It finally happened this week. The price of oil passed the all-time inflation-adjusted peak of $103.76 that was set in April 1980—and is now three times what it was just four years ago. What’s going on? This is a record that virtually none of the world’s oil experts predicted, particularly at a time when the world economy is slumping and the demand for gasoline is now dropping in the United States. Some of the blame may go to speculation and the decline of the dollar. But the roots of the problem run deeper.
It finally happened this week. The price of oil passed the all-time inflation-adjusted peak of $103.76 that was set in April 1980—and is now three times what it was just four years ago.
What’s going on? This is a record that virtually none of the world’s oil experts predicted, particularly at a time when the world economy is slumping and the demand for gasoline is now dropping in the United States. Some of the blame may go to speculation and the decline of the dollar. But the roots of the problem run deeper.
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World crude oil production has actually fallen from 73.8 million barrels per day in 2005 to 73.2 million barrels per day in the first ten months of 2007, according to the U.S. Energy Information Administration. This makes 2005 the peak year for world oil production so far, though it is too early to know if this will turn out to be the all-time high.
In 2007, crude oil production declined in some of the world’s largest oil-producing countries— including Indonesia, Mexico, Norway, Nigeria, the United Kingdom, Saudi Arabia, and Venezuela—due to a combination of geological and political factors.
The fact that the world is having a hard time expanding oil supply fast enough to keep up with even modest demand growth is beginning to be accepted in some corners of the oil industry. The CEO of Royal Dutch Shell and the U.S. industry-dominated National Petroleum Council have both stated that supply constraints are likely to put continued pressure on world oil markets in the years ahead.
Although the dreaded phrase “peak oil†is still used mainly by oil industry mavericks like Matthew Simmons and T. Boone Pickens, their views—if not their language—do appear to be spreading to the mainstream. Last week, oil analysts at Deutsche Bank concluded that steep decline rates of some of the world’s largest oil fields will limit future growth in oil production and could push oil prices to hit $150 as early as 2010.
It’s high time for governments around the world to wake up to the new oil era we have now entered. There are lots of ways to reduce dependence on oil, starting with more efficient cars. But it won’t happen without political leadership.
