Eight Pieces of Our Oil Price Predicament

A person might think that oil prices would be fairly stable. Prices would set themselves at a level that would be high enough for the majority of producers, so that in total producers would provide enough–but not too much–oil for the world economy. The prices would be fairly affordable for consumers. And economies around the world would grow robustly with these oil supplies, plus other energy supplies. Unfortunately, it doesn’t seem to work that way recently. Let me explain at least a few of the issues involved.

1. Oil prices are set by our networked economy.

As I have explained previously, we have a networked economy that is made up of businesses, governments, and consumers. It has grown up over time. It includes such things as laws and our international trade system. It continually re-optimizes itself, given the changing rules that we give it. In some ways, it is similar to the interconnected network that a person can build with a child’s toy.

Figure 1. Dome constructed using Leonardo Sticks

Figure 1. Dome constructed using Leonardo Sticks

Thus, these oil prices are not something that individuals consciously set. Instead, oil prices reflect a balance between available supply and the amount purchasers can afford to pay, assuming such a balance actually exists. If such a balance doesn’t exist, the lack of such a balance has the possibility of tearing apart the system.

If the compromise oil price is too high for consumers, it will cause the economy to contract, leading to economic recession, because consumers will be forced to cut back on discretionary expenditures in order to afford oil products. This will lead to layoffs in discretionary sectors. See my post Ten Reasons Why High Oil Prices are a Problem.

If the compromise price is too low for producers, a disproportionate share of oil producers will stop producing oil. This decline in production will not happen immediately; instead it will happen over a period of years. Without enough oil, many consumers will not be able to commute to work, businesses won’t be able to transport goods, farmers won’t be able to produce food, and governments won’t be able to repair roads. The danger is that some kind of discontinuity will occur–riots, overthrown governments, or even collapse.

2. We think of inadequate supply being the number one problem with oil, and at times it may be. But at other times inadequate demand (really “inadequate affordability”) may be the number one issue. 
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What the new 2011 EIA oil supply data shows

The US Energy Information Administration (EIA) recently released full-year 2011 world oil production data. In this post, I would like show some graphs of recent data, and provide some views as to where this leads with respect to future production.

World oil supply is not growing very much

Figure 1. World crude oil and other "liquids" supply has dropped below the 1983-2005 trend line in recent years. Actual data is from EIA International Petroleum Monthly, through December 2011.

The fitted line in Figure 1 suggests a “normal” growth in oil supplies (including substitutes) of 1.6% a year, based on the 1983 to 2005 pattern, or total growth of 10.2% between 2005 and 20011. Instead of 10.2%, actual growth between 2005 and 2010 amounted to only 3.0% including crude oil and substitutes.

The shortfall in oil production relative to what would  have been expected based on the 1983-2005 growth pattern amounted to 4.7 million barrels in 2011. This is far more than any country claims as spare capacity. This is no doubt one of the reasons why oil prices are as high they are now. These high oil prices tend to interfere with economic growth of oil importing nations.

The shortfall in growth especially occurred in crude oil. Figure 2, below, shows crude oil production separately from substitutes.

Figure 2. World oil and other liquids supply, broken out into crude and condensate, natural gas plant liquids, other liquids (mostly ethanol), and processing gain (increase in volume from refining heavy oil), based on EIA data.

Between 2005 and 2011, crude oil production rose only 0.5%. It was mostly the substitutes that grew.

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Egypt’s Problems – Robert Knight interviews Gail Tverberg

A few days, ago, Robert Knight of  WBIA public radio in New York City interviewed me about the problems in Egypt. The interview touched a little on Libya’s problems as well. I am not certain of when the interview actually aired. He asked me about a number of issues, including peak oil.

I thought a few readers might be interested. This is a link to the MP3 recording. It is about a half-hour in length.
Tverberg Oil Interview – 22 Feb 2011

Why all of the Concern about Libya?

We keep hearing about unrest in the Middle East and Northern Africa, with Libya being the latest country to get top billing. Why all of the concern, especially related to oil?

Libya is a relatively oil-rich country. According to the CIA World Factbook, its per capita income is more than double Egypt’s. While Egypt is clearly on a down-hill slope with respect to exports based on my earlier analysis, Libya still has high export income and little debt. The fact that revolution could hit Libya shows that it is possible for revolution to hit any of the countries in this region, not just ones that don’t have the money to maintain their promises.

Figure 1. Libya's Oil Production and Consumption - EIA

One issue that Libya has in common with other oil producing countries is a high unemployment rate, listed as 30% by the CIA Factbook. Its population has been growing rapidly also, so there are many young people looking for work. While the country provides subsidies, this is not the same as each individual being able to provide for himself or herself. Continue reading