Important new developments in the peak oil story have been coming so rapidly in recent weeks that we thought a one page mid-week update might be helpful.
Thus far the surge in oil prices is continuing with crude reaching $135 a barrel last night. There were a number of factors behind this week’s increase including the US stocks report showing that US crude and gasoline inventories unexpectedly dropped last week while distillate stocks, which normally increase at this time of the year, went up by only half what analysts had been forecasting. So far this year, US imports are not going well. Crude imports are down by 2.3 percent for the first 136 days of 2008, and the net of oil product imports and exports is down by 18.4 percent largely because of a 15.7 percent gain in product exports.
Other factors behind the run-up are long-term production worries, a falling dollar, short covering, and increased demand from China in the wake of the earthquake. Forecasts from brokerage houses that oil will reach $140 to $200 a barrel in coming months are adding to the anxiety as are falling equity markets and the consequent flight to the perceived safety of commodities.
A notable development in the past few days of oil futures trading was a rapid shift to continuous “contango” which is a situation in which prices of futures contracts become progressively more expensive into the future. This is the first time that continuous increases have ever occurred in the history of the oil futures market; that means the consensus of the oil traders is that the price of oil will continue to climb steadily for at least the next eight years.
Even with strong fundamental reasons for the current surge, prices have been moving up so quickly that some kind of a correction can be expected soon. The size and length of the correction may provide an insight into the course of oil prices over the rest of the year. The debate over how much speculation there is in current oil prices continued this week when, at a Senate hearing, various senior US oil executive said that without the speculators, the price of oil would be anywhere from $35 to $90 a barrel which is anywhere from $45 to $100 less than current world prices.
The International Energy Agency
This week’s major news came in a Wall Street Journal story reporting on efforts by the International Energy Agency. According to the Journal, “The world’s premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand….The IEA has predicted for several years that crude-oil supplies will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day now. But the agency is now worried that aging oil fields and diminished investment mean that companies could struggle to break beyond 100 million barrels a day over the next two decades.”
While the IEA’s report will not be released until November, this story is another indication that there has been a major revision in the IEA’s thinking about world oil production. Instead of forecasting that world oil production would simply keep up with demand, they seem to be making a good-faith effort to describe a more realistic view of future world oil supplies.