If you want the clear-eyed view of the current situation this is it.
Kopits is a director at Douglas-Westwood.
The marginal consumer banged into the price of the marginal barrel, on a static basis, somewhere in 2011 at about $110-115 Brent. And then, oil prices essentially stopped rising. Those of us who use supply-constrained forecasting weren’t surprised. It’s entirely consistent with the historical record. But I think many in the oil business still thought, somehow, that oil prices would continue to rise as they had done in the 2000s. After all, the oil supply is widely acknowledged as constrained, even by those who are not necessarily believers in peak oil. So why wouldn’t prices continue to rise if we’re supply short? Well, because there was a price at which the marginal global consumer would rather reduce oil consumption than pay more. And that price is around $110-115 Brent, and from here on in, we should expect that number to rise only with the purchasing power of the marginal consumer.
On the other hand, the cost of extraction and production has continued to increase. Last year costs increased somewhere between 10% and 13%, depending on who you talk to. Exxon’s costs rose about 7% in excess of its increase in revenues, which were also falling. And Petrobras’ costs were rising 10% to 13% faster than its revenues. So what we can see is that in the contest between technology and geology, in recent times geology has been winning. Oil has become more expensive to extract.
You need to read the whole interview at ASPO-US, it's worth a couple of minutes of your time, even if you never read anything about peak oil again.
This is the reality; no drama, no zombies, just the economics of self preservation.
The consumer can only pay so much for oil and only increase what they pay by a limited amount and we've reached both of those limits. At the same time the cost of extraction has been climbing dramatically. To the point that the majors and even some NOCs are getting negative returns on their investment so are canceling huge projects and even begun divesting assets just to survive. When oil companies stop developing new production there is only one way to go - imagine what happens to a plane when you kill the throttle, you can glide for a while, then . . .
It's the wedge I drew a few years ago, I called it the demand ceiling and the supply floor. What happens when the cost of the last barrel becomes higher than the ability of the last consumer to pay?
Production falls.
