak.” Hubbert was an American geophysicist who, in 1956, correctly predicted that peak oil production within the United States would occur around 1969. U.S. production did peak in 1970 and since then has steadily fallen.

Hubbert also predicted that global oil production would peak in 2000, begin dropping off slowly at first, and then decline more rapidly after about 2005. On this prediction, Hubbert has been proven wrong, so far. Over the past decade, world production rates have slightly increased.

However, there are indications that Hubbert’s projections were not far off. A supply crunch looms.

Much of the world’s oil production comes from old discoveries. The last giant oil finds were discovered in the late 1960s in Alaska, the North Sea and Siberia. Alaska peaked in the 1990s at 2 million barrels daily and now produces less than half of that. The North Sea peaked six years ago and is now maxed out at about 75 percent of its peak. Siberia, too, produces several million barrels per day less than its peak production several years ago.

Saudi Arabian oil fields are also aging. Ninety percent of Saudi oil comes from six gigantic fields, all of which were discovered before 1970. According to one expert, the largest Saudi oil field, Ghawar, that has produced over half of all Saudi oil during the past 50 years, is already past its peak and is likely entering a period of accelerated decline (Daily Reckoning, September 29).

The world is finding it harder to discover oil. “In 2000, there were only 13 major oil discoveries; in 2001, six; in 2002, two; and in 2003, none” (Business Line, July 29). Much of the oil being found is of poorer quality and is more costly to extract.

Many countries are looking north of America’s border at the 175 billion barrels of oil in Canada’s oil sands as an abundant fuel source. The oil sands, however, are difficult and expensive to extract. Worse, the time required to delineate the required resource, develop a mining plan, obtain the proper permitting and construct needed infrastructure can be years.

Meanwhile, oil demand is rapidly accelerating.

Recently, Asian demand has been leading the way and is expected to double over the next 8 to 10 years. The International Energy Agency is predicting that global oil demand will hit record levels during the fourth quarter of this year.

About a decade ago, China was a net exporter of oil. Now, China has become the world’s third-largest importer of oil (behind the United States and Japan), and the second-largest oil consumer.

As developing countries continue to industrialize and become more urbanized, their oil consumption increases. Industrialized countries use an average of 18 barrels of oil per person per year, while people in developing countries only use two barrels of oil per year.

According to the Institute Francais de Petrole, if all countries consumed oil on a per capita basis equal to that of the United States, all the world’s known oil resources would be gone in eight short years.

Most of the world’s industrialized and rapidly developing countries are dependent on foreign oil. The United States is the world’s largest consumer and importer of oil. In 2004, the United States imported 58 percent of the 20.7 million barrels of oil per day it consumed.

European countries are even more dependent on foreign oil. The EU now imports over 80 percent of its oil needs, a trend that is only getting worse. Last year Germany, the world’s fourth-largest oil consumer, had to import more than 92 percent of its oil. France, Italy and Spain, the world’s sixth-, seventh- and eighth-largest importers respectively, all had to import over 94 percent of their oil. According to the Energy Information Administration, the rest of Europe, excluding the United Kingdom and Scandinavia, are not much better off.

Parts of Asia, including Japan, also rely heavily on foreign oil. Japan, the world’s third-largest oil consumer, had to import 98 percent of its oil. India, the world’s second-most populous country, imports 65 percent of its oil. China, which is now the number-two oil consumer, had to import 44 percent of its oil.

Realizing their dependency and the potential of a coming supply crunch, nations, especially China and the EU, have already begun scrambling to secure fuel sources.

Following Chinese President Hu Jintao’s trip to Venezuela this past September, Venezuelan President Hugo Chavez expressed his country’s “extreme interest in becoming a safe supplier of oil and oil derivatives to the People’s Republic of China” (bbc, September 16). This has worried some observers in the U.S., since Venezuela is a major supplier of oil to America.

Chinese oil companies have also been on the prowl, looking for acquisitions. Following the Chinese National Offshore Oil Company’s (cnooc) failed takeover bid for U.S. rival Unocal, cnooc purchased Canadian company Petro Kazakhstan. Sinopec, another Chinese oil company, also made recent large-scale investments in the Canadian Oil Sands. PetroChina too just signed a deal with Canada’s Enbridge to construct a $2.5 billion pipeline that would deliver Canadian oil to China via a port in British Columbia.

The EU is also starting to take steps to mitigate any oil supply shocks and maintain a secure supply of oil. Recently, Germany and Russia announced plans for a $5 billion pipeline to deliver gas from Russia to Germany. France’s oil giant Total recently announced that it had purchased a major investment in Canada’s oil sands.

According to the chief European economist at Deutsche Bank in London, “Oil is by far the biggest threat to the world economy, and it is felt most by the weakest link, the European Union” (New York Times,April 8).

Perhaps this threat to the European Union is what spurred the agenda for the recent meeting of the EU’s Oil Supply Group, which “has begun to discuss the coordination of measures to reduce demand in the event of an even graver supply crisis. These measures range from car-free Sundays and speed restrictions on motorways, to airport closures” (European Information Service, September 24).

World oil supplies are tight and there have been no major discoveries of late. As the developing world industrializes, its vast populations will continue to drive up the demand for oil.

The United States, the European Union, Japan and China are getting set to engage in an increasingly intense competition over oil supplies. This puts the countries with oil to spare at a massive advantage. We are already witnessing how Iran is taking advantage of the situation; Russia is positioning itself to do the same. You can be sure oil will play a decisive role in determining the outcome of an emerging new global geopolitical order. Watch for it.