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Page added on October 30, 2008

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The Peak Oil Crisis: A Steepening Slope

Thus far, last week’s OPEC production cut of 1.5 million barrels a day (b/d) has done little to stem the slide in oil prices.


Immediately after the cut, prices went down another $4 on the theory that the cut was too small. OPEC of course is trying to maximize its revenue in real dollars. If they cut oil production more slowly than world demand slows then oil prices will continue to slide and revenues will go down. If they can agree on more substantial cuts, then they will almost certainly drive prices back up hurting demand and eventually setting off a round of inflation that will reduce the value of their revenue. For OPEC, it is a tough call.


At the minute, the oil and other commodity markets seem seized with the notion that a rip-roaring, world engulfing depression is on the way that will demolish oil consumption. People are actually starting to talk about oil falling all the way to $20 a barrel again. Is this likely or even remotely possible?


Start with the International Energy Agency, which is still forecasting that worldwide demand for oil will grow during 2008 and 2009. They have of course reduced their growth estimates in the last six months, but they still are talking about actual growth in world consumption – not declines.


In thinking about who might slow their use of oil in the world these days, let’s start with the oil exporting countries as this is where consumption has been growing the fastest. Most of these sell their oil products domestically at discounts, some substantial, to world prices. Their foreign exchange earnings are obviously hurting from much lower prices at the minute and they are starting to talk about slowing economic development projects, but there certainly has been no sign of lower domestic consumption for now.


Falls Church News-Press



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