Saturday, December 24, 2005

Peak Oil Update; what will it cost to drive next year?

Look at this chart from the following link:

This jagged graph represents the very best official information available on world oil production during the last few years.

Given the soaring price of oil over the last several years, why would production have slowed down so much that world production appears to be stagnant during the last year or so?

Other than the fact that production can no longer respond to price, so that steadily increasing demand causes the price to rise sharply to accommodate this new reality. An expert analysis by the editor of Petroleum Review Chris Skrebowski [at the recent ASPO-USA conference in Denver] meanwhile predicts peak oil within 30 months, which includes now.

A good bit of discussion follows at the link above, while the following parent site is a good place to go to keep up with discussion on energy-related topics.

As a snip of the discussion by Stuart Staniford points out below, only Russia and Saudi Arabia can potentially turn production around for a time, but it is probably not in their interest to spend a fortune increasing production just to keep it cheap and decrease their own long term benefit. -- Roger

"... Let's think about it from a different angle. We know the IOCs, taken together, have been unable to increase production for a number of years. All through that big 2002-2004 rise in global production, the IOCs were not contributing a whit to the cause. They bought a lot of production on stream, but it just offset their decline rates. Judging by the nice Bloomberg story we saw Dave post, we shouldn't expect much change in that in the next few years (as megaproject analysis tends to confirm). So if production is to increase by a lot over the next 5-10 years, you've basically got two places with the reserves (maybe) to do it: Russia and Saudi Arabia. Some people would argue even they can't increase production, but I tend to the view that they could if they really pulled all the stops out to do so. As HO has been documenting at length in his posts, there's not much evidence that Saudi Arabia is drilling at the rate required for massive increases in production, and John Grace makes, to me, persuasive arguments in his book that Russian production is unlikely to increase too much more absent a large independent oil sector to go after all the smaller fields. So they could increase production somewhat further, but for some reason they aren't acting like they plan to. Why not?

Well, Putin and Abdullah basically control the price of oil. How much should they charge? Should they sell it cheap, such that demand will grow fast? Or should they sell it dear so that demand will grow slowly? Or very high so demand will collapse? What's in their best interest? They're not interested in maximizing global growth in oil production, they're interested in maximizing revenues to their respective regimes. I would say that it's in their interest to charge as much as the market will bear without causing a substantial collapse in demand. I suggest that would be high enough that any uses of oil with much elasticity will tend to get weeded out to make room for the growth in BRIC vehicle miles traveled. There's a lot of inefficiencies in oil use such that it's quite possible for demand to go flat for a number of years as developing countries fuel-switch to coal for power generation and the vehicle fleet gets more efficient. So if it's possible for demand to go flat, and it's in the self interest of the people who control the market for that to happen, why is it not going to happen?...


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