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com Oil Past Peak Production Friday July 13, 4:47 pm ET By Dirk van Djik, CFA There are several major oil exporters which are at or past their peak levels of production. This is a very serious problem, and a recent report by the International Energy Agency (IEA) forecast that world oil demand is likely to outstrip world oil capacity with in 5 years. Of course, in reality, demand can not exceed supply or the market will not clear. However, prices would have to rise to the point where demand is suppressed enough to match the available supply, and that number is likely to be far higher than what we are seeing today, in real prices.
Click Here Oil demand is highly correlated with economic growth and prosperity. So lets consider what happens if some of the major oil producers get to the point where their production starts to fall. Lets assume for the sake of convenience that the exporting country is consuming 50% of its production, so it produces two million barrels a day and exports one million. Given that total world production capacity is tight, that 5% decline in production would cause prices to rise by more than 5%. The net result is that even though its volumes are falling, the country is getting richer. With that increased prosperity will come more domestic demand. So lets assume that domestic consumption rises by 25% per year. Well the UK went from peak oil production from the North Sea to being a net oil importer within six years. One has to assume that even the most dictatorial regime will value domestic consumption over exports. The price of gasoline might be cheap in the US relative to say Europe, but relative to places like Venezuela, Iran and Russia it is very expensive. Democratic societies which happen to be oil exporters (short list, Norway and Mexico come to mind) will without a doubt be more concerned with the interests of their citizens for relatively cheap oil than they will be about the welfare of oil importing countries. From the point of view of oil importing countries, such as the US it is the availability of oil export capacity is more critical than total production capacity. Well lets just go through the list of countries which had lower production in 2006 than 2005. For some clearly the cause was natural field declines, in others above ground problems played a significant role. Its real hard to make the case that it was unprofitable for those countries to have been producing in 2006 and thus decided to restrain their production. However, this problem will allow those who are well positioned for it to make a boat load (supertanker) worth of money. The probability of oil (in real terms) being above $150 a barrel is far higher than the probability of it being below $50 a barrel five years from now.
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