Not enough new oil

One of the classic responses from Economists about Peak Oil is "Well, if prices go up then the market will increase production, either by pumping more out or discovering new oil fields". I know that this is a classic response because I believed it years ago before fully understanding Peak Oil.

It's a classic response because, well, it's actually true within an endogenous economic model. Economists often deal with economic theory and when oil is seen as just another "product" that can be bought, sold and made, then this sort of response is quite understandable. It's only when you start realising that the world's easy oil supplies have been pretty much discovered that things start to go wrong.

High oil prices have resulted in oil companies expanding their production and searching for new oil. The problem is that it is not enough. The Oil Megaprojects group at The Oil Drum is proving more and more that, while new oil fields will probably increase total oil production in the next few years, the effect of declining oil production elsewhere will limit this increase and, eventually, outstrip it.

Here's their nice looking graph that gives bad news:
Put simply - oil production will increase from now until around 2010-2011, but not enough to lower prices significantly. After 2011 the increasing production levels of these new projects will be negated by declining production levels in current oil fields. Oil prices will remain painfully high and the demand destruction caused by The Great Economic DownturnTM won't be enough to lower them significantly (though I still expect prices to drop below $100).

1 comment:

JD Walters said...

What I worry about is that with a great economic downturn investment in alternative fuels and infrastructure needed to make the transition to a reduced carbon economy will also drop. Although it could be that while traditional industries (like real estate, financing, automobiles) decline other sectors (like alternative energy) really take off as the high oil prices lead to a substitution effect.

It seems to me that if the world's economies actually survive the great downturn, what will happen is not so much a destruction of wealth as a radical redistribution. But you're the expert amateur economist here! Any thoughts?