Is Peak Oil Closer Than We Imagined?

Anyone try to lock in Oil for next heating season? If you have, you’ll know that the lock in price for oil is now over $4 per gallon.

Why is that?

The sad truth is that the world is running out of oil, and faster than most of us would like.  In 2008, oil spiked to $140 a barrel not because of speculators, but because global demand had out grown supply, and there was no short term fix.  As a result of the 2008 price spike, every nation and company that could extract oil went into high gear to satisfy growing demand at an increased price.  As a result, global production grew from 87 Million Barrels per day to 89 MBPD today.

There are a couple of crazed, radical Peak Oil Freaks that have recently started making some startling remarks about an imminent spike in the price of oil.  Ever heard of Goldman Sacs?  How about the International Monetary Fund or Barrons?  All of these groups have been looking at data gathered from another fringe element (ever heard of the Central Intelligence Agency), and all have come to the same conclusion regarding Peak Oil.

The big picture is this; there are 54 countries in the world that produce oil.  Of those, 60% of the worlds’ crude comes from 30 countries where oil production is either flat or declining.  There are only 14 countries that may have spare capacity to put toward the increased demand in the world and the decline in the 30 countries that are post peak.  Put that another way, every year that goes buy sees an increase in world demand of between 1 and 2%.  Every year that goes by also sees a decline in production by those countries that produce 60% of the worlds’ oil.  That increase in demand and decrease in supply has to be made up through increased production in the remaining 14 countries of the world that may have some spare capacity.

Goldman Sachs, Barrons and the IMF believe sometime between this fall and 2012 we will reach the point where global demand for oil outstrips demand.  No one knows for sure, as there may be a few million barrels a day that Saudi Arabia could start pumping and perhaps things will quiet down in Libya.  The bottom line is that most analysts agree we are skating dangerously close to the point where global demand and supply lines cross as they did in 2008.  From that moment forward, the only thing that will decrease demand is increasing price, or another global recession.  As we know from 2008, when an increase in the price of gas from $2.50 to $3.50 saw a decline in gas consumption of 6%, oil consumption is inelastic; it takes a lot of price increase to drive a little decline in demand.

In the words of Goldman Sachs;  “In our view, it is only a matter of time until inventories and OPEC spare capacity will become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supplies,”

In the words of Barrons; “As oil producers’ spare capacity gradually declines to worrisome levels, the average monthly price could reach a record $150 per barrel by next spring, with spikes to $165 or $170. With this, $4.50-a-gallon gasoline will become the norm.”

People who sell oil future’s contracts that allow oil companies to lock in prices, and pass those prices on to consumers, read Barrons, the IMF and Goldman Sach’s reports.  It’s not a done deal, but the high lock in price is a strong reminder that many in the financial world believe that world oil production is at or near its peak.

Peak Oil will have profound repercussions on our economy, and everything that affects our lives.  Deep and drastic changes will need to occur quickly to respond to the increased costs of energy.  The good news is that Americans are a dynamic resilient bunch, and we will rise to this task as we have many before us.