this blog entry has been updated
After peaking in the high $140s, the price of a barrel of oil has receded below $120. This, naturally, has led to as much knee-jerk bloviating from pundits as the steady rise past $100 that preceded it.
What most of the analysts have missed in stirring such causes out of their tea leaves as US President Bush's decision to lift the moratorium on offshore drilling and the good behaviour of Tropical Storm Edouard is the underlying role of supply and demand.
The very high petroleum prices over the past several months have finally succeeded in stalling growth in global demand - particularly in places like China, which have been driving most of the demand growth over the past several years. This stall has taken pressure off suppliers.
In the developed economies, demand is actually falling. For example, driving is down four and a half percent in the US this year. At the same time, the US is in a full-fledged recession and Europe is in precarious shape.
Canada may not technically be in a recession, but that's mainly because of the huge increase in national revenue from Oilsands exports. The rest of the economy may be in recession already.
So has the decline in oil prices disproven the Hubbert Peak hypothesis and vindicated the naysayers? Hardly.
Peak Oil theory predicts exactly what we are observing: a turbulent yo-yo of price volatility. Growing demand for oil leads to price super-spikes when supply growth can't keep up, followed by economic crisis and falling demand for oil, which leads to falling prices.
Lower prices then trigger a resurgence in demand, which leads in turn to another super-spike when demand again hits the peak in rate of production. (Market signals are effective but clumsy.)
This volatility is the "bumpy plateau" in which oil production hovers around a global peak - around 85 million barrels a day, it turns out - and demand strains against the upper limit of production as prices spike and fall off, spike and fall off.
The analysts poring too closely over each putative trigger - a hurricane develops or disperses, blustering over Iran intensifies or eases, the US dollar rising or falling against a basket of other currencies, offshore drilling in the US is approved or vetoed - will surely miss this larger picture of global demand repeatedly banging off a rate of production that has reached its zenith and must rachet back bit by painful bit through each mini-crisis from here on out.
Update: added to the description of the bumpy plateau for clarity. -Ed.
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