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Tuesday, January 24, 2006

Are we there yet?

A while back, I wrote a letter about the oil crunch to come, probably sooner than later. It looks like it might be getting started.

Has production reached a plateau?This IEA1 graph, from their Oil Market Report, shows world oil production from 2002 to the end of 2005. As you can see, total production seems to be levelling off — only in the last half of 2005 do you see production for two quarters in a row lower than the previous quarter.

Better news is in the text of the report: production climbed to 85Mbpd in December, resuming the steady climb (US production was hosed up by the hurricanes, and is slowly coming back on-line). But what the text giveth, another graph taketh away: follow the link and compare the "World Oil Supply" and "World Oil Demand" graphs. Demand is consistently outstripping supply, which suggests the reserves that Western nations have been building up for an emergency are being tapped and slowly(?) depleted as well.

So are we getting close to Peak Oil? The graph above suggests world production is starting to plateau, although it may well be a temporary hesitation while the Gulf of Mexico producers get their collective act back together. OPEC et al can still increase production, but it’s getting more and more difficult. My crystal ball is a little murky, but I think we’ll see another year or two of increasing yields before the trend turns the other way. The wild card is the deteriorating situation in the Middle East: military in Iraq, diplomatic in Iran. As bogged down in Iraq as we are, we can’t make a credible threat to Iran.

What’s more important is the difference between demand and supply. Unless Americans suddenly get rational and park their SUVs, permanently, demand will continue to climb. But even if we could control our own consumption habits, we can’t control China’s and India’s increasing thirst for oil: anything we leave on the table, Asia will grab with both hands.

The only thing I know for certain, the era of cheap oil is over.

1International Energy Agency, a consortium of energy-consuming nations.


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