The International Energy Agency (IEA) just lowered its global demand forecast again in its October oil report, making 2008 demand growth lower than 500,000 barrels per day (half the average rate of the last several years). The news, along with the financial collapse of last week, brought oil below $80 per barrel for the first time in a year before rebounding today along with global stock markets. Also in the report was a reduction in supplies, especially from non-OPEC countries who may be in permanent decline from here on out. Thus, the trillion dollar question that emerges for more accurate price projection is: Which will be faster – oil supply declines or demand destruction?
Many analysts estimate that the average rate of decline in oil fields is ~4%. Some analysts claim a higher decline rate closer to 6%, pointing to the rapid decline in Mexico’s Cantarell and in British and Norwegian production of the North Sea. If 4% is the decline rate, then we need to bring ~3.3 million barrels per day (Mbd) online each year to keep supply constant. If the rate is instead 6%, the number rises to 5 Mbd. A wikipedia entry has collected data from oil megaprojects and shows that, based on media listings on projects in the works, a higher rate of decline could make 2008-2010 production levels the peak of global oil production while a lower decline rate could put peak production off until 2016 or so.
But with US demand for oil potentially having peaked in 2005 at 20.8 Mbd, global peak consumption may also naturally arrive in the 2010s, helped by current high prices. If electric vehicles take off and communities worldwide plan more climate-friendly transit/bike/ped-oriented development, global oil demand may stabilize and even slide.
The future price will be determined by the changes in supply and demand. If demand naturally peaks at the same time and falls at the same rate as production, then the price of oil may remain constant around its current level. But if decline rates are high and substitutes like wind- and solar-powered plug-in hybrid electric vehicles remain expensive, then the price of oil will rise until it reaches the level of its substitutes. That price level for solar is equivalent to ~$350 per barrel today. But here’s hoping we can bring the price down for solar energy, and continue to deploy efficiency that keeps prices below $300 per barrel in the decade ahead. If we can reduce US demand for oil in each of the years ahead like we have done in 2008, control of oil’s price will be in our hands. But if we try to resume growth in US demand in the years ahead — OPEC will have the power to bring $150+ oil by shutting in a few of their fields whenever they desire. I prefer the efficiency route, and so does our climate.
Onwards-
Tags: oil demand, oil prices, oil supply