The End of Cheap Oil

If you'd said back in 2006 or 2007 that oil would be trading at $70 a barrel you'd have been laughed at. Yet here we are with oil trading at just under $100 a barrel in January 2011. Historically, this is a very high price. It reflects the fact that the oil the world is now consuming, 86 million barrels in 2010, is increasingly hard to get, from deep water reserves, the Canadian tar sands, etc. Just at the moment the mainstream market is treating this as the new normal, not seeming cognizant of 2008 when high energy prices caused the aviation and auto industry to tank. However, there are people like veteran commodities trader Jim Rogers who are injecting the new reality into mainstream coverage. Another is Tom Whipple, cited below.

http://www.postcarbon.org/article/231815-the-peak-oil-crisis-it-s-not

The Peak Oil Crisis: It's not Adding up!
The official bottom line is that IEA's conservative estimate says the world will be consuming 89.1 million b/d this year, while currently producing 88.1. There are only two places the extra oil can come from if we are not to have another damaging and demand killing price spike. Either we draw down global stockpiles or the Saudis increase production. Presently both of these phenomena are underway - OECD stocks fell by 8 million barrels in November and another 33 million in December, not to mention a substantial fall in unofficial floating storage held by speculators. Without fanfare, the Saudis seem to be slowly ramping up production - at least for now.

There are two obvious holes in this rosey scenario that has oil creeping past $100 a barrel this year (It is currently only a couple of dollars away), but not so high as to stunt global growth. First, the problem is whether demand growth this year will be constrained to only a 1.4 million b/d increase vs. the 2.2-2-7 million b/d increase we witnessed last year and near-universal estimates of economic recovery. The other is whether the Saudis really are able or willing to push up production by a million or more b/d to keep prices under control.

Unless these questions are answered in the affirmative, the prospects for a price-spike free year do not look good. The IEA says that China's oil consumption climbed to pass the symbolic 10 million b/d level to 10.2 million b/d in November as Beijing shut down power plants to reach year-end efficiency goals. While everyone seems to be predicting some sort of drop in the torrid pace at which China's demand for oil has been increasing, the question is whether it be as much as the IEA and EIA are forecasting. The Agency's director recently said that OPEC must continue to be alarmed that the recent ascent to near $100 oil is more than just a cold winter as speculators. We all should be alarmed too.