Heading Out

Seeking the winds that help to sail on Shakespeare's tide.

Monday, December 06, 2004

Peak Oil - A Dickensian view

Thanks to Instapundit I came across a question on Powerline as to whether the rise in oil prices over the election was due to some conspiracy. The probable answer is that, unless the conspirators can control the weather, it’s unlikely.

To explain it is probably easiest if I cite Mr Micawber, from David Copperfield

'My other piece of advice, Copperfield,' said Mr. Micawber, 'you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and - and in short you are for ever floored. As I am!'
In this case consider that our expenses – i.e. global oil consumption, went up this year to around 83 million barrels a day (mbd). (A barrel is 42 gallons). It is rising at about 2 mbd each year. Now as long as our supplies (income) can match this outlay then we are in happiness.

However when we do not – such as:
when the hurricanes closed down about 0.5 mbd of production in the Gulf,
when oil production in Iraq dropped below 2 mbd because of pipeline bombings,
when there was a threatened strike in Nigeria,
and when there was a fear that Ukos (which produces around 1.6 mbd) might stop production in Russia – then we have a problem.

At present those issues have all been resolved and thus there is once again more oil being produced (income) than being consumed (expenditures). However there are some small points at issue for the future.

World demand is still rising at 2 mbd. (You might call this the sixpence in Mr Micawber’s advice). So that this time next year expenses will have gone from a pound to a pound and sixpence – and if we can continue or increase production then happiness continues. A number of economists are forecasting a reduction in the rise in demand, but perhaps they do not see the considerable needs in China and India that drive this increase (and they only have to read the papers to see it).

The question then becomes can we meet the demand, and here is the problem. There are only 11 countries that are increasing production and most of those have production levels so small as to be inconsequential. Of the rest while it is possible that they might make the 2 mbd increase next year it is unlikely (for reasons I have and will post on again). They almost certainly will not the year after next.

Bear in mind that as production in other countries (such as the UK) falls, that countries that used that supply must find another source. And if we are now at the peak of production, then our income no longer rises above a pound and sixpence and may indeed fall back below a pound, while our expenses will continue to increase. The result – misery, and we are floored.


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