Why oil prices are so high: Production shortfall, Iran concerns, and low interest rates

Rising oil and gasoline prices are of concern to many people today. I see three basic issues involved:

  1. “Stalled out” growth in world oil supply
  2. Concerns about Iran
  3. Artificially low interest rates

Stalled Out Oil Supply Leads to Five Million Barrel a Day Shortfall in 2011

In my view, the biggest contributor to high oil prices is the first one–stalled out oil supply.  At this point, the interaction between oil demand and oil supply does not work in the way most people expect it would. Even if the price of oil rises, world oil production doesn’t increase by very much (Figure 1), if at all.

Figure 1. Brent oil spot price and world oil supply (broadly defined), based on EIA data.

In the words of economists, world oil supply is relatively inelastic. This is true, even though the oil supply shown in Figure 1 is what is sometimes called “All Liquids,” so includes substitutes for crude oil, such as biofuels, natural gas liquids, “refinery gain,”  and any fuels from coal-to-liquid and gas-to-liquid processes. These substitutes are not growing by enough to make up for the shortfall in crude oil growth.

If we compare recent oil production with that in the 1980s and 1990s, we see that about 2005, growth in world oil supply suddenly slowed down (Figure 2).

Figure 2. World oil production (broadly defined) based on EIA data, with exponential trend line fitted by author to 1983 to 2005 values.

Between 1983 and 2005, world oil supply rose by 1.64% per year. If world oil supply had continued to rise at that rate, oil production would have been about 5 million barrels a day higher in 2011 than it actually was. The fact that oil production has remained relatively flat since 2005 is the primary reason oil prices have continued to rise, except during the 2008-2009 recession. (This recession was to a significant extent caused by high oil prices–I wrote an academic article on this subject, published in the journal Energy called, Oil Supply Limits and the Continuing Financial Crisis, summarized in this post. Economist James Hamilton has also written on this subject.)

The amount of the oil shortfall is huge. It is far more than the amount of oil taken off-line by Libya, and more than Saudi Arabia’s supposed spare production capacity. Given the high price of oil, most of the missing oil seems to be oil that we do not have production capacity for.

In recent years, emerging markets such as China and India have been increasing their demand for oil. If anything, it seems as if their huge additional demand would ramp up required oil supply even more quickly than predicted by a trend line from the 1983-2005 period. Instead actual production (and consumption) is lower since 2005.

Other Reasons Oil Prices Are High

Iran. Clearly concern about the Iran situation is having an impact on oil prices. As long as there is worry about instability in the Middle East, there is likely to be pressure on oil prices. Iran produces about 4.2 million barrels a day, and consumes about 1.8 million barrels a day, leaving about 2.4 million barrels a day for exports. Of this, 2,156,000 is reported by the EIA to be exports of crude oil; the remainder is exported as refined products.

Figure 3. Iranian oil production and consumption. Figure by EIA.

According to the EIA, Iran’s top export destinations are China, Japan, and India. The EU and Turkey are said to import 650,000 barrels of oil a day, with one source in Turkey accounting for 200,000 barrels of the total. France and Britain are reported to account for very little of Iran’s oil exports.

Besides concern about exports, there is also concern that oil that might be delayed passing through the Straight of Hormuz. Currently 17 million barrels a day of oil passes through the Straight of Hormuz, with 85% of these exports headed for Asian destinations. While other routes are available, there would be delays and higher costs involved. Even if the delays do not directly affect the US and the EU, there would likely be indirect impacts on world markets.

The world clearly cannot get along without 2.4 million barrels a day of exports from Iran, although perhaps losing only the EU portion of those exports (about 500,000 barrels a day) might be tolerable for a time. While some oil from Libya is coming back on line, oil prices are still very high. In a world where oil production is not rising by much, any loss of production is a problem because of the adverse impact high oil prices have on economies of oil importing countries, including those of the EU, Japan, and the United States. Any loss of production also leaves us more vulnerable to disruptions if another oil exporter suddenly has difficulties.

Low interest rates. Low interest rates should theoretically not directly affect oil prices, but if alternative forms of investment do not provide a reasonable yield, this fact may affect oil decisions as well. For example, if prices are trending upward, there may seem to be a premium for holding oil off the market. If interest rates are very low, this will make the comparison seem even better. Thus artificially low interest rates would seem to reinforce an upward oil price trend.

Furthermore, if artificially low interest rates actually induce businesses and individuals to invest in durable goods, production of these goods will require more oil, as well as other types of commodities. But we have already seen that oil supply does not really increase by much, even with large price increases. Thus, because of this effect, low interest rates will also act to increase oil prices, at least until recession (because of high oil prices) hits again.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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97 Responses to Why oil prices are so high: Production shortfall, Iran concerns, and low interest rates

  1. Bill Simpson says:

    I am always amused when people complain about $4 a gallon gasoline. If you consider the amount of work that an internal combustion engine can do using a gallon of gas, to how many hours of human labor it would take to do an equal amount of work, a gallon of gas should cost a LOT more. Like 10X more. Try cutting your suburban lawn with a reel push mower, or cutting up a tree with a hand saw, and you will discover the true value of petroleum. When it is gone, we will be in serious trouble. A hundred years from now, I suspect there will be a lot fewer people on this planet, unless some new nuclear energy source like fusion can be perfected. With enough cheap electricity, we could make fuel from seawater. There is no hydrogen shortage in the oceans.

  2. Andras says:

    I think that bicycle is one alternative option for traveling in the future. However I know that the city structure in the US is different than in EU (where I’m from). In US up to 80 miles per day commute drive is “normal”, but in EU bicycle drives can be one solution for daily travel in the city. For example in Budapest, Hungary there is growing number of cyclist in the last years:
    They have been examined that the fastest (in time) travel option in the city of Budapest is the bicycle. (then comes the mass transport and the last is the car)
    Other reason is that in EU the gas price is about double than the US price – so more and more people think car drive is no “affordable” – if it is possible than change. In Budapest we see much less traffic jams this year then the last – however car drive is still slow in the city.
    So the process of change is ongoing in the present and not something that will happen sometime.

    • Thanks for your perspective. I don’t think we are as far along here.

      • Andras says:

        However I would not be sure about the European city structure is better then in the US – in transition point of view. The Eu city’s “density” is higher than US cityes – this is in one side better taking the commuting into account.However a city consumes a lot energy for other purposes, like food transport to the city. European cities have grown to be huge – in number of citizens and area. The US city structure may be better for a transition time interval -even if in one point the commuting they seem to have more problems. Cities are complex systems so very hard to predict how they will behave in other circumstances.

        • Without enough energy, it is hard to see that cities will do as well as today. They depend on agricultural surpluses and large numbers of jobs outside of the agricultural sector. It is not clear that these will always be around.

  3. Part II now up in the Doomstead Diner

    [b]Energy-Money Equilibrium II: The Modern Era and the Jenga Paradox[/b]



    • Update: Peter added a cool new scrolling synopsis of Articles to the Homepage of DD. The “Overshoot” Article Gail posted here is now crosslisted on DD as well with all the linkbacks to OFW.

      More cool Widgets coming soon to DD to make Doom Research more User Friendly! Check in regularly to see the Site Improvements!



  4. Tracey Trisko says:

    Recently Iran’s crude oil production rate has been falling from over 4 million barrels a day to under 3.5. Knowing if this is due to sanctions or geophysical issues is the hard part.

    • Through November 2011, Iran’s production isn’t down very much, according to EIA data. “All Liquids” is at about 4.2 million barrels a day; crude and condensate is at about 4.0 million barrels a day, down a bit over the last couple of years due to natural decline.

      This recent OPEC report (page 45) shows a slow decline from 2010 to Jan 2012, from 3.7 to 3.5 million barrels a day. It is on a different basis than the EIA data–crude, without condensate.

      My guess is that you are comparing oil amounts from one report with oil amounts from another report, when they are on different bases. So you are comparing apples to oranges, and asking why the big drop in production. The answer is that there really hasn’t been a big drop in production, from sanctions or from natural declines. Don’t feel bad–everyone who has worked with oil data has made this mistake at least once in their lives.

      • Owen says:

        You will generally never see reports like this without a phrase added that goes something like:

        This decline is the result of a lack of investment.

        Which . . . is true. If they could get someone to put up $20 billion to drill $2 million wells that produce $1 million total, then they could get their production up. All they have to do is drill more and more wells for smaller and smaller oil containing pores in the rock and yes, production can improve.

  5. Lee Smith says:

    Most of the focus is on the short term, but energy needs are intergenerational. Who better than actuaries to develop long term supply-demand price structures which will allow future generations a chance at a toleranble lifestyle?

    • Yes and no. The oil problem is one that looks solvable when a person starts looking at it, but gets worse and worse as one gets into it. Substitutes which are said to be “renewable” are not in fact sustainable. If there is a solution, you are right, actuaries could be the ones to figure it out.

      • Don Stewart says:

        What do you think about the final paragraphs in Tom Murphy’s current post?

        Also, I dimly remember that marginal utility curves slope down and to the right. Which means that the second unit of something provides less value than the first unit, and the tenth unit is likely to provide quite a lot less than the first or second unit. Which suggests to me that China and India are likely to reach parity with the OECD countries in terms of consumption per capita–which would put all of us on the same curve at the same place. And looking at the current figures, that suggests quite a bit lower consumption in the OECD countries, and higher consumption in China and India. Which makes the projections of West Texas, which have been commented on fairly extensively, plausible. That is, China and India will, fairly soon, get all the exports. Granted that that won’t be exactly true, does the marginal utility curve support the argument put forth by West Texas?

        Thanks…Don Stewart

        • There is probably a transition period, before an ultimate downslope. What Tom says is sort of right for the transition period, but not for the final downslope. I don’t think Tom understands all the financial problems that will make all of this worse than the way he writes about it. His mention of Herman Daly and a steady state economy indicates to me that he doesn’t really understand how badly off the financial system is, if there are major debt defaults. I expect oil production will drop off more quickly that Tom believes, making any transition difficult, and making it difficult to maintain population.

          In his “Expect Less” section at the very end, he mentions “climate change” and “species extinction”. I think climate change is already baked into the cake. I am not convinced that anything we do now will fix it (partly because there are 7 billion people on earth, and partly because the climate is already changing–some of it not caused by humans). Climate has changed for the life of the planet. (But he is right, the warming component won’t increase as much as models assume.)

          With respect to expecting less “Species extinction,” one of the issues I see is that humans are near the top of the list of species veering toward extinction, because we were the ones that caused the current huge imbalance, and we are currently present in vastly greater numbers than ecological systems could normally support. Other species may stop dropping off in huge numbers, but only if there is a correspondingly large drop in human’s effect on the planet.

          In the “Expect More” section he includes “bicycles,” “train rides,” “pies cooling on the sill,” “canning,” and “durable goods”. I think we will likely end up with a lot less of everything. I don’t expect a very long period (if at all) where there is more canning–this requires glass jars and lids, and some way to transport them to people. It is a fairly advanced technique. Bicycles and train rides are also fairly advanced. Any time period of “more” goods made out of steel and rubber seems very limited. We need to expect to walk, or make goods out of local materials.

          Regarding WestTexas’ forecasts of exports going to China and India, I expect that in not too long, exporting countries will be concerned about exactly what they will be getting in return, because there will have been so many debt defaults. Countries that can provide food may be favored. This could favor the US again, since China and India are limited in what they can supply for food. With all of the financial upheavals, I think the countries that don’t fall apart politically will have a better chance to obtain oil imports.

          • Don Stewart says:

            Those who are interested in the issue of food preservation should take a look at the solar dryer in:

            I always have trouble linking to Janaia Donaldson’s videos, but it is Peak Moment 168 if this link doesn’t work. Mark Cooper explains why he doesn’t do canning and does drying instead–it’s easier and preserves more nutrients and doesn’t require fuel. The solar dryer demo starts at 11:40 in the tape.

            My thought is that those who are interested should keep an eye out for opportunities to build a solar dryer with a local group of people–some of whom know what they are doing. While it isn’t difficult, there are principles involved that you may not be able to learn by playing this interview when things get bad. But if you have built one, you will remember, and then it is a question of scavenging parts.

            Don Stewart

            • I agree–drying makes a lot more sense than canning. Canning is a modern technique, that it is going to be hard to keep up, IMO.

            • Justin Nigh says:

              Hi Don,

              You’ve probably seen this before, but it’s new to me and seemed relevant to post here. It’s a Fresnel lense and can be used to boil a gallon of water in 30 minutes. I’ve read that in crisis events, most people end up drinking untreated surface water and succumb to microbial illness that leads to death. Having one of these lenses available in such scenarios seems like a smart idea. If you’re familiar with it, I’d be interested in what you might tell us about your experience.


  6. Andras says:

    Very exciting article!
    It is so clear that almost anyone can understand. But if this is true than how come the oil industry leaders don’t see this. And almost all of the politicians and economy leaders insist on the GDP grow theory. Most of us can access to high level information from this sort of articles, but the leaders have other and better sources. I would be curious about the opinions of vehicle or oil industry leaders.

    • Oil companies that are not government run have a top priority of making their stock attractive to investors. No matter what their real view of the oil situation, they are going to say that the prospects for the industry look wonderful. How many companies write reports about being part of a dying industry?

      Oil companies that are government run are very closely tied to their governments. Their governments want to “sell” the idea that their country is prosperous and growing. They are not likely to tell the true story about oil decline either.

      Vehicle makes need to make money off cars and trucks. They make the most money off big cars and trucks. They will sell smaller cars and trucks if ordered to. I am not sure that they are in the business of making dire predictions, if others aren’t.

  7. Energy-Money Equilibria: The Vaue of Money in the Age of Oil.
    Now up on the Doomstead Diner.



  8. Ed Pell says:

    I still do not see car pooling nor house sharing. I think we have a long way to go before life becomes impossible.

    • Ian says:

      Car pooling to go to a supermarket wouldn’t take place until gas prices are much higher, perhaps $20 per gallon. That is hard to visualize.

    • Owen says:


      Kids moving back in with parents is house sharing. And once they start sharing the house, the weekly or biweekly grocery store run is done in one car for the consolidated household. It cuts the number of grocery store gas consumption events in half.

      This is carpooling. It’s already underway.

      • Don Stewart says:

        Dear Owen
        I see this happening in the US on a large scale. It is frequently a topic for hand-wringing in the financial blogs because it ‘doesn’t stimulate the economy. Australia is still in the boom stage, and here is an interesting article from Australia which looks at the question from the perspective of saving the world and saving money:

        Proportionally, smaller households use more energy and create more greenhouse emissions than larger ones.

        “As you get down to double- and single-person homes, the efficiency of the household economy falls,” Mr Holmgren says. “Food preparation, food wastage, heating, cleaning and maintenance all become a bigger load for less benefit.

        “And when it comes to more self-reliant living, in a small household you can’t do as many things, like growing and preserving food, keeping animals, or your own building and renovation.”

        He notes that not only are fewer people living together, but we’re also spending fewer hours at home. The combination forces ever-more development, jams our transport systems and exacerbates social isolation.

        “Our cities are crowded by empty buildings under lock and key, with people racing between them – whether it’s to work, the gymnasium, the restaurant or the childcare centre,” he says.

        Given the spare capacity in existing housing stock, he argues the case for “higher density living”, not higher density building.

        Bigger households, where people are home more often, are likely to be consuming less, producing more of their own needs and contributing to the vitality of the local area.

        So how can we live in larger numbers? Mr Holmgren says the two most common ways are to take in boarders or share with extended family.

        “From a hard-nosed, self-interested perspective, if you’re a homeowner with a mortgage, renting the spare room out to a boarder is the best thing you can do to reduce your debt burden,” he says.

        Likewise, Ed McKinley, of the Groupwork Institute of Australia, argues young people should consider the financial, social and environmental plusses of teaming up to buy a house.

        Don Stewart

        • Owen says:

          There is a significant downside.

          Extra people in a house accelerates deterioration of the structure and all things in it. Landlords HAVE to price it higher. Relentlessly higher.

          The reduced number of abodes also decreases property tax revenue for the municipality.

          Car production will eventually be destroyed too. This will fire people, who won’t be able to afford the increased rent.

          No free lunches.

          • Don Stewart says:

            My wife grew up in a row house. Her parents rented the top floor. The idea was that someday their daughter would marry and move into the top floor. Unfortunately, she married me and I took her away to the Midwest. But back in those days, a house was typically not seen as just the abode of a nuclear family. It either produced rent or it was a place for children (or parents) to live. I see no reason we can’t get back to that. When times are tough, you do what you need to do.

            As for the bad effects on city budgets, so be it. Cities do lots of things today they won’t be able to do in the future. They might as well get used to the idea–just like the rest of us.

            While they are getting used to it, they will begin to notice all the dysfunctional regulations which prevent people from doing the right things. If we are very lucky, they will eliminate the dysfunctional regulations.

            Don Stewart

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  10. jpmist says:

    Left one out. According to a McClatchy news report, over 60% of oil futures trades are by speculators with no interest or ability to take actual physical delivery of the oil they speculate on.

    Your own first chart underscores this by showing the relative volatility of price versus supply. Did productive physical demand for oil increase so drastically in 2007 as to justify a doubling in price? Later that year did productive physical demand for oil grind to a complete halt justifying a 50% collapse in price later that year?

    The chart shows the volatility of fear and greed, not supply and demand.

    • babystrangeloop says:

      You forgot to say “it’s turtles all the way down”.

    • There are clearly things besides supply and demand at work. I think credit markets are the big thing. US credits supply starting heading downward, precisely at the time oil prices spiked in July 2008. The credit markets affect all kinds of demand.

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  12. babystrangeloop says:

    Reuters just published a FACTBOX report showing Iranian oil to Greece has fallen from 140,000 barrels/day in 2011 down to 30,000 barrels/day in 2012.

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  14. pjc says:

    “invest in durable goods, production of these goods will require more oil, as well as other types of commodities”

    Nope. Durable goods generally draw on natural gas, not oil. Gas is used in the plastics industry (as well as the fertilizer industry, and the spot electrical generation industry).

    Thus, greater industrial activity requires more plastics and more electricity, both of which are priced by gas and not oil.

    Gas in the US is the lowest it’s been in 10 years, and (adjusted for inflation) pretty close to the price in the 90s.

    Oil (in the US) is almost exclusively a transportation fuel. The fuel economy of the car and airline industry continues to improve at a steady clip. The proportion of the typical homeowner’s paycheck dedicated to gasoline is reasonably muted, from a historical perspective. (I.e. much lower than the late 70s).

    2008 was different, in as much that gas and oil spiked at the same time.

    Of course, internationally the price of natural gas is high (for now — they haven’t started fracking China, India, Argentina, Australia, Poland, Ukraine, Ireland yet – give it another 5-10 years). But here in the US, the energy related prices of production are not prohibitive, and are far cheaper than they were 4 years ago.

    • You have to transport durable goods to their destination and this takes oil. One type of “durable good ” is cars. Another is trucks. Both of these take oil to operate.

      • pjc says:

        “You have to transport durable goods to their destination and this takes oil”.

        The logistics industry is quite efficient. Proportionally, this is a small player. The price of natural gas has a lot more to do with the cost of delivering a car to a consumer than does oil.

        “Both of these take oil to operate.”

        Cars are certainly becoming more efficient to operate. High oil, low natty gas, low interest rates is actually a form of “cash for clunkers” – i.e. incentivizing a higher turnover of the fleet for more efficient vehicles. Thus, this is an anti-recessionary force.

        The fleet has become 10% more efficient in just the last 4 years. So from the consumer standpoint $4 gasoline is really more like $3.50 gasoline, since people are driving cars that take them 10% farther.

        Durable goods move quite efficiently on rails. They’re durable so the rail speed isn’t too much of a problem. In a low interest rate world, the opprotunity cost loss is also pretty low. The US is the most efficient moving of freight on rails in the world. (Our ability to move people on rails is pretty lousy, but we’re the world leader in moving stuff). The rate of efficiency for freight on rails is so high that the price of oil would need to broach $300 before durable goods start become expensive to move on rails.

    • Justin Nigh says:

      I live in Australia. Fracking is definitely occuring here. There is a lot of public resistance to it as there have already been reports of groundwater contamination. Hydraulic fracturing has been suspended in NSW but is still used in CSG mining in other states. Further political action is being taken to halt the practice in certain regions and to ban the use of some chemicals.


      • pjc says:

        Australia isn’t really fracking much at all, actually. Nowhere near as much as the US.

        They’ll frack the heck out of Australia eventually — Australia is investing in massive LNG export facilities, which will drive up the price of domestic gas and Australia and create an irrestibale urge to frack.

        Perhaps more in some areas than others. Australia has some big empty places that will likely mount little resistance to fracking, and some tiny slivers of population that might create local bans. That seems like a reasonable compromise to me.

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  16. Owen says:

    I have been looking at the spike in rig count required to get a mere 150K bpd increase in production. It’s huge. The concept is frantic drilling to hold the number up.

    It doesn’t take much extrapolation to realize what this means. It means that the wrong yardstick is in play. We have forgotten that money is imaginary. Money doesn’t physically exist as an entity. It’s an artificial, imaginary substance. We are measuring everything using it.

    The correct measure is the aloof ER per energy invested, but that’s too aloof and obscure. Better to view it as how much comes out per number of trucks driven to surround the hole, number of cars that brought the workers there, how much work to route the pipe to the hole . . . just how much sheer work it is to drill frantically to maintain some progress while sprinting up a down escalator that is accelerating.

    In fact, it gives rise to an even better analogy. Society is sprinting up a down escalator for the purpose of reaching out a finger to hold a button down. As long as that button is down, people don’t die. So we sprint upwards (frantic drilling), the escalator’s downward speed is accelerating (as more fields enter the “old and post peak” category), but the one thing usually left out of this sort of analogy is the button . . . it’s moving upwards away from us. It is global demand.

    So we have to sprint (drill) fast enough to overcome an accelerating down escalator to hold our finger outward pressing a button that is rising upwards away from us. It doubles the required sprint requirement.

    • I am afraid you are right. And it looks like the opposite of going up this escalator is falling back to the basement level. There is no nice “steady state” that we can step off to the side on, and stay there for a few hundred years.

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  18. etfideas says:

    I’ve just seen an article on NPR (http://www.npr.org/2012/02/25/147421345/whats-behind-the-rise-in-gas-prices) that says gasoline prices are high in the US, because US refiners can produce it cheaply thanks to low cost natural gas and that drives export demand.

    Some refiners also have to close older refineries that cannot process low grade crude oil.

    • Natural gas one of the feedstocks used when the very heavy oils are cracked and made into shorter molecules. The fact that the US has bargain prices for natural gas right now makes this process cheaper in the US than elsewhere, so the US is a sought-after refinery destination. I probably should add a little to the post on this. Many people think that the fact that the US is exporting gasoline is a problem. It isn’t really–the issue is that countries are sending us their oil for us to refine, and we are refining it and sending much of the finished products back. We are a service provider, and the we record the “refinery gain” as oil we have produced, in our calculation of our “oil production”. Our contribution was really adding natural gas.

      Edit–I decided that a separate post on this subject would be better.

  19. La Curee says:

    addendum: well it already has caused cost push to some degree and this will accelerate IMO until the dollar crashes.

  20. La Curee says:

    Nice piece Gail.
    Have you seen this comment from WestTexas it explains why IMO the West will continue to print money until it generates cost push inflation while talking up austerity.
    I know you like a good graph, some good graphs here!;¬)
    The last line of the comment:
    ‘The CANE metric is very much analogous to a fuel tank. If we project current trends, the “fuel tank” that would provide exported oil to about 155 oil importing countries would be full at the end of 2005, and about 50% empty by the end of next year.’

    • Thanks! I hadn’t read it. WestTexas has some good graphs in the post, and makes some worthwhile projections. It seems like people need to see how much oil would have been produced, to understand that there is a problem.

      • La Curee says:

        Hey Gail,
        Westexas has been commenting again.
        This time on Orlov’s blog.
        ‘If there is anything that is more overlooked than the ongoing decline in Global Net Exports of oil (GNE) and the even sharper decline in Available Net Exports (ANE), it is the rate of depletion in post-2005 Cumulative Net Exports.

        Note that the ANE metric is defined as GNE less the Chindia region’s combined net oil imports.

        But first, five annual “Gap” charts follow, showing the gaps between where we would have been at the 2002 to 2005 rates of increase, versus the actual data in 2010 (common vertical scale):

        EIA Total Liquids (including biofuels):

        BP Total Petroleum Liquids:

        EIA Crude + Condensate:

        Global Net Oil Exports (GNE, BP & Minor EIA data, Total Petroleum Liquids):

        Available Net Exports (GNE less Chindia’s net imports):

        Note the divergence between the first chart, total liquids, and the second chart, ANE.

        I estimate that there are about 157 net oil importing countries in the world. If we extrapolate the Chindia region’s rate of increase in their combined net oil imports, as a percentage of GNE in 19 years just two of these oil importing countries–China & India–would consume 100% of GNE.

        Assuming that the Chindia region’s combined net oil imports were to approach 100% of GNE around 2029, I estimate that the current CANE (Post-2005 Cumulative Available Net Exports) depletion rate could be on the order of about 8%/year (versus a 2005 to 2010 2.8%/year rate of decline in the volume of ANE).

        The CANE depletion rate would be the rate that we are consuming the cumulative post-2005 supply of global net exports available to importers other than China & India. Based on a simple model and based on actual case histories, note that it is common for the initial depletion rate to exceed the initial annual rate of decline in net exports.

        If, and obviously this is a big “If,” but if we extrapolate the 2005 to 2010 data trends, I estimate that the post-2005 cumulative volume of (net) exported oil available to importers other than China & India, or CANE, will have fallen by about 50% by the end of next year, 2013.

        The CANE metric is very much analogous to a fuel tank. If we project current trends, the “fuel tank” that would provide exported oil to about 155 oil importing countries would be full at the end of 2005, and about 50% empty by the end of next year.’

        • I don’t think that we can really count on a forecast like this working. There are so many fixed expenses, that businesses start going bankrupt it their volumes drop very much. Also, our whole debt and financial system are set up for a system which is increasing, not decreasing. It will not operate if the economy is shrinking. So the 8% decline is likely to become a much larger decline, quickly. Or the decline will vary from country to country, and our ability to buy oil extracted elsewhere will drop greatly.

          • La Curée says:

            Yes, that is my thinking looking at the North Sea a few years ago I projected 9% when giving a talk to a local (UK) council and said that it could not be managed just on its own.
            Then factor in loss of earnings (oil exports and industries subsidised directly and indirectly), the need to import more from a shrinking pool of available oil for export and a complete reorganisation of society.
            How can you force people instantaneously into a new mind set – and on what basis in the UK during WWII we had a cost plus systems to keep the system running we would need a cost minus regime to prevent a collapse, LMAO.
            Extremely rapid collapse seems inevitable for the UK the more you examine the data and history.
            Our position as the banking and business centre can be used to shield us right up until like the Greeks recently Iran ‘declines’ to fill up our tankers…
            Seems analogous to the first grain ships to return unladen to Ostia.

  21. It’s unfortunate we’re still leaving out the one real underlying cause of oil price escalation, the one we might potentially have some control over.

    That’s the economy’s structural design for continually multiply energy demand. Without that there wouldn’t be multiplying prices as we hit natural limits. Excess structurally growing demand is also what ties together the very similar rising price curves for so many primary resources, all being driven to hit “peak supply” at about the same time. It’s horrible that we’re paying no attention to that common source of the whole problem. We keep talking if each of the great environmental threat and resource supply shortages has separate causes. They don’t.


    At this point I’m just begging. Please, please, please… have a heart and deal with the whole problem. Please!!!! After years and years of trying to point to this very obvious fact, no one is picking up on it, as if because you didn’t learn in school how growth works for economic systems I guess. Please teach yourselves!!

    The simple fact is the economy burns resources, producing profits, that businesses and investors allocate as they like. It’s usually to expand the economy to make more profits. Using the profits to use the economy to expand the economy is what enables the economy to grow, and to have ever growing demand for all resources at once, and our present price spirals for nearly all resources at once.

    The only non-destructive way growth systems can stabilize their resource demands (i.e. other than by failing) is for their profits to no longer be used to multiply the scale of the system. There are myriad examples, you can readily learn from by yourself, if you don’t like my writing style… “A decisive moment for Investing in Sustainability”

    • timl2k11 says:

      I’m sorry, but I think *you* are missing something. If there is not enough supply that implies that there is too much demand. It’s just two sides of the same coin. You need only look at Gail’s previous post (“Population Overshoot”) to see looking at things from the demand side is done as well. In a finite world there are limits to growth.

    • Strav7 says:

      Nope. Have no heart. Will not comply.

  22. Lucas Durand says:

    Regarding artificially low interest rates…
    And with the caveat that I’m no expert…
    Here in Canada interest rates are artificially low – national inflation was 2.5% for January, while Bank of Canada interest rates were at 1% for the same period.

    Jeff Rubin has made the point that sudden increases in interest rates can burst bubbles…

    I have my suspicions that many of the over-hyped energy projects that we hear so much about today – shale gas, shale oil, even tar sands – are possibly just other investment bubbles fueled more by desperation than by rational decision making.

    Under what circumstances do you think interest rate hikes could be forced?
    Do you see such sudden interest rate hikes as causing trouble for such energy projects?

    • It seems like interest rates will rise when some of these loans start going bad, and it is clear that there is risk involved. Those accepting the risk will demand higher rates.

      It seems to me that the current very low interest rates are something governments will keep, as long as they can. I am wondering if the system will “break” rather than change to higher interest rates. It is pretty clear that governments would not be able to pay much higher interest rates–they would end up in the shape of Greece. But even the economy as a whole is only limping along, with interest rates where they are now. If interest rates were to rise, home and car sales would decline greatly, that people would not fix up existing homes. The impact of higher interest rates would be as great as the impact of high oil prices.

      • Lucas Durand says:

        Thanks for taking the time to answer my questions.
        Perhaps it is the complexity of our predicament that I find so fascinating…
        It seems like an endless game in trying to understand even a fraction of the various feedbacks.

        What surprises me is how many people, some experts in their fields, seem to miss the point on how complex the world really is.
        The complexity of all these intertwined systems, natural and artificial, should be freaking people out.
        It seems to me there’s somewhat of a monster of our own creation lurking in the entropy.

        Oh, and I really like you blog – I know it’s hard work maintaining a blog.
        Thanks for that too.

        • Strav7 says:

          Hear, hear. Another great point in systems breaking before high interest rates. If I had to venture a guess.. That’s a decision that has yet to be made, but you may very well be right.

      • Owen says:

        Hard to see how interest rates can be allowed higher. At $16Trillion, each 1% rise is an instant $160 billion budget smack, and we’ve seen Congress not even able to cut $4 B in a single year.

        I see no way the Fed could allow an interest rate rise.

        • Right. Low interest rates help offset high oil prices (and resulting high food prices) in the economy (in some ways). Also, they help make up for the lack of economic growth, and the difficulty in paying back debt with interest without much growth.

  23. Don Stewart says:

    Do you have any estimates for how much the cost of supply has increased since 1983? We hear a lot of numbers about EROEI falling from 100 to 1 to 10 to 1, and we hear numbers like ‘Iraq can produce oil for $20 a barrel while the tar sands cost $80 a barrel’, but I have never seen a composite figure.

    thanks…Don Stewart

    • I don’t think I have seen a number. Part of the problem is that at any point in time, we are still drilling from cheap sources as well as drilling from more expensive sources. So the EROEIs vary around the world.

      When you look at the Iraq numbers claiming $20 barrel, my guess is that no one has factored in the cost of all the infrastructure that needs to be put in place, in order to extract the oil. You certainly need ports and pipelines. You probably need roads and schools and hospitals and a reasonable standard of living for people in the area (or very good security). EROEI doesn’t capture this.

      Also, now oil exporters have to think about the cost of imported food and the cost of subsidies for gasoline. Even the Saudis are said to have a break-even price of $92 barrel because of increased social spending. Russia is said to need a price over $100 barrel now too, if I recall correctly. Exporting countries depend on oil for so much of their budgets (even Russia), that they have plan their spending around what they get from oil, and that depends on getting a high price for oil.

      One of the issues on the break-even price is the level of taxes. Canada has tended to keep these low. Britain raised its level of taxes last year, and this seems to be reducing production this year. Countries have been known to raise tax rates, once they see that oil prices are higher, since budgets everywhere are so dependent on oil revenues.

  24. Gail, can you repost this on the Doomstead Diner in the Blogger Buffet?


    • I have a “Creative Commons” license that says in effect that anyone can recopy the post (if not for resale) if they link back and mention me (Gail Tverberg) as author.

      • I will post it in the Blogger Buffet with the link back.

        You are invited also to be a Contributing Author on the Blog and post your articles there. I think it will help to increase your readership and also expand the diversity of knowledge available on DD. It only takes copy pasting from one Blog to the other and the HTML all works the same. On the Board, it uses BBcode so the formatting gets lost unless you translate, which is a bit of work to do.



        • I will think about it. Other sites have me as contributing author (for example, Financial Sense) but I don’t actually have to physically do any work myself. That is a lot more convenient. If The Oil Drum runs one of my posts, they copy it over themselves.

          I agree that working with WordPress would be a lot easier than working across platforms.

          • I realize the additional work involved in posting up yourself rather than me simply taking your post and pasting it into the Blog. Tyler Durden does this all the time, and in fact most of the Reposting Blogs do this.

            The reason I request the Bloggers themselves to post up as opposed to my doing it is so that the Post appears under their own name rather than my own nom de plume. I am an Anon Blogger, and prefer to stay this way for many reasons. Anyhow, I am inviting my favorite Bloggers to post up on DD under their own names, which particularly if you use WordPress takes only a few seconds to paste in. All the linkbacks to your own site work just fine also with no changes.

            Your insights would be a great addition to the information available on the blog, and would be most welcome.


  25. To Gail and all other OFW Readers:

    My fellow Doomers and I have come out from the Kalahari Desert of the Yahoo Groups to begin a new Blog and Forum for discussion of all issues surrounding the Collapse of the Industrial Economy.

    You will find the new forum at http://www.doomsteaddiner.org

    Gail, I would like your permission to repost your articles in the Blogger Buffet area of our board, or you are welcome to that yourself.

    All are welcome to join up in the discssions and debate happening at the Doomstead Diner. You have complete freedom and ability to add Pics and Media to your posting and start your own Threads on issues which concern you. You are not limited by typical Wrodpress and Forum issues in the Doomstead Diner. Come visit with us and say Hello!


    • I found this post in my spam filter, after I replied to your other related post.

      Good luck with your new endeavor. I would rather you copy my post over, rather than I do (with proper attribution). My posts appear in several places now, and I don’t have time to do the copying.

  26. Two extra factors driving up the price of the oil price (noted in US$)
    1. Inflation of the US$; for every dollar printed by the FED the value of the US$ declines in respect to gold.
    2. Oil which is not traded for US$; increasingly oil is being paid for in non-US$ currency or traded for other commodities like gold. This decreases the amount of oil on the market available for traders in US$ thus increasing the price…

    My prediction is that TSHFT when WTI eaches US$ 120,00/bbl …

    • I’m not sure. Dollars printed don’t necessarily go to people who can spend them. If we start having more debt defaults, these will work in the opposite direction.

      You are right that WTI above $120 barrel is likely to be a problem.

      • Matthew says:

        While it is true that the printed dollars do not go to people, i.e. consumers, the electronically created dollars DO go to entities that wish to invest them. With these dollars being created to buy debt instruments and thereby keep interest rates low, doesn’t this money then bid up other non-debt asset classes, including oil?

        • This subject is controversial.

          It seems to me that there is little direct connection between oil speculation and oil prices. When people buy ETFs, or when hedge funds and others invest in futures contracts, they are not really purchasing oil. In other words, no one really takes delivery of oil as a result. It is only when buyers who will refine oil or who will store it for a while buy it that there is really extra demand which would tend to raise prices. So even if printing extra dollars translates to more speculation in oil, it is not at all clear that it will affect oil prices.

          A recent academic study published by the St. Louis Federal Reserve bank indicates that while supply-demand imbalance is the primary reason for the price run-up between 2004 and 2008, speculation may play a role as well. If I understand the paper correctly, it is suggesting that producers may be holding back oil production, in the expectation of higher prices later. I find it hard to believe that much of this really happens (except that if a field needs $100 oil to be profitable, an oil company won’t work on it until it is pretty clear that oil will be $100 barrel).

          • schoffhoff says:

            I actually thought that was a policy of Stat Oil (STO). They wanted to be pumping for many decades, and did not want immediate exploitation in an around Norway.

      • Strav7 says:

        Agreed, Gail.. Also, b/c of QEx(insert variable here), the effects are OBVIOSLY supposed to kick in much longer down the road, when the can is no longer spinning..

  27. Owen says:

    China bought about 20+ million total vehicles last year. They have been growing that number. 2011 was only a few % gain, but it was 32% in 2010. Their avg over the past, say 5 years, is about 13 million. They expect 24 million this year.

    Sequencing the numbers, this is, for that 5 years X 13 = 65 million new cars. They are newly wealthy so these are new added cars. Not replacement cars of an old clunker that gets junked. This is additive gasoline consumption.

    At say, yearly miles driven total of 10,000 miles (significantly less than US norms) and 25 miles/gallon, we have 10,000 / 25 = 400 gallons per car burned in a year. 65 million new cars X 400 is 26 billion more gallons burned PER YEAR now than 5 years ago. Ignoring refinery gain this is 619,000 more barrels/day burned in China just from their cars and trucks today vs 2007.

    This is on about 9 million bpd total Chinese oil consumption. It’s a 7% increase.

    There has not been a 7% increase in oil production since 2007. Worse, the flat nature of that curve has required a veritable explosion in number of oil rigs drilling just to be flat.

    As for Iran as impetus for price, some facts. The Iranian oil minister announced this week he is still outputting 2.4 mbpd. The sanctions have not affected their unit sales. They are probably having to give a discount to buyers, but the overall price from which the discount was taken has now risen so they are getting the same amount of money. Result: Iran is under no pressure.

    Countries under no pressure need other reasons to start a war. Iran doesn’t have one and likely wont.

    The drum pounding about an Israeli strike falls afoul of air power logistics. Their planes can’t get there and back from Israel without air to air refueling. They have no tankers. It’s 2000 miles round trip direct. These are not airliners. They are fighters/bombers. An F16 can go maybe 350 miles without refuel. If you hang ordnance on the wings, the drag eats that range. Additionally, they would have to traverse two different hostile countries airspace. If they go around those countries, it is much worse. So such a strike mission requires US provision of KC135 tankers, orchestration of hostile airspace traverse, and even if they got all that done, Iran has spread out their nuclear program. There is no one or even five targets that would affect the program particularly.

    Lastly, the Chinese now have a supplier who is providing them oil at below market prices. One would think they would defend such a supplier. Were I them, I could take some very benign, non aggressive acts to raise the ante a great deal, namely, provide Iran with state of the art air defense equipment AND staff it with Chinese troops as advisors. Given that the air defense network has to be taken down before you hit targets, this would put the US or Israel in the position of targetting Chinese troops.

    Overall, my read is there will be no attack on Iran any time soon. Of course, stranger things have happened, but in this case they’d have to be strange and incompetent. That’s very possible in an election year.

    • timl2k11 says:

      Nice to hear the facts, which are impossible to get from the mainstream media.

    • Owen says:

      Replying to myself to clarify. Israel has cobbled together some tankerized versions of C130s and Boeing 707s, but these have to traverse and then loiter over hostile airspace (Jordan or Syria or Saudi Arabia and Iraq) to do any sort of mission, and that’s not conceivable because a aerial tanker is the most vulnerable military asset known to man. You don’t loiter them in missile range. So it would require US KC135s and orchestrated permission for such a mission. Hard secret to keep, given that people in those countries would alert Iran. The whole thing looks unlikely, unless the Obama polling weakens further and evokes desperation.

    • No attack… well, not in the sense of an airstrike on their nuclear labs, anyway. I expect we’ll see plenty of other attempts to put a kink in Iran’s nuclear pipeline.

  28. timl2k11 says:

    Reblogged this on Sunset America.

  29. Pingback: Why oil prices are so high: Production shortfall, Iran concerns, and low interest rates | Economy and Investments | Scoop.it

  30. timl2k11 says:

    Nice summary. I go out on the internet and it seems 99% of the population is in denial or has no clue what is going on with gas prices. I’m so glad to see a voice of reason and sanity in a sea of delusion and insanity.

  31. etfideas says:

    Thanks for this post. I think you’re right on. Although concerning Iran, I believe the root cause is the foreign policies of Europe and the US.

  32. Is anyone in favor of opening ANWR for 3-D seismic and limited exploratory drilling to have the information available before the pipeline freezes?

    • weaseldog says:

      If the oil industry thought they could make a profit from ANWR, they’d already be drilling there.
      They’ll need heavy subsidies to make it profitable.

      But that is an interesting idea. We could raise taxes and subsidize the oil industry. Then they could sell the oil to China. That would offset the losses they’ll see when we attack Iran.

      • It is my understanding that the oil companies are not allowed to drill in ANWR. Declining Alaskan production surely contributes to rising gasoline prices. The effect will likely be even greater if and when the pipeline ceases to function

        • kharris says:

          If you look at the data on Alaskan oil production, you’ll find that it represents a small share of US supply. It represents an even small share of global supply, and petroleum prices are set in a global market. The importance of Alaskan supply to lower-48 gasoline prices has been greatly exaggerated. (One wonders who would do such a thing.)

          The importance of Alaskan crude to gasoline prices in the lower 48 can be seen in part by comparing Brent and WTI prices, but understand Alaska gets mixed in with Canada in that effect, so you should not attribute any but a small fraction of the distortion in spreads between Brent and WTI to Alaska. (Not the spread, but the distortion in the spread now relative to historic norms.) Once you’ve had a look at that, consider how big an impact it would have on gasoline. The result is tiny.

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