Oil futures just flirted with $90 per barrel before settling at around $89. (In real terms, the prices that followed the 1979 OPEC crisis were higher, but only slightly: adjusted for inflation, oil hit $95 per barrel in
Some analysts are still talking about political instability and the weak dollar, and of course these are factors, but the high prices we're experiencing are fundamentally geological in origin.
It comes down to rate of production. Saudi Arabia, for example, has promised to increase its daily production to 12 million barrels by the end of the decade; but their production actually fell over the past year. That's because Ghawar is past its production peak and no amount of salt water injection is going to reverse its decline in rate of production.
Kuwait admitted last year that it actually has only 50 billion barrels, not 100 billion barrels as it had previously claimed.
Iran is about two decades past its production peak and falling slowly. Ditto for Venezuela's conventional oil.
Iraq's production is well below capacity due to, er, political instability in that country, but it's also past its production peak. In any case, Iraq was producing around two million barrels a day before the invasion, and it's producing around two million barrels a day today.
North Sea oil is dropping off by about ten percent a year.
There's plenty of non-conventional oil (oilsands, shale, deep-water, etc.), but hard physical constraints will limit the rate of production they can realize. There's a reason the oil companies went for the easy-to-reach stuff first.
Refining capacity is a bottleneck today, but that's because the oil companies don't see any point in building the new infrastructure that would be needed to ease it, since upstream oil production is going into decline anyway.
Another pressure is that sour, heavy crude is making a bigger share of the total as light, sweet supplies dry up (light sweet is already past its global production peak), and it requires more refining.
Total global oil production has been stalled at around 84 million barrels per day for the past three years despite very strong price signals and steadily growing demand. Exploration and drilling are way up, which we would expect as a result of the high prices, but discovery is way down and production is flat, which we would expect as a result of a geological production peak.
Sooner or later, production is going to slide into permanent decline and the world is going to have to figure out how to get by with less and less each year.
The sooner we start to think about how we should do that, the better our chances of transitioning to a lower-energy, post petroleum economy without extreme volatility and horrible economic, political and social dislocations.
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