I wrote about this last month but it bears repeating – we have hit a production ceiling with an inability to increase global oil production to anywhere near the amounts needed to meet demand.
The pricing now is inelastic, meaning that prices are volatile (due to speculators) and increasing due to demand.
We found all the oil that can produce $1 a gallon gas. Also the $2 and $3. The $4 is the best we can do. Soon it’ll be just the $5.
Here is a figure from the Nature letter talking about this that displays this ceiling and the price volatility.
You can see the huge volatility in prices as we hit the production ceiling. But the very interesting aspect is the ‘phase change’ that occurred as we hit this ceiling.
Normally one might think that increasing price would drive increasing production – oil that was not worth producing at $20 a barrel might at $40. Thus an increase in production levels.
Before 2004, the price and production levels stayed along a narrow range – increasing prices had a nice linear relationship with increasing production.
Now look what happened after 2004 – increasing prices have little effect on oil production. The price can be $40 or it can be $120. There no longer seems to be any relationship or, rather the line is now straight up and down.
Oil prices do not appear to be connected any longer with oil production. They are connected much more to speculation, the same sort of speculation that destroyed our financial markets will find another way to destroy our economies.
What Obama does or what the GOP does will have no effect. Unless we can increase global oil production substantially, we will be stuck here. No political policy will change this.
The world needs an extra 22 million barrels a day of oil to keep meeting demand – rough increasing production by a third.
Oil from tar sands in Canada and Argentina would only add at most 6 billion barrels a day by 2035. No one has any idea where the rest of the oil can come from because proven reserves do not support that level of added production. New fields may magically appear but that is not likely and any oil will not arrive in any reasonable timeframe.
There will not be a quick fix. Gas prices will be very volatile due to external difficulties. Anyone promising substantially lower gas prices by more drilling in the US is simply wrong.
In the last two years something not seen in the previous 30 was observed – substantial increases in the production of oil in the US. Yep, Obama has not been a hinderance to oil production in the US and has actually presided over the first increase in US oil production since Reagan, reversing a 25 year decline.
But, this added production is only 600,000 barrels more a day. Far below the levels needed.
We will not produce our way out of this. Different legislation will not do anything to stop this. Gasoline prices will continue to be high and volatile due to the inability to affect global oil production.
And we will continue to deal with this until either the production ceiling is lifted or we find new energy sources.