Oil

I just finished reading a few books about oil.
Oil 101 by Morgan Downey
I highly recommend this book, there are some very technical detailed chapters that you can skim, but there are some key ones that are must-reads.
Why Your World Is About To Get A Whole Lot Smaller by Jeff Rubin
Another great read, the first half was the best part.
Twilight in the Desert by Matthew Simmons
I have just cracked this one, but it is fascinating.

Here is a short primer.
The US was the biggest producer of oil in the world until 1974. US Oil production peaked in 1970 and has been declining ever since. The US had surplus production until 1970 and controlled the price.

From 1970 til about 2004 OPEC had control of the price of oil because they had the surplus production. Quota cheating by member countries has always made that precarious, but excess capacity always existed. Short term oil price spikes occured due to politically motivated supply restrictions.

In 1983 the rate of discovery of new oil reserves fell below the rate of consumption. That point signaled that at some point in our future we would run out of oil as we know it. However reserves are unreliable estimates that are hard to concretely determine, production is much more measurable.

By 2004 world oil production was essentially maxed out. Supply interruptions from any producer were significant to the world market. Everyone was producing as much as they could, including OPEC. In 2005 OPEC lifted quotas on member states allowing all to produce as much as they could ( even though they already were ). Prices rose.

As oil prices climb, oil that was too expensive to produce ( not profitable ) becomes so, increasing available production. But that new oil puts a price floor under oil. Prices continued to climb until 2008 as supply struggled to meet demand.

In 2008 demand peaked and then declined due to the world recession. Oil prices crashed because of the decline in demand. Recessions have always had a short term impact on demand and prices fall. Oil transported via tanker takes 3 – 6 weeks to get to its destination. At the peak of prices there could easily have been 3+ months worth of oil in transit. The world crash and recession was so sudden that those inventories were already in transit as demand went into a nosedive.
When the recession is over and there is economic growth, the oil consumption will quickly climb back to that peak and continue its climb. In fact we arent even out of the recession yet and oil is back to $70 a barrel.

While world consumption has been rising at 1 to 2% per year over the long term, many of the producers have been declining. The US has been declining at 2% per year. Major non-OPEC producers, Mexico, Norway and the UK have also been declining. OPEC members Venezuala and Nigeria have been declining. Indonesia joined OPEC in 1962 and became a net importer of oil in 2004. The major OPEC suppliers that are not declining all appear to be maxed out.

This price rise of the last 5 years is not a temporary thing caused by suppliers withholding production. It is not like the price shocks of the past.
Here are the 3 possibilities to reduce oil prices:
1) Miraculous discovery of new cheap oil.
2) Paradigm shift in energy consumption drastically reducing demand.
3) Continuing and worse economic weakness.

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2 responses to “Oil

  1. You’re painted a clear picture of the cliff we’re all running toward.

  2. You’ve painted a clear picture of the cliff we’re all running toward.

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