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Page added on August 24, 2010

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Major reports point to oil supply turmoil and price volatility


Peak Generation Blog

Major energy reports published this year are pointing to a significant rise in the price of oil due to supply constraints sometime over the next three years – the only disagreement is how soon.

So far 2010 has seen three international reports considering the future of oil production, demand and prices. These were published by high profile groups that command widespread respect – in turn, a collection of UK industrialists, the US military and a joint effort between Europe’s most recognized insurance company and a politically connected think-tank.

Largely ignored by the media, and considered separately online as they came out, it is interesting to do a compare-and-contrast between documents produced for widely different audiences on each side of the Atlantic.

In early February a group calling itself the UK Industry Taskforce on Peak Oil & Energy Security presented The Oil Crunch: a Wake-up Call for the UK Economy, an “independent, business-minded” view of a coming decline in oil production. Representing six UK companies – Arup, Foster + Partners, Scottish and Southern Energy, Solarcentury, Stagecoach Group and Virgin – the group called for immediate government action to help overcome potential economic turmoil relating to oil demand versus production (see graphic, left, from the report).

The report begins with a clear definition of peak oil, before suggesting that “global supply rates are currently at, or near, their peak and cannot rise significantly above 92 million barrels per day.” Or, in more detail:

There are now serious concerns that the free flow of relatively low cost oil, which has underpinned OECD countries economic growth since 1945, may not be sustainable for very much longer. . . low-cost (under $25/b) oil supplies effectively ended in early 2005 and are unlikely to return. The actual global supply of oil is now expected to be limited to 91-92Mb/d (million barrels per day) of capacity that will be in place by end 2010/early 2011. Global capacity will then remain in the 91-92Mb/d range until 2015 from which time depletion will more than offset capacity growth from then onwards. . .

The next major supply constraint, along with spiking oil prices, will not occur until recession-hit demand grows to the point that it removes the current excess oil stocks and the large spare capacity held by OPEC. However, once these are removed, possibly as early as 2012/2013 and no later than 2014/2015, oil prices are likely to spike, imperilling economic growth and causing economic dislocation.
It makes some interesting observations about demand destruction arguments that suggest prices above $120 per barrel kills the market and brings oil down again. Nowadays world economic development is “systematically different from the past,” it suggests, with the growth coming from developing countries whose “economic systems are currently evolving in a climate of higher oil prices and therefore might be relatively immune to it.”

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One Comment on "Major reports point to oil supply turmoil and price volatility"

  1. KenZ300 on Tue, 24th Aug 2010 10:05 pm 

    Economic security and national security will require a substantial effort to transition to alternative fuels.

    Wind, solar, geothermal and biofuels all need to ramp up production.

    What will the economic impact of high oil prices be on the economy?

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