The price of oil has been increasing rapidly since 2002, going from ~$25/barrel to its current flirtations with a record $80/barrel. Prices are skyrocketing largely because global demand is rising quickly, led by China’s unprecedented growth that shows no signs of slowing as it hit 11.9% in the 2nd quarter of 2007. The discussion regarding oil is often centered on when we will run out or when production will decline. But I would like to reframe the issue into three important questions that we need to answer even if there is no decline for decades:
1. Can global oil production physically keep up with demand?
2. Can it politically keep up with demand?
3. If not, then what?
1. In this context of higher prices, economists would expect competitive producers to take advantage of the current price premium and ratchet up their supply. But over the past few years the competitive non-OPEC producers have been largely unable to increase their output as reported by the International Energy Agency (IEA) in mid-July. A plateau has been reached ~50 million barrels per day (mbd) because producers such as the UK, Norway, and Mexico are unable to maintain current production levels so that additional supplies by Russia, Brazil and Azerbaijan only offset those losses and hold non-OPEC supply mostly constant. The IEA predicts tighter supply through the next five years as 2.2% per year demand increases have to be met by OPEC producers.
