"Oil prices have more than doubled over the past year on concerns about rising demand in fast-growing economies such as China and India, and supply disruptions in the Middle East and Nigeria."
 
Associated Press article printed in the Advocate (June 27th, 2008)
 
I had to chuckle over the sentence above. It implies that the real reason for the high price of oil is "concerns" (code word for speculation in the markets). The fundamentals of supply and demand get superseded by "concerns" about supply and demand. Adam Smith must be spinning in his grave.
 
Of course, market speculators do have an effect. We can see this when the price of oil goes up or down $5 or $10 in a single day on the news of a pronouncement by a Saudi oil minister or the threat of a hurricane in the Gulf of Mexico.
 
But some commentators have said that if there was no market speculation on oil futures, the price would plummet back down to $60 a barrel. I assume that these are the same commentators who said that after the mess from Hurricane Katrina was cleared up (ie, oil refineries back on line), the price of oil would go back down to $30 to $40 a barrel.
 
One thing is for sure. These commentators are not in the habit of talking to petroleum geologists. Petroleum geologists are the people who make a living trying to figure where and how much and how easily oil can be sucked out of the ground. And if they are not paid by Exxon-Mobil to make optimistic pronouncements, we can learn a great deal by listening to them.
 
When it comes to supply, we know that global oil production has stalled since 2005. More importantly, global exports have actually declined since then. Saudi Arabia has graciously stepped in and offered to increase production by 500,000 barrels per day (about 1/2 percent of global production). However, their own internal consumption increases by over 200,000 barrels per day each year, so unless they can pull a rabbit out of a hat, it will soon be a net zero.
 
On the demand side, there are the Chinese and Indians and other newly industrializing countries who want a bit of the good life. From 2005 to 2007, they were largely responsible for global oil consumption increasing by about two million barrels a day (more than two percent of global production).
 
The tipping point came in 2007, when global demand surged ahead of global supply. We have seen the result: $147 for a barrel of oil.
 
The recent decline in prices was mainly due to "demand destruction". This took the form of an economic recession in the USA, a partial lifting of gasoline subsidies in China, and the disappearance of kerosene for cooking in the poorest nations of the world. Once these factors work themselves through the global economic system, prices will rise again to new heights.
 
New supplies of oil are in very inconvenient places, such as under the ocean or locked up in molecules of bitumen (ie, tar), so they will be of little help in moderating prices. Thus, over the next decade or so, we will see the recurring cycle of one step forward and two steps back (ie, a slight price reduction due to economic downturns followed by massive price increases due to the inexorable burbling sound of gasoline flowing into Asian gas tanks).
 
We will look for scapegoats and we will find them. Currently, they are a bunch of pinstripe suits on Wall Street. Perhaps at some time in the future, a demagogic politician will convince us that some nation in the Middle East is to blame. However, we would do well to wipe the sleep from our eyes and start talking to petroleum geologists.