It's evident for some of us that we now are very close to a situation where oil supply will dictate future oil price rather than the oil demand. Almost everybody on chat sites as this one as well as proffessional analysts still focus on the demand side and many argue there now is demand destruction for oil and thus we can expect lower prices.

First of all if that where to be true woulden't possibly future lower prices then make demand increase at some point of time? Thus making the case for higher oil prices going forward even stronger? Secondly, if we look at actual demand as well as the predictions for 2008 and 2009 according to EIA this is now what it looks like:

Oil consumtion from 2005 EIA:

2005: 83,65 mbpd
2006: 84,70
2007: 85,53
2008: 86,31
2009: 87,30 (expected)

To me at least is seems ww demand in fact seems to progress in quite a steady pace.

Then according to (IEA) we are now losing some 5,2%/annually (or some 3,5 mb per day) from existing oil fields.

2007: 4%/year
2008: 5,2%/year = 3,5 mb per day

http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=267

However citing people like Boone Pickens and Matt Simmons they indicate it could be more:

"World oil production, I believe, has peaked, and the world’s current oil fields are declining at the rate of 8 percent a year." (Boone Pickens 17 june, 2008)

"a more realistic rate of decline is 8% to 10% a year. The decline rate is probably going to end up averaging 10-15% over the next decade Mr. Simmons said."

According to CERA "Individual offshore fields are declining at a 10 percent annual rate compared with six percent for onshore fields, and deepwater fields decline at 18 percent annually."

"Simmons said in some deep-water fields, the decline rates have been above 30 percent."

A resent study made by ASPO in Uppsala, Sweden and Robert Hirsch indicated production decline from oil fields starting it's decline today is higher (annual average 12%) compared to oil fields that entered in to decline in between 1960-1990 (average (5-6%) as well as fields entering in to decline before 1960 (4% annual decline on average).

Given the fact that peak discovery occured 1964and new oil discoverys has declined ever since and that we since 1990 have consumed more oil than what we have found new per year, we do not have new recovery per yer necessary to compensate even for the now occuring annual and possibly from now on ever increasing supply decline, not mentioning then the the demand increase.

Now the implication of oil fields peaking are quite severe as as only 507, or 1 % of the total number of fields, are giants. But their contribution is striking: over 60 % of the 2005 productionand about 65 % of the global ultimate recoverable reserve (URR).

A majority of the largest giant fields are over 50 years oldand the discovery trend of less giant fields with smaller volumes is clear.

Clear is that when a giant field peaks and starts to decline the implication on world oil production may be quite significant. As an example Cantarell in Mexico, once the worlds third largest oil field discovered 1974, currenty is falling out of a cliff having lost some 50% by now of it's production capacity.

Bottom line: still we see oil demand increase, decreases in OECD for sure but increases basically everywhere else. This as basically the only oil consumers at the moment paying full market price for oil are consumers in the OECD countries, that is the once without any oil. Oil field decline rates seems to be increasing and as larger and larger filds now risk to enter in to decline the implications on world wide production may be quite severe.

There has been some decrease in the ww oil demand increase rate but we still ww have a clear total increase of demand.

Given the supply destruction of some 3.5 MB per day and add to that the expected demand increase of some 1% equivilent of some 1 MB per day and what then needs to be added every day is some 4.5 MB of new production. This is the same as a new oil discovery equivilent of Saudi Arabia every second year.

The question is whether ww demand for oil will start to decline in the future and if so if that decline to any extent can match the at least 5.2% annual supply destruction(possibly even higher) in the future?

What really will happen is that oil price will not be dictated as it used to, by demand but in fact by the availability of supply. Ever srinking and most likely escalating supply declines from now on indicates ever increasing future oil prices.

Expect this insight to "enlighten " the broader investor community as the new IEA supply report will be presented November the 12th this very year. From then on it is very probable valuations of oil companies with possible future increases of reserves will be rewarded. Especially if they are activ in geopolitical "safe" regions of the world.

http://www.worldenergyoutlook.org/2008.asp