Editore"s Note
Tilting at Windmills

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May 27, 2004
By: Kevin Drum

BLACK GOLD....Here's the latest news on the crude oil front:

Non-OPEC Mexico this week proposed to pump an extra 70,000 barrels per day (bpd) in the second half of this year, raising output to a targeted 1.95 million bpd.

....Saudi Arabia said at the weekend it would lift production by 10 percent to 9.1 million bpd in June, and was ready to pump its maximum 10.5 million bpd if demand warranted.

....Most other members of the Organization of the Petroleum Exporting Countries are already pumping at full throttle, while non-cartel producers typically do not restrain output, meaning little extra oil is available in the short-term.

....Non-OPEC Russia, the world's second largest exporter, has raised oil production sharply in recent years but is running into export constraints due to pipeline bottlenecks, the head of state pipeline company Transneft Semyon Vainshtok said recently.

Confused about what this means? Let me spell it out:

  • Current demand for crude oil is about 80 million barrels per day.

  • There is practically no spare producing capacity anywhere in the world except Saudi Arabia. They have spare capacity of about 1.5 million barrels per day.

  • Demand for oil increases by about 2 million barrels each year.

When people talk about oil, the most common question is "How much do we have left?" The answer is "quite a bit," but unfortunately it's the wrong question. The right question is, "How much can we pump out of the ground per day?" And the answer is, "Not very much more than we're pumping now."

Twenty years ago the world had about 15 million barrels/day of spare pumping capacity. Ten years ago we had about 5 million barrels of spare capacity. Today we have close to none. There are ways of increasing this capacity, of course, but it takes time to build additional pumping, pipeline, and refinery capacity, and time is something we've run out of. What's more, although we can increase pumping capacity in the medium term, we will eventually run into an absolute limit on global pumping capacity, which is something on the order of 100 million barrels/day. We are probably within about ten years of reaching this absolute production peak.

In other words, even though there's a lot of oil in the ground, oil supplies are going to become permanently tight within the next couple of years and will become disastrously tight within the next decade or so. In the meantime, demand will continue to grow inexorably at about 2% per year, which means that over the next few years the price of oil is going to skyrocket and not everyone is going to get all the oil they want.

There's a lot more to the oil story than this, of course, but in its broadest outline this is what we're up against. I'll let you noodle on this for a few days and then I'll have more to say about it.

Kevin Drum 9:08 PM Permalink | Trackbacks

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