The Oil Drum

222 comments on DrumBeat: October 14, 2006

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Halfin on October 14, 2006 - 8:11pm

Is that plateau for oil production or oil CONSUMPTION?

Yes, that is the big question. Generally speaking, if prices are high we would say it is supply limited. If prices are low then that points to a failure of demand. Despite the recent fallback, prices even today can still be considered high. If we truly had an oil glut then producers would be competing with each other to cut prices, and we'd see historically low prices of $10-20 per barrel. Since we're not, that points to supply limitations.

Having said that, we should keep in mind that market participants look to the future as well as the present in making their decisions. Producers may choose to produce below the maximum if they believe that we will have shortages in the future and their oil will be worth even more then. A production cutback in the face of high prices is therefore not necessarily evidence that we are at peak now, but it suggests that producers see a peak as a realistic possibility within their planning horizon, and that is affecting their decisions today.

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oilaholic on October 15, 2006 - 11:00am

Thanks for taking my question seriously. Another clue to whether it's supply or demand constrained may be the willingness of OPEC to attempt to reduce supply temporarily. If they thought the peak was really demand driven, they would know that cutting down supply temporarily in order to lift prices back into the $70 range would be futile because it would continue to reduce demand and therefore make any price increase they could achieve only temporary, requiring more cutbacks later to maintain the higher price and therefore ceding more of the oil market to non-OPEC countries. So their willingness to attempt a cutback to restore higher prices suggests that they think there has been either a TEMPORARY demand peak or a TEMPORARY supply spurt that can be corrected by their temporary cutback. Since demand destruction would not be likely to be a temporary phonemenon (unless it is weather-related), this suggests they don't see supply continuing to increase steadily among the non-OPEC producers, since that phenomenon would make their current proposed cutback feckless. Bottom line: it seems like OPEC believes that supplies are likely to be fairly well constrained going forward.