Editore"s Note
Tilting at Windmills

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August 12, 2005
By: Kevin Drum

PEAK OIL WATCH....Despite all the blogging I've done about peak oil, I've been a little surprised at the continuing steady rise of oil prices over the past few months. After all, with only a couple of exceptions, even the most pessimistic peak oil folks don't think world oil production is going to peak for several more years, which means there's not much reason for short term price spikes. So what's the explanation?

It's possible that it's due to nothing more than normal short term market fluctuations. However, the chart on the right suggests the answer is more fundamental: demand is now exceeding supply. And while this doesn't necessarily mean that production has peaked, it may mean that we've hit the supply/demand crunch I wrote about a couple of months ago:

Current world demand for oil is about 84 million barrels per day, and current world production capacity is about....84 million barrels per day. As Amy Myers Jaffe points out, OPEC's spare capacity and thus the world's has dropped nearly to zero in the past few years. Everyone is pumping full out.

This is why prices are increasing now even though there's been no oil shock. It's not because of a sudden disruption, it's because demand is now bumping up against supply. What's more, this is a permanent condition: new capacity takes years to develop, so even in the best case supply will only barely keep up with future growth in demand. There's not much margin for error.

Oil production will almost certainly surpass 84 million barrels per day as new fields come online in the future, but demand is going to increase right along with it. Thus, unless there's a global economic shock of some kind, it's likely that demand is now permanently equal to supply. There's no spare capacity left, and there never will be again.

This mean that we're now living in a different world. I'm not sure what all the ramifications of this are, but one thing is pretty certain: the next oil shock and there will be one eventually is going to be worse than any previous shock. Fasten your seat belts.

Kevin Drum 1:03 AM Permalink | Trackbacks

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