Looks Like Oil Production Already Peaked

The following graph shows that the spike in West Texas Intermediate Oil of $147 per barrel may have signaled that global oil production has already hit its peak.

There are two telling signs:

1. July 2004 – September 2007: Daily oil production remained flat while prices doubled and consumption was on an upward trajectory. Perhaps OPEC wanted to create a tightening bias in the world oil markets to force prices to rise. But more realistically, OPEC likely knew it had limited production slack and did not want to use up its last ‘bullet’ before price rises started destroying demand.
2. May 2007 – February 2008: Daily oil consumption rose by 3.6 million barrels and daily oil consumption peaked at nearly 88 million barrels per day during February 2008. The supply response during the same period was a meaningless 1.7 million barrels of extra production. During the same period, prices rose from $63 per barrel to $95 per barrel (eventually spiking to $147/barrel during July 2008). Given that as of May 2007 prices had already tripled from 2002 levels it is difficult to argue that OPEC wasn’t satisfied with market prices and wasn’t beginning to worry about demand destruction. The problem was that excess capacity simply didn’t exist and production couldn’t be increased meaningfully to offset destructive price increases.

Production was eventually increased to 86.71 million barrels per day by July 2008. This was still below peak demand.

Regardless, by that point demand destruction had already begun. The twin ravages of high prices and a developing economic recession pulled the plug on oil demand thereby temporarily alleviating the supply-demand imbalance.

Bottom Line

$147 per barrel oil prices were caused by supply-demand characteristics that illustrated global oil production had peaked. A global near-depression only resulted in a 6% decline in oil demand.

Therefore, a return to tepid global growth could be enough to push consumption back to the 85-86 million barrels per day point. As of June 2009, world consumption is already back above the 84 million barrel mark.

Given the supply-side constraints (lack of capacity, depleting reserves, delayed projects) any form of a global economic recovery would risk pushing oil prices back up to the triple-digit range.

Comments

[The Greates...:]

Never before has the theory of supply and demand been proven so wrong in this one commodity product as has been shown in the 2009 rise in the price of crude oil this year. Every available storage facility is running over with supply, gas inventories are working on a three month increase in spite of all the prognosticators predicting drops in inventory. The world is simply over ran with the stuff at this point in time, and yet, the price has risen to around $71 a barrel and gas around $3 a gallon once again. Only recently has the price started to loose some steam, or maybe it was just profit taken. Whatever the reason, one must question the validity of the supply vs demand theory on this one commodity. Seriously, who tells us there is only this much oil left here or there? Where are the inventory reports generated? What entity promotes the “Peak Oil Theory”? OPEC controls around 40% of the oil market, that leaves another 60% from other producers. But then there are the 5 major oil companies who act as the middlemen, who have their finger on the pulse of the world’s economy. It is simply the control of the supply to market that generates the volatility in the commodities industry today, coupled with some inside information creating the speculation of the product. The ability of a few that affects the whole world’s economy. This is sometimes called the “Dark Energy Trading” loopholes, going back to the re-writing of the energy commodity bill by Phil Graham.(2000)
Another example of the effects of speculators in the crude oil commodities market was the “ Rogue Trader” who with a 16 million barrel order of crude, pushed up the price of crude oil $4 in the blink of an eye. (that’s just twice the amount of oil Saudi Arabia’s daily production) So one can keep believing in the supply and demand theory, or take off the blinders.

Jul 19 09:12 AM

[Ferdinand E...:]

This is a good article and a good comment by 'The Greatest'. The thing that shouldn't be forgotten though is that OPEC has its act together, and they understand enough of economics 101 through to the PhD level to comprehend that it's a mistake to sell oil for peanuts today when it will bring top dollar later.

A gentleman from Norway said something like this to me at a conference a few years ago, after a discussion about Norwegian oil , and I wondered why the rest of the Norwegians hadn't figured it out. Then I remembered something that a Norwegian teacher of mine said shortly after I arrived in Sweden: "The thickest book in the world is the book with the names of dumb Norwegians".

Jul 19 09:23 AM

[mikeriz12:]

Bottom line if you limit the ability of run away freight train speculation you do not have what you had last year, no way, no how!

Jul 19 12:50 PM

[58robbo:]

thank god someone actually gets it! i really can't stomach anymore speculator witch hunts. oil producers just couldn't meet demand. it really is that simple. the problem is that our overlords in washington never miss a crisis from which they can extort more power or political goodwill.

Jul 19 05:14 PM

[OilFinder:]

>> "Daily oil production remained flat while prices doubled and
>> consumption was on an upward trajectory."
>> [...]
>> "Daily oil consumption rose by 3.6 million barrels and daily oil
>> consumption peaked at nearly 88 million barrels per day during
>> February 2008. The supply response during the same period
>> was a meaningless 1.7 million barrels of extra production. During >> the same period, prices rose from $63 per barrel to $95 per
>> barrel."

The production of very few economic goods rises and fall in direct proportion to rises and declines in price. It is much easier to double or halve the price of something than it is to double or halve the production of something. This is as true of oil is anything else. It is disingenuous to complain about a meager 1.7 million barrel/day rise in production in the face of a 50% rise in the price, because it is basically impossible to raise world oil production by 50% in just 9 months, while it is quite easy to raise the price by 50% in 9 months. A 1.7 million barrel/day rise in production in 9 months *is* a sizable increase in production - you won't find many cases where it rose faster.

I have made a chart overlaying the rise and fall of oil prices to the rise and fall of production between the beginning of 2004 to July 2008. You can see they follow the same trajectory, albeit with some lag.
img38.imageshack.us/im...
A similar chart extended to the latest data will show production falling in response to the crash in price.

In other words, no, your information says nothing about whether oil production has peaked. Oil production over the past 5 years has done exactly what one would expect it to given the rises and falls in price.

Jul 19 11:20 PM

[OilFinder:]

BTW, my chart above shows only crude oil production, which is what is priced on the NYMEX and other exchanges. It does not include ethanol, natural gas liquids and condensates, which are included in your own chart but which are not priced the same as CL, Brent or other grades of actual crude oil. Including a chart of crude oil prices and comparing it to a basket of liquids which includes not just crude oil but other liquid forms of energy is an apples-to-oranges comparison.

Jul 19 11:24 PM

[Plan B Econ...:]

Peak or no peak, production basically remained flat for 3yrs as demand and prices grew. The1.7 million barrel rise - significant or not - was insufficient to keep up with demand. The swing producers can't keep up with demand.

Also, production doesn't need to increase by 50%. Obviously that's impossible (and unnecessary). As you know, oil is priced on the marginal barrel so a supply gap of just a couple million barrels (2% or so of production) can cause prices to rise 50%.


On Jul 19 11:20 PM OilFinder wrote:

> >> "Daily oil production remained flat while prices doubled and

Jul 20 01:22 AM

[KIT:]

On demand I drive a F-150 4x4 and had a Mustang ( they get the same milage ). In Canada we hit $1.47 per liter ( $5.88 US gallon ).
I sold the Mustang and limited the F-150 to work only. My joy rides were in the Mustang so that fuel usage is gone. We drive to Walmart once in 6 weeks not every two. I have perminently cut fuel use in more than half and gas is $1.02 ltr now. If fuel climbs again the truck will be replaced with a Civic.


On Jul 20 01:22 AM Plan B Economics wrote:

> Peak or no peak, production basically remained flat for 3yrs as demand
> and prices grew. The1.7 million barrel rise - significant or not
> - was insufficient to keep up with demand. The swing producers can't
> keep up with demand.
>
> Also, production doesn't need to increase by 50%. Obviously that's
> impossible (and unnecessary). As you know, oil is priced on the marginal
> barrel so a supply gap of just a couple million barrels (2% or so
> of production) can cause prices to rise 50%.

Jul 20 04:04 AM

[jerrydd:]

This author is correct, we hit peak oil in 08. Those who don't believe it will lose big time betting we have not.

Since 88mmb/day was the max that could be pumped as proven and oil well drilling has slowed plus we are only finding 1bbl for every 4 we use means we better get off oil before we get screwed like last yr.

We need plug in Hybrids, EV's, more eff ICE's and switch semi's to NG in a hurry or we'll be paying $1T/yr to Iran, Russia, oil dictators and terrorists while killing our economy.

The recent $70/bbl oil price during a deep recession if not depression shows how short of oil we are. And as soon as the world's economy recovers oil will be back to $150/bbl or more until that kills the recovery.. .

Jul 20 10:21 AM

[erewhonman:]

OilFinder, you jiggy-jigged your charts to make your argument. Chart on Price of oil ranges something like 500%. Over that you superimpose a Production chart that has about a 6% range. Then, because the slopes look similar you argue close correspondence. Yes a 300% increase in price affected production but in a surprisingly small way. In part that was the argument.


On Jul 19 11:20 PM OilFinder wrote:

> >> "Daily oil production remained flat while prices doubled and

Jul 20 01:55 PM

[Keith1234:]

We are a very short sighted society, 1/2 of the drilling rigs are idled and because some cavern is full we think everthing is fine. The world has 40 years of reserves so the young people of today will have to replace the energy in oil with something else, there is alot of energy in a barrel of oil. I have spent alot of money as a completion & workover consultant on behalf of oil companies, I have been amazed how little production resulted. I have also abandoned wells, it can cost up to 1/2 million to abandon a well on land, as more and more wells have to be abandoned the cost must be built into the current oil price. Basically we are using the oil our fathers and grandfathers found with careless abandon and we do not have a backup plan for oil.

Jul 20 02:45 PM

[Tony Daltorio:]

Absolutely great article! Demand continues to grow (especially from the emerging world) and supply is flat at best.

Jul 20 03:06 PM

[OilFinder:]

You're right, I did, but there was a good reason for that. As I explained:

"The production of very few economic goods rises and fall in direct proportion to rises and declines in price. It is much easier to double or halve the price of something than it is to double or halve the production of something . . . . It is disingenuous to complain about a meager 1.7 million barrel/day rise in production in the face of a 50% rise in the price, because it is basically impossible to raise world oil production by 50% in just 9 months, while it is quite easy to raise the price by 50% in 9 months."

If I were posting a chart showing the relationship between the price and production of gold, Doritos or Nike shoes, I would have done the same thing.

On Jul 20 01:55 PM erewhonman wrote:

> OilFinder, you jiggy-jigged your charts to make your argument. Chart
> on Price of oil ranges something like 500%. Over that you superimpose
> a Production chart that has about a 6% range. Then, because the
> slopes look similar you argue close correspondence. Yes a 300% increase
> in price affected production but in a surprisingly small way. In
> part that was the argument.

Jul 21 12:21 AM

[ccpo:]

Interesting that a five year plateau (now six) is ignored by some. A plateau that occurred as oil rose from $25/bb to $147 - or better stated as an average for the year somewhere around $70 - $90/bb. So, a steady rise of 300+% creates a rise of @7% in crude, condensate and oil sands from '03 to '08. If we remove '03, which was part of a pre-existing rise in production in response to demand - not price - then the increase from '04 to '08 is less than 3%, all while demand was still skyrocketing at 2% a year.

So, you can play with the numbers all you like in terms of economics, but you're just playing games. Reality is that a steady rise in prices did not result in steady rises in production over at least a four year period.

Add to this what we now "officially" know (those of us that follow these issues have known this for some time) of decline rates from the IEA report last November of avg. net loss in the 5+%/ year (minimum of 4.5) and you've got serious issues. The combination of 5+ decline and 1 to 2% increase in demand is utterly impossible at this point. Saudi Arabia can go as high as 12.5 mb/d. Iraq supposedly can add another 4mb/d. There are a few others that can add some few millions all added together. All of them together equal no more than 2 years of decline. Each year we move forward in time equals another half a Saudi Arabia needed to replace what we are losing.

Dick Cheney, himself, said in 1999 decline rates were 3% a year (before the decline of Cantarell, the North Sea, etc. ) and we'd need 50 million new barrels a day by 2010. Things are that much worse now.

This is simple geology and math, folks. The sooner you realize that, the better off you'll be.

Jul 24 04:56 PM