Saturday, August 31, 2013

The State of Oil

Former Saudi oil minister Sheikh Yamani is reputed to have said
The stone age didn’t end because we ran out stones.
By this I guess he meant that the industry should watch its success at maintaining a price cartel, because that would lead to intensified research on alternatives. Since the oil crises of the 1970s and 1980s, OPEC has tried to keep pumping oil at the rate the market demands, to avoid the kind of price shocks that lead to renewed electric car research, better public transport, and so on.

Oil prices adjusted to 2013 dollars. Source:
How successful have they been? Prices fell rapidly since the last major conflict-induced price shock in 1979, the Iranian revolution. While the Gulf War of 1990 caused a price spike, this was nothing on the scale of the previous price shocks. The Iraq war in 2003 is not a serious candidate for the ongoing increase in prices, since this has continued well past the point where Iraqi oil production resumed. The Arab Spring movement of 2011 can’t be blamed for a major decline in output either, as the countries most affected are not major oil producers. Libya, for example, is only responsible for about 2% of worldwide oil production, though it’s 17th in the world in total production. And Libyan oil output us more or less back where it was before the 2011 uprising.  Remember also that there has been a worldwide economic crisis since 2007, with many countries battling to recover since. So the oil price spike hasn’t been driven by major conflict or an upsurge in demand. The worst of the 2007–2008 global crisis only pulled prices back a little, bringing them nowhere near the inflation-corrected stable average of about $20 (corrected to 2013 US$).

It is plausible that this price spike is being driven by growing difficulties in extracting oil fast enough to meet demand. If you don’t know about peak oil theory, this may be a good time to find out.

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