In the most recent edition of the OPEC Bulletin, recently put online on the OPEC webline and which can be read here (120 page pdf – relevant bit on p.60), OPEC – via a senior member, i.e. Dr Shokri Ghanem, Chairman of the People’s Committee, the National Oil Corporation (NOC) of Libya – addresses the issue of peak oil head on:
while some of the more pessimistic oil specialists are declaring that peak oil has already been passed, or at best is here now, others believe it is not going to arrive before 2010. Some optimists give the world a little more breathing space — that is to say up to 2020, and perhaps even up to 2030. However, all in all, most would appear to agree that peak oil output is not very far away for all of us. It could take place sometime within the next decade or so, which in fact means that there is not much time left for a world economy to be driven largely by oil.
His article is about where oil prices are headed, and while it’s self-serving for OPEC to talk about higher oil prices, you have to remember that OPEC is scared to death by what happened in the late 70s and early 80s, i.e. when higher oil prices led to lower demand and higher production from non-OPEC sources, and their revenues collapsed quite quickly thereafter, creating tense domestic situations.
So when they write that:
since peak oil output is not about the time at which oil will run out, but the time at which production can no longer be increased to cope with increased demand, it seems the only way the oil price can go is up.
This conclusion seems to be in line with the view held by the peak oil output advocates who argue that the ongoing oil price rises are mainly due to supply-demand imbalances. This is because we are at, or near, the production peak of world oil, if not on the downward slope of Hubbert’s peak curve. This is not to deny the role of other factors (such as geopolitical), but only to stress the importance of supply and demand for crude oil as the prime factor in determining the price of the commodity.
So, for some, $100/b oil may still be cheap after all and, as such, the world economy can cope with this price. Having said that, I would like to turn now to the fundamental question: what is keeping the oil price high? The simple answer to this question should be first and foremost strong world oil demand. We can see this growing demand evident in China, India, and the United States, coupled with dwindling spare production and less economically viable recoverable reservoir capacities. Other factors, such as a lack of refining capacity, geopolitical uncertainties, market speculation, and natural disasters are also important.
They are confident about talking prices up because they consider the underlying supply-demand balance to be highly favourable: strong demand growth, including in recent years despite sharply higher oil prices, and a lack of substitutes for supply.
So we will reach the point soon when demand will still be growing, but supply won’t – and something will have to give, i.e. demand will have to be destroyed because supply won’t be able to provide. And the most likely solution will be a big recession – unless we act first to prevent this from happening.
Even if we did not care about the geopolitical angle (all these shady and/or hostile countries holding a vital supply in their hands), the economic angle makes it urgent to work on energy conservation and savings in order to avoid the downturn that will unavoidably be required to balance the oil markets in the face of supply’s inability to cope.
For now, it’s still in out hands. Soon, it will be too late. Prudence would suggest that we should at least think hard about it, even if only as insurance.